File Pursuant To Rule: 424B5
Registration File No.: 333-97457
PROSPECTUS SUPPLEMENT
(To prospectus dated September 25, 2002)
WACHOVIA ASSET SECURITIZATION, INC.
DEPOSITOR
WACHOVIA BANK, NATIONAL ASSOCIATION
SELLER, SERVICER, MASTER SERVICER AND CERTIFICATE ADMINISTRATOR
$2,083,000,561 (APPROXIMATE)
MORTGAGE PASS-THROUGH CERTIFICATES, SERIES 2002-1
PRINCIPAL AND INTEREST PAYABLE MONTHLY, COMMENCING IN OCTOBER 2002
YOU SHOULD CAREFULLY CONSIDER THE RISK FACTORS BEGINNING ON PAGE S-14 OF THIS
PROSPECTUS SUPPLEMENT.
Neither the offered nor the underlying mortgage loans are insured or guaranteed
by any governmental agency or instrumentally.
The offered certificates will represent interests in the Trust only and will not
represent interests in or obligations of Wachovia Asset Securitization, Inc. or
any other entity.
This prospectus supplement may be used to offer and sell the offered
certificates only if accompanied by the prospectus.
THE TRUST WILL ISSUE --
o Three groups consisting of seven classes of senior Class A Certificates.
o Six classes of Class B Certificates, all of which are subordinated to, and
provide credit enhancement for, the Class A Certificates. Each class of
Class B Certificates is also subordinated to each class of Class B
Certificates, if any, with a lower number.
The classes of offered certificates are listed under the heading "Offered
Certificates" in the table beginning on page S-4.
THE ASSETS OF THE TRUST WILL INCLUDE --
o Three loan groups of fixed rate, fully amortizing and balloon residential
first lien mortgage loans, substantially all of which have original terms
to stated maturity of not more than 35 years.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED THE OFFERED CERTIFICATES OR DETERMINED THAT THIS
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS IS ACCURATE OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The Class 1-A-1, Class 2-A-1 and Class 3-A-1 Certificates will be offered by
Wachovia Securities, Inc., as underwriter, at varying prices to be determined at
the time of sale to investors. The anticipated delivery date for the offered
certificates is September 27, 2002. Total proceeds to the depositor for the
Class 1-A-1, Class 2-A-1 and Class 3-A-1 Certificates will be approximately
102.57% (excluding accrued interest) of the initial principal amount of such
classes, before deducting expenses payable by the depositor. The remaining
offered certificates will be transferred by the depositor to Wachovia Bank,
National Association as partial consideration for the purchase of the mortgage
loans.
WACHOVIA SECURITIES
September 25, 2002
TABLE OF CONTENTS
Important Notice About Information
Presented in this Prospectus
Supplement and the Prospectus ............ S-3
Summary of Terms ............................ S-6
Risk Factors ................................ S-14
The Rate of Principal Payments on
the Mortgage Loans Will Affect the
Yield on the Offered Certificates ..... S-14
Certificates May Not Be Appropriate
For Individual Investors .............. S-15
Subordination of Class 1-A-2A and,
Class 2-A-2A Components and
Class B Certificates Increases Risk
of Loss ............................... S-15
Limited Source of Payments -- No
Recourse to Depositor, Seller,
Servicer, Master Servicer,
Certificate Administrator or
Trustee ............................... S-16
Limited Liquidity ........................ S-16
Balloon Mortgage Loans Present a
Special Risk .......................... S-16
Geographic Concentration May
Increase Risk of Loss Due to
Adverse Economic Conditions or
Natural Disasters ..................... S-17
Rights of Beneficial Owners May Be
Limited by Book-Entry System .......... S-17
Tax Consequences of Residual
Certificates .......................... S-17
Absence of Original Mortgage Note
May Increase Risk of Loss ................ S-18
Inclusion of Delinquent Mortgage
Loans Increases Risk of Loss ............. S-18
Forward Looking Statements .................. S-18
The Mortgage Pool ........................... S-19
Group 1 Mortgage Loan Data ............... S-20
Group 2 Mortgage Loan Data ............... S-27
Group 3 Mortgage Loan Data ............... S-35
Wachovia Bank, National Association ......... S-40
Servicing of the Mortgage Loans ............. S-40
Foreclosure and Delinquency
Experience of Wachovia Bank ........... S-40
Underwriting Standards ...................... S-41
The Pooling and Servicing Agreement ......... S-43
Assignment of Mortgage Loans ............. S-43
Repurchases of Mortgage Loans ............ S-43
Optional Repurchases of Certain
Mortgage Loans ........................ S-44
Payments on Mortgage Loans;
Accounts .............................. S-44
Servicing Compensation and Payment
of Expenses ........................... S-44
Compensating Interest .................... S-45
Advances ................................. S-45
Optional Termination ..................... S-46
Special Servicing Agreements ............. S-46
The Trustee .............................. S-47
The Certificate Administrator ............ S-47
Voting Rights ............................ S-47
Reports to Certificateholders ............... S-47
Description of the Certificates ............. S-47
Denominations and Form ................... S-48
Book-Entry Certificates .................. S-48
Distributions ............................ S-52
Pool Distribution Amount ................. S-52
Priority of Distributions ................ S-53
Interest ................................. S-53
Principal ................................ S-55
Cross-Collateralization .................. S-61
Allocation of Losses ..................... S-62
Restrictions on Transfer of the Class
1-A-R and Class 1-A-LR
Certificates .......................... S-64
Prepayment and Yield Considerations ......... S-66
Prepayment Considerations and
Risks ................................. S-66
Assumptions Relating to Tables ........... S-68
Weighted Average Lives of the
Offered Certificates .................. S-70
Yield on the Class 1-A-2 and Class
2-A-2 Certificates .................... S-76
Yield on the Class 1-A-R and Class
1-A-LR Certificates ................... S-76
Yield on the Subordinate Certificates..... S-77
Yield Considerations with Respect to
the Class B-2 and Class B-3
Certificates .......................... S-77
Credit Support .............................. S-80
Use of Proceeds ............................. S-81
Federal Income Tax Consequences ............. S-81
Regular Certificates ..................... S-81
Residual Certificates .................... S-82
Backup Withholding and Reporting
Requirements .......................... S-82
State Taxes ................................. S-82
ERISA Considerations ........................ S-83
Method of Distribution ...................... S-83
Legal Matters ............................... S-84
Certificate Ratings ......................... S-84
Index of Significant Prospectus
Supplement Definitions ................... S-85
Annex I -- Global Clearance,
Settlement and Tax Documentation
Procedures ............................... A-1
S-2
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED
IN THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS
The offered certificates are described in two separate documents that
progressively provide more detail: (i) the accompanying prospectus, which
provides general information, some of which may not apply to a particular
series of certificates such as your certificates; and (ii) this prospectus
supplement, which describes the specific terms of your certificates and may
differ from information in the prospectus.
IF THE DESCRIPTION OF THE TERMS OF YOUR CERTIFICATES VARIES BETWEEN THIS
PROSPECTUS SUPPLEMENT AND THE PROSPECTUS, YOU SHOULD RELY ON THE INFORMATION IN
THIS PROSPECTUS SUPPLEMENT.
Cross-references are included in this prospectus supplement and the
prospectus to captions in these materials where you can find additional
information. The foregoing Table of Contents and the Table of Contents in the
prospectus provide the locations of these captions.
The Index of Significant Prospectus Supplement Definitions beginning on
page S-85 of this prospectus supplement and the Index of Significant
Definitions beginning on page 134 of the prospectus direct you to the locations
of the definitions of capitalized terms used in each of the documents. Any
capitalized terms that are not defined in this prospectus supplement and that
do not have obvious meanings are defined in the prospectus.
Wachovia Asset Securitization, Inc.'s principal offices are located at
8739 Research Drive, NC0121--Suite D, Charlotte, North Carolina 28288-0121 and
its phone number is (704) 596-7616.
----------------
S-3
THE SERIES 2002-1 CERTIFICATES
INITIAL RATINGS
INITIAL CLASS OF CERTIFICATES(3)
BALANCE PASS-THROUGH ----------------------
CLASS BALANCE(1) RATE PRINCIPAL TYPES(2) INTEREST TYPES(2) S&P MOODY'S FITCH
- ------------------ -------------------- ------------- ------------------------ ------------------ ----- --------- ------
OFFERED CERTIFICATES
Class 1-A-1 ...... $ 122,000,000 6.25% Senior, Super Senior Fixed Rate AAA Aaa AAA
Class 1-A-2 ...... $ 469,719,720 (4) Senior, Component (4) AAA Aaa AAA
Class 1-A-R ...... $ 50 6.25% Senior, Sequential Pay Fixed Rate AAA Aaa AAA
Class 1-A-LR...... $ 50 6.25% Senior, Sequential Pay Fixed Rate AAA Aaa AAA
Class 2-A-1 ...... $ 235,000,000 6.25% Senior, Super Senior Fixed Rate AAA Aaa AAA
Class 2-A-2 ...... $1,158,150,741 (5) Senior, Component (5) AAA Aaa AAA
Class 3-A-1 ...... $ 42,458,000 6.50% Senior, Sequential Pay Fixed Rate AAA Aaa AAA
Class B-1 ........ $ 29,413,000 (6) Subordinated Variable Rate AA Aa2 AA
Class B-2 ........ $ 14,705,000 (6) Subordinated Variable Rate A A2 A
Class B-3 ........ $ 11,554,000 (6) Subordinated Variable Rate BBB Baa2 BBB
COMPONENTS
Class 1-A-2 Certificate:
Class 1-A-2A ..... $ 464,475,000 6.25% Senior, Super Senior Fixed Rate N/A N/A N/A
Support
Class 1-A-2B ..... $ 5,244,720 (7) Senior, Ratio Strip Principal Only N/A N/A N/A
Class 1-A-2C ..... (8) (9) Senior, Notional Variable Rate, N/A N/A N/A
Amount Interest Only
Class 2-A-2 Certificate:
Class 2-A-2A ..... $1,151,094,000 6.25% Senior, Super Senior Fixed Rate N/A N/A N/A
Support
Class 2-A-2B ..... $ 6,445,413 (10) Senior, Ratio Strip Principal Only N/A N/A N/A
Class 2-A-2C ..... (11) (12) Senior, Notional Variable Rate, N/A N/A N/A
Amount Interest Only
Class 3-A-2A ..... $ 611,328 (13) Senior, Ratio Strip Principal Only N/A N/A N/A
Class 3-A-2B ..... (14) (15) Senior, Notional Variable Rate, N/A N/A N/A
Amount Interest Only
NON-OFFERED CERTIFICATES
Class B-4 ........ $ 7,353,000 (6) Subordinated Variable Rate
Class B-5 ........ $ 5,253,000 (6) Subordinated Variable Rate
Class B-6 ........ $ 5,252,170 (6) Subordinated Variable Rate
- ----------
(1) Approximate. The initial class balances may vary by a total of plus or
minus 5%.
(2) See "Description of the Securities -- Categories of Classes of Securities"
in the prospectus for a description of these principal and interest types
and see "Description of the Certificates -- Priority of Distributions" and
"-- Allocation of Losses" in this prospectus supplement for a description
of the effects of subordination.
(3) See "Certificate Ratings" in this prospectus supplement.
(4) The Class 1-A-2 Certificates will be deemed for the purposes of the
distribution of principal and interest to consist of the following three
components described in the table: 1-A-2A, 1-A-2B and 1-A-2C. The
components are not severable.
(5) The Class 2-A-2 Certificates will be deemed for the purposes of the
distribution of principal and interest to consist of the following five
components described in the table: 2-A-2A, 2-A-2B, 2-A-2C, 3-A-2A and
3-A-2B. The components are not severable.
(6) Interest will accrue on the Class B Certificates as of any distribution
date at a per annum rate equal to the weighted average (based on the
group subordinate amount, as described under "Description of the
Certificates -- Interest," for each loan group) of (i) with respect to
loan group 1, 6.25%, (ii) with respect to loan group 2, 6.25% and (iii)
with respect to loan group 3, 6.50%. For the initial distribution date in
October 2002, this rate is expected to be approximately 6.26% per annum.
S-4
(7) The Class 1-A-2B Component is a principal only component and will not be
entitled to distributions in respect of interest.
(8) The Class 1-A-2C Component is an interest only component, has no principal
balance, and will bear interest on the Class 1-A-2C notional amount
(initially approximately $469,457,326) as described in this prospectus
supplement under "Description of the Certificates -- Interest."
(9) Interest will accrue on the Class 1-A-2C notional amount as of any
distribution date at a per annum rate equal to (i) the weighted average
of the net mortgage interest rates of the premium mortgage loans in loan
group 1 (based on the stated principal balances of such mortgage loans on
the due date in the month preceding the month of such distribution date)
minus 6.25%. For the initial distribution date occurring in October 2002,
this rate is expected to be approximately 0.55% per annum.
(10) The Class 2-A-2B Component is a principal only component and will not be
entitled to distributions in respect of interest.
(11) The Class 2-A-2C Component is an interest only component, has no principal
balance, and will bear interest on the Class 2-A-2C notional amount
(initially approximately $1,258,217,060) as described in this prospectus
supplement under "Description of the Certificates -- Interest."
(12) Interest will accrue on the Class 2-A-2C notional amount as of any
distribution date at a per annum rate equal to (i) the weighted average
of the net mortgage interest rates of the premium mortgage loans in loan
group 2 (based on the stated principal balances of such mortgage loans on
the due date in the month preceding the month of such distribution date)
minus 6.25%. For the initial distribution date occurring in October 2002,
this rate is expected to be approximately 0.78% per annum.
(13) The Class 3-A-2A Component is a principal only component and will not be
entitled to distributions in respect of interest.
(14) The Class 3-A-2B Component is an interest only component, has no principal
balance, and will bear interest on the Class 3-A-2B notional amount
(initially approximately $30,606,021) as described in this prospectus
supplement under "Description of the Certificates -- Interest."
(15) Interest will accrue on the Class 3-A-2B notional amount as of any
distribution date at a per annum rate equal to (i) the weighted average
of the net mortgage interest rates of the premium mortgage loans in loan
group 3 (based on the stated principal balances of such mortgage loans on
the due date in the month preceding the month of such distribution date)
minus 6.50%. For the initial distribution date occurring in October 2002,
this rate is expected to be approximately 0.72% per annum.
S-5
SUMMARY OF TERMS
This summary highlights selected information from this prospectus
supplement. It does not contain all of the information that you need to
consider in making your investment decision. To understand the terms of the
offered certificates, you should read this entire prospectus supplement and the
prospectus carefully.
TITLE OF SERIES: Wachovia Asset Securitization TRUSTEE: JPMorgan Chase Bank
Inc., Mortgage Pass-Through
Certificates, Series 2002-1 CERTIFICATE Wachovia Bank, National
ADMINISTRATOR: Association
DEPOSITOR: Wachovia Asset
Securitization, Inc. CUSTODIAN: Wachovia Bank, National
Association
ISSUER: Wachovia Asset
Securitization 2002-1 Trust DISTRIBUTION The 25th day of each month (or,
DATE: if not a business day, the next
SELLER: Wachovia Bank, National business day) beginning
Association October, 2002
SERVICER: Wachovia Bank, National CLOSING DATE: On or about September 27,
Association 2002
MASTER SERVICER: Wachovia Bank, National CUT-OFF DATE: September 1, 2002
Association
RECORD DATE: The last business day of the
month preceding a distribution
date
---------------------
THE CERTIFICATES
The certificates will be issued pursuant to a pooling and servicing
agreement, dated as of the closing date. A summary chart of the initial class
balances, principal types, pass-through rates, interest types and ratings of
the certificates is set forth beginning on page S-4.
The certificates represent all of the beneficial ownership interest in the
trust.
CLASSIFICATIONS OF CLASSES OF CERTIFICATES
- --------------------------------------------------------------------------------------------
Offered Certificates: 1-A-1, 1-A-2, 1-A-R, 1-A-LR, 2-A-1, 2-A-2, 3-A-1, B-1,
B-2 and B-3
Non-Offered Certificates: B-4, B-5 and B-6
Senior Certificates: 1-A-1, 1-A-2, 1-A-R, 1-A-LR, 2-A-1, 2-A-2 and 3-A-1
Subordinate Certificates: B-1, B-2, B-3, B-4, B-5 and B-6
Class A Certificates: 1-A-1, 1-A-2, 1-A-R, 1-A-LR, 2-A-1, 2-A-2 and 3-A-1
Class B Certificates: B-1, B-2, B-3, B-4, B-5 and B-6
Component Certificates: 1-A-2 and 2-A-2
Super Senior Certificates: 1-A-1 and 2-A-1
Super Senior Support Components: 1-A-2A and 2-A-2A
Group 1-A Certificates: 1-A-1 and 1-A-2
Group 2-A Certificates: 2-A-1 and 2-A-2
Group 3-A Certificates: 3-A-1
IO Components: 1-A-2C, 2-A-2C and 3-A-2B
PO Components: 1-A-2B, 2-A-2B and 3-A-2A
Residual Certificates: 1-A-R and 1-A-LR
S-6
The Senior Certificates are divided into three groups. The Group 1-A
Certificates form Group 1, the Group 2-A Certificates form Group 2 and the
Group 3-A Certificates form Group 3.
The Group 1-A Certificates will, except to the extent of the
cross-collateralization payments described herein, represent interests solely
in the group 1 mortgage loans. The Class 2-A-1 Certificates will, except to the
extent of the cross-collateralization payments described herein, represent
interests solely in the group 2 mortgage loans. The Class 2-A-2 Certificates
will, except to the extent of cross-collateralization payments described
herein, represent interests in the group 2 mortgage loans and certain group 3
mortgage loans. The Class 3-A-1 Certificates will, except to the extent of
cross-collateralization payments described herein, represent interests solely
in the group 3 mortgage loans. The Class B Certificates will represent
interests in the mortgage loans of all Loan Groups.
Only the Class A, Class B-1, Class B-2 and Class B-3 Certificates are
being offered by this prospectus supplement.
The Class B-4, Class B-5 and Class B-6 Certificates are not offered by
this prospectus supplement. These non-offered certificates are subordinated to
the offered certificates for distributions of principal and interest and for
allocations of losses on the mortgage loans.
Information provided with respect to the non-offered certificates is
included solely to aid your understanding of the offered certificates.
MORTGAGE POOL
The mortgage pool will consist of three loan groups consisting of
fixed-rate, conventional, fully-amortizing and balloon mortgage loans secured
by first liens on residential properties. All of the mortgage loans were
originated or acquired by Wachovia Bank, National Association (which is an
affiliate of the depositor, the master servicer, the servicer, the custodian,
the certificate administrator and the underwriter) or its predecessor. The
depositor expects the mortgage loans to have the following approximate
characteristics:
SELECTED GROUP 1 MORTGAGE LOAN DATA AS OF SEPTEMBER 1, 2002
RANGE OR TOTAL WEIGHTED AVERAGE
- ------------------------------------------------------------------------------------------------------------------------
Number of Mortgage Loans 1,797 --
Aggregate Unpaid Principal Balance $613,181,313.59 --
Unpaid Principal Balance $5,087.89 to $2,141,519.09 $341,224.99(1)
Interest Rate 5.125% to 13.000% 6.876%
Administrative Fee Rate 0.256% --
Remaining Term to Stated Maturity 2 to 316 months 132 months
Original Term 60 to 360 months 180 months
Number of Months Since Origination 5 to 282 months 48 months
Current Loan-to-Value Ratio 2.13% to 97.34% 53.92%
Credit Scores 484 to 879 723
Latest Maturity Date 1/1/2030 --
Geographic Concentration in Excess of 5.00%
Florida ........................................................ 26.72%
North Carolina ................................................. 12.45%
New Jersey ..................................................... 11.76%
Pennsylvania ................................................... 7.59%
Georgia ........................................................ 6.05%
Virginia ....................................................... 5.84%
Maximum Single Zip Code Concentration 0.90% --
(1) The balance shown is the average unpaid principal balance of the group 1
mortgage loans.
S-7
SELECTED GROUP 2 MORTGAGE LOAN DATA AS OF SEPTEMBER 1, 2002
RANGE OR TOTAL WEIGHTED AVERAGE
- ------------------------------------------------------------------------------------------------------------------------
Number of Mortgage Loans 3,595 --
Aggregate Unpaid Principal Balance $1,443,046,126.96 --
Unpaid Principal Balance $5,019.86 to $2,809,025.77 $401,403.65(1)
Interest Rate 3.625% to 16.750% 7.156%
Administrative Fee Rate 0.256% --
Remaining Term to Stated Maturity 6 to 355 months 317 months
Original Term 120 to 414 months 358 months
Number of Months Since Origination 5 to 353 months 40 months
Current Loan-to-Value Ratio 1.52% to 99.58% 70.47%
Credit Scores 457 to 909 715
Latest Maturity Date 3/1/2032 --
Geographic Concentration in Excess of 5.00%
Florida ...................................................... 16.79%
California ................................................... 10.52%
New Jersey ................................................... 9.65%
Virginia ..................................................... 7.27%
North Carolina ............................................... 6.82%
Pennsylvania ................................................. 6.26%
Connecticut .................................................. 5.53%
New York ..................................................... 5.28%
Georgia ...................................................... 5.20%
Maximum Single Zip Code Concentration 0.68% --
(1) The balance shown is the average unpaid principal balance of the group 2
mortgage loans.
SELECTED GROUP 3 MORTGAGE LOAN DATA AS OF SEPTEMBER 1, 2002
RANGE OR TOTAL WEIGHTED AVERAGE
- -----------------------------------------------------------------------------------------------------------------------
Number of Mortgage Loans 335 --
Aggregate Unpaid Principal Balance $44,631,291.00 --
Unpaid Principal Balance $5,066.82 to $249,132.16 $133,227.73(1)
Interest Rate 3.000% to 15.500% 7.160%
Administrative Fee Rate 0.256% --
Remaining Term to Stated Maturity 60 to 353 months 153 months
Original Term 120 to 360 months 236 months
Number of Months Since Origination 7 to 286 months 83 months
Current Loan-to-Value Ratio 3.26% to 99.61% 47.51%
Credit Scores 499 to 805 714
Latest Maturity Date 1/1/2032 --
Geographic Concentration in Excess of 5.00%
Florida ........................................................ 86.98%
New York ....................................................... 9.29%
Maximum Single Zip Code Concentration 2.26% --
(1) The balance shown is the average unpaid principal balance of the group 3
mortgage loans.
The characteristics of the loan groups may change because:
o Prior to the issuance of the certificates, the depositor may remove
mortgage loans from a loan group. The depositor also may substitute new
mortgage loans for mortgage loans in a loan group prior to the closing
date.
S-8
o After the issuance of the certificates, mortgage loans in a loan group
may be removed from the trust because of repurchases by the depositor
for breaches of representations or failure to deliver required
documents. Under certain circumstances, the depositor may instead make
substitutions for defective mortgage loans.
These removals and/or substitutions may result in changes in the loan
group characteristics shown above. These changes may affect the weighted
average lives and yields to maturity of the related offered certificates.
Additional information on the mortgage pool and each loan group appears
under "The Mortgage Pool" in this prospectus supplement.
OPTIONAL TERMINATION
At its option, the servicer may purchase all remaining mortgage loans in
the trust and effect early retirement of the certificates on any distribution
date on which the aggregate scheduled principal balance of the mortgage pool is
less than 10% of the initial aggregate scheduled principal balance of the
mortgage pool.
See "The Pooling and Servicing Agreement -- Optional Termination" in this
prospectus supplement.
IF THE SERVICER EXERCISES ITS RIGHT TO REPURCHASE ALL OF THE MORTGAGE
LOANS, THE CERTIFICATES OUTSTANDING AT THAT TIME WILL BE RETIRED EARLIER THAN
WOULD OTHERWISE BE THE CASE.
See "Prepayment and Yield Considerations" in this prospectus supplement.
PRIORITY OF DISTRIBUTIONS
Distributions to each group of Senior Certificates and the Class B
Certificates will be made on each distribution date from the pool distribution
amount for the related loan group in the following order of priority:
o First, to the certificate administrator an amount in payment for its
services for such distribution date;
o Second, to each class of senior certificates of a group to pay interest;
o Third, to the classes of senior certificates entitled to receive
distributions of principal, as set forth in this prospectus supplement
under "Description of the Certificates -- Principal," to pay principal;
o Fourth, to the principal only components, to pay certain deferred
amounts, but only from amounts that would otherwise be distributable on
such distribution date as principal of the subordinated certificates;
o Fifth, from the pool distribution amounts for all loan groups, to each
class of subordinate certificates, subject to any payments described
under "Description of the Certificates -- Cross-Collateralization,"
first to pay interest and then to pay principal in the order of
numerical class designations, beginning with the Class B-1 Certificates;
and
o Sixth, to the Class 1-A-R and Class 1-A-LR Certificates, any remaining
amounts in the related REMIC.
All of the distributions described above are subject to the limitations
set forth in this prospectus supplement under "Description of the Certificates
- -- Interest" and "-- Principal."
Under certain circumstances described in this prospectus supplement,
distributions that would otherwise be made on the subordinate certificates may
be made on the senior certificates of a group instead. See "Description of the
Certificates -- Cross-Collateralization" and "-- Allocation of Losses" in this
prospectus supplement.
S-9
INTEREST DISTRIBUTIONS
The amount of interest that will accrue on your certificates during each
interest accrual period (unless you own a Class 1-A-2 or Class 2-A-2
Certificate) is equal to:
o one-twelfth of the pass-through rate for your class (as set forth on
page S-4) multiplied by the principal balance of your certificate on the
distribution date, minus
o the amount of certain interest shortfalls arising from the timing of
prepayments on the mortgage loans and interest losses allocated to your
class, as described under "Description of the Certificates -- Allocation
of Losses" in this prospectus supplement.
The amount of interest that will accrue on the Class 1-A-2 and Class 2-A-2
Certificates is equal to the sum of the interest that will accrue on each
component of each such certificate as described under "Description of the
Certificates -- Interest" in this prospectus supplement.
See "Description of the Certificates -- Distributions" and "-- Interest"
in this prospectus supplement.
PRINCIPAL DISTRIBUTIONS
On each distribution date, principal distributions to the certificates
will be made in the order and priority described under "Description of the
Certificates -- Priority of Distributions" in this prospectus supplement.
CREDIT SUPPORT
Credit support for the offered certificates is provided by subordination
as follows:
SUBORDINATION OF CLASS B CERTIFICATES
Priority of Class A
Payment (Credit Support 3.50%)(1)
Class B-1
(Credit Support 2.10%)
Class B-2
(Credit Support 1.40%)
Class B-3
(Credit Support 0.85%)
Class B-4
(Credit Support 0.50%)
Class B-5
(Credit Support 0.25%)
CLass B-6 Order of
(Credit Support 0.00%) Loss Allocation
- ----------
(1) The credit support percentage set forth in this chart shows the initial
balance of the classes of Certificates subordinate to a class or classes
as a percentage of the initial aggregate scheduled principal balance of
the mortgage loans.
See "Description of the Certificates -- Priority of Distributions" and "--
Allocation of Losses" and "Credit Support" in this prospectus supplement.
SHIFTING INTEREST IN PREPAYMENTS
Additional credit enhancement is provided by the allocation of all
principal prepayments on the mortgage loans in a loan group to the Class 1-A-1
Certificates, Class 1-A-2A Component, the
S-10
Class 1-A-R and the Class 1-A-LR Certificates (in the case of loan group 1) and
Class 2-A-1 Certificates and Class 2-A-2A Component (in the case of loan group
2) and the Class 3-A-1 Certificates (in the case of loan group 3) for the first
five years and the disproportionately greater allocation of prepayments to such
senior certificates or components over the following four years. The
disproportionate allocation of prepayments on the mortgage loans in a loan
group will accelerate the amortization of the senior certificates relative to
the amortization of the subordinate certificates. As a result, the credit
support percentage for the Class A Certificates of a group should be maintained
and may be increased during the first nine years.
See "Description of the Certificates -- Principal" in this prospectus
supplement.
PREPAYMENT AND YIELD CONSIDERATIONS
The yield to maturity on your offered certificates will be sensitive to
the rate and timing of principal payments (which will be affected by
prepayments, defaults and liquidations) on the mortgage loans in the related
loan group or groups (or any loan group, in the case of the Class B
Certificates). As a result, your yield may fluctuate significantly.
o In general, if you purchased your offered certificate at a premium and
principal distributions occur at a rate faster than you assumed, your
actual yield to maturity will be lower than anticipated.
o Conversely, if you purchased your offered certificate at a discount
and principal distributions occur at a rate slower than you assumed,
your actual yield to maturity will be lower than anticipated.
Because the Class 1-A-2B, Class 2-A-2B and Class 3-A-2A Components
represent only the right to receive a portion of the principal received with
respect to mortgage loans in the related loan group with net mortgage interest
rates lower than 6.25% for loan group 1 and loan group 2, or lower than 6.50%
for loan group 3, the yield to maturity on the certificates relating to such
components will be sensitive to the rate an timing of principal payments on the
mortgage loans with net mortgage interest rates lower than 6.25% or 6.50%,
respectively.
Because the interest accrued on each distribution date on the Class
1-A-2C, Class 2-A-2C and Class 3-A-2B Components is based on a per annum rate
equal to (i) the weighted average of the mortgage loans in the related loan
group with a net mortgage interest rate greater than or equal to 6.25% for loan
group 1 and loan group 2 and greater than 6.50% for loan group 3 less (ii)
6.25% for loan group 1 and loan group 2, or 6.50% for loan group 3, the yield
to maturity on the certificates relating to such components will be sensitive
to the rate and timing of principal payments on the mortgage loans with a net
mortgage interest rate greater than or equal to 6.25% for loan group 1 and loan
group 2, or 6.50% for loan group 3, particularly those mortgage loans with
higher mortgage interest rates.
Because the Class 1-A-2A Component will bear losses allocated to the Class
1-A-1 Certificates, as well as their own share of such losses, once the Class B
Certificates are no longer outstanding, the yield to maturity of the Class
1-A-2 Certificates will be more sensitive to the amount and timing of losses in
the group 1 mortgage loans than the Class 1-A-1 Certificates.
Because the Class 2-A-2A Component will bear losses allocated to the Class
2-A-1 Certificates, as well as their own share of such losses, once the Class B
Certificates are no longer outstanding, the yield to maturity of the Class
2-A-2 Certificates will be more sensitive to the amount and timing of losses in
the group 2 mortgage loans than the Class 2-A-1 Certificates.
The yield to maturity of the Class B-1, Class B-2 and Class B-3
Certificates will be increasingly sensitive to the amounts and timing of losses
on the mortgage loans due to the fact that, once the total balance of the Class
B-4, Class B-5 and Class B-6 Certificates has been reduced to zero, all losses
will be allocated to the Class B-3, Class B-2 and Class B-1 Certificates, in
that order, until the balance of each class has been reduced to zero.
S-11
Because the mortgage loans may be prepaid at any time, it is not possible
to predict the rate at which you will receive distributions of principal. Since
prevailing interest rates are subject to fluctuation, you may not be able to
reinvest your distributions at yields equaling or exceeding the yields on the
offered certificates. Yields on any reinvestments may be lower, and could be
significantly lower, than the yields on your offered certificates.
See "Prepayment and Yield Considerations" in this prospectus supplement
and "Yield Considerations" in the prospectus.
WEIGHTED AVERAGE LIFE (IN YEARS)(1)
CPR(2)
---------------------------------------------------------
CLASS 0% 15% 30% 45% 60%
- ---------------- --------- --------- --------- --------- ---------
1-A-1 .......... 6.21 3.52 2.14 1.38 0.94
1-A-2 .......... 6.21 3.52 2.14 1.38 0.94
1-A-R .......... 0.08 0.08 0.08 0.08 0.08
1-A-LR ......... 0.08 0.08 0.08 0.08 0.08
2-A-1 .......... 17.21 5.20 2.50 1.48 0.98
2-A-2 .......... 17.21 5.20 2.50 1.48 0.98
3-A-1 .......... 7.70 3.58 2.11 1.37 0.94
B-1 ............ 13.80 9.20 7.65 6.31 4.39
B-2 ............ 13.80 9.20 7.65 6.31 4.39
B-3 ............ 13.80 9.20 7.65 6.31 4.39
----------
(1) Determined as described under "Prepayment and Yield Considerations --
Weighted Average Lives of the Offered Certificates" in this prospectus
supplement. Prepayments will not occur at any assumed rate shown or
any other constant rate, and the actual weighted average lives of any
or all of the classes of offered certificates are likely to differ
from those shown, perhaps significantly.
(2) "CPR" is the Constant Prepayment Rate which is described under
"Prepayment and Yield Considerations -- Weighted Average Lives of the
Offered Certificates" in this prospectus supplement.
FEDERAL INCOME TAX CONSEQUENCES
For federal income tax purposes, elections will be made to treat the trust
as two separate REMICs.
o The Class 1-A-1, Class 2-A-1, Class 3-A-1 and Class B Certificates and
each of the Components will constitute "regular interests" in one of
the REMICs and will be treated as debt instruments for federal income
tax purposes.
o The Class 1-A-R and Class 1-A-LR Certificates will constitute the sole
class of "residual interests" in the respective REMICs.
Interest on the offered certificates must be included in your income under
an accrual method of tax accounting, even if you are otherwise a cash method
taxpayer.
The Class 1-A-2 and Class 2-A-2 Certificates will, and certain other
classes may, be issued with original issue discount for federal income tax
purposes. If you hold such a certificate, you will be required to include
original issue discount in income as it accrues on a constant yield method,
regardless of whether you receive concurrently the cash attributable to such
original issue discount.
The holders of the Class 1-A-R and Class 1-A-LR Certificates will be
required to report as ordinary income or loss their pro rata share of the net
income or the net loss of their respective
S-12
REMIC and will be required to fund tax liabilities with respect to any such net
income although no cash distributions are expected to be made with respect to
the Class 1-A-R and Class 1-A-LR Certificates other than the distribution of
their respective class balances and interest on those balances.
See "Federal Income Tax Consequences" in this prospectus supplement and in
the prospectus.
LEGAL INVESTMENT
If your investment activities are subject to legal investment laws and
regulations, regulatory capital requirements or review by regulatory
authorities, then you may be subject to restrictions on investment in the
offered certificates. You should consult your legal, tax and accounting
advisers for assistance in determining the suitability of and consequences to
you of the purchase, ownership and sale of offered certificates.
o The senior certificates and the Class B-1 Certificates will constitute
"mortgage related securities" for purposes of the Secondary Mortgage
Market Enhancement Act of 1984, as amended, so long as they are rated
in one of the two highest rating categories by at least one nationally
recognized rating agency.
o The Class B-2 and Class B-3 Certificates will not constitute "mortgage
related securities" under the Secondary Mortgage Market Enhancement
Act of 1984.
See "Legal Investment" in the prospectus.
ERISA CONSIDERATIONS
If you are a fiduciary or other person acting on behalf of any employee
benefit plan or arrangement, including an individual retirement account,
subject to the ERISA, the Internal Revenue Code of 1986, as amended, or any
federal, state or local law which is similar to ERISA or the Internal Revenue
Code or 1986, you should carefully review with your legal advisors whether the
purchase or holding of an offered certificate could give rise to a transaction
prohibited or not otherwise permissible under ERISA, the Internal Revenue Code
of 1986 or any similar law.
Subject to the considerations and conditions described under "ERISA
Considerations" in this prospectus supplement, it is expected that the offered
certificates (other than the Class 1-A-R and Class 1-A-LR Certificates) may be
purchased by plans. THE CLASS 1-A-R AND CLASS 1-A-LR CERTIFICATES MAY NOT BE
ACQUIRED BY PLANS.
See "ERISA Considerations" in this prospectus supplement and in the
prospectus.
S-13
RISK FACTORS
o The offered certificates are not suitable investments for all
investors.
o The offered certificates are complex financial instruments, so you
should not purchase any offered certificates unless you or your
financial advisor possess the necessary expertise to analyze the
potential risks associated with an investment in mortgage-backed
securities.
o You should not purchase any offered certificates unless you
understand, and are able to bear, the prepayment, credit, liquidity
and market risks associated with the offered certificates.
o You should carefully consider the risk factors discussed below in
addition to the other information contained in this prospectus
supplement and the prospectus.
THE RATE OF PRINCIPAL PAYMENTS ON THE MORTGAGE LOANS WILL AFFECT THE YIELD ON
THE OFFERED CERTIFICATES
The rate of distributions of principal and the yield to maturity on your
certificates will be directly related to (i) the rate of payments of principal
on the mortgage loans and (ii) the amount and timing of defaults by borrowers
that result in losses on the mortgage loans. Borrowers are permitted to prepay
their mortgage loans, in whole or in part, at any time.
The rate of principal payments on the mortgage loans mainly will be
affected by the following:
o the amortization schedules of the mortgage loans;
o the rate of partial prepayments and full prepayments by borrowers due
to refinancing, job transfer, changes in property values or other
factors;
o liquidations of the properties that secure defaulted mortgage loans;
o repurchases of mortgage loans by the depositor as a result of
defective documentation or breaches of representations or warranties;
and
o the optional purchase of all the mortgage loans by the servicer to
effect a termination of the trust.
For a more detailed discussion of these factors, see "Prepayment and Yield
Considerations" in this prospectus supplement and "Description of the
Agreements -- Material Terms of the Pooling and Servicing Agreements and the
Underlying Servicing Agreements -- Assignment of Assets; Repurchases" and "--
Termination; Optional Purchase of Mortgage Loans" and "Yield Considerations" in
the prospectus.
The rate of payments (including prepayments) on mortgage loans is
influenced by a variety of economic, geographic, social and other factors, but
depends greatly on the level of mortgage interest rates:
o If prevailing interest rates for similar mortgage loans fall below the
interest rates on the mortgage loans, the rate of prepayment would
generally be expected to increase due to refinancings.
o Conversely, if prevailing interest rates for similar mortgage loans
rise above the interest rates on the mortgage loans, the rate of
prepayment would generally be expected to decrease.
Mortgage originators make general and targeted solicitations for
refinancings. Any such solicited refinancings may result in a rate of
prepayment that is higher than you might otherwise expect.
If you are purchasing offered certificates at a discount, you should
consider the risk that if principal payments on the mortgage loans in the
related group occur at a rate slower than you expected, your yield will be
lower than you expected.
If you are purchasing offered certificates at a premium, you should
consider the risk that if principal payments on the mortgage loans in the
related group occur at a rate faster than you expected, your yield may be lower
than expected.
S-14
The Class 1-A-2 Certificates are comprised of three components and the
Class 2-A-2 Certificates are comprised of five components, each of which may be
affected differently by the rate and timing of principal payments (including
prepayments on the mortgage loans in the related group), which rate may
fluctuate significantly from time to time. The yield to investors in the Class
1-A-2 and Class 2-A-2 Certificates therefore may be affected differently than
the yield on their respective components would be if issued separately.
The particular sensitivities of the Class 1-A-2 and 2-A-2 Certificates are
separately displayed in the tables appearing under the heading "Prepayment and
Yield Considerations" herein.
See "Summary of Terms -- Prepayment and Yield Considerations" and
"Prepayment and Yield Considerations" in this prospectus supplement.
CERTIFICATES MAY NOT BE APPROPRIATE FOR INDIVIDUAL INVESTORS
If you are an individual investor who does not have sufficient resources
or expertise to evaluate the particular characteristics of the applicable class
of offered certificates, the offered certificates may not be an appropriate
investment for you. This may be the case because, among other things:
o if you purchase your certificates at a price other than par, your
yield to maturity will be sensitive to the uncertain rate and timing
of principal prepayments on the mortgage loans;
o the rate of principal distributions on, and the weighted average lives
of, the offered certificates will be sensitive to the uncertain rate
and timing of principal prepayments on the mortgage loans and the
priority of principal distributions among the classes of certificates,
and as such, the offered certificates may be inappropriate investments
for you if you require a distribution of a particular amount of
principal on a specific date or an otherwise predictable stream of
distributions;
o you may not be able to reinvest amounts distributed in respect of
principal on your certificates (which distributions, in general, are
expected to be greater during periods of relatively low interest
rates) at a rate at least as high as the applicable pass-through rate
on your certificates or any component of your certificates or your
expected yield;
o a secondary market for the offered certificates may not develop or
provide you with liquidity of investment; and
o you must pay tax on any interest or original issue discount in the
year it accrues, even if the cash is paid to you in a different year.
If you are an individual investor considering the purchase of an offered
certificate, you should also carefully consider the other risk factors
discussed in this prospectus supplement and the special considerations
discussed under the headings "Summary of Terms -- Prepayment and Yield
Considerations" and "Prepayment and Yield Considerations" in this prospectus
supplement and "Yield Considerations" in the prospectus.
SUBORDINATION OF CLASS 1-A-2A AND CLASS 2-A-2A COMPONENTS AND CLASS B
CERTIFICATES INCREASES RISK OF LOSS
If you purchase Class B Certificates, you are more likely to suffer losses
as a result of losses or delinquencies on the mortgage loans than are holders
of the Class A Certificates.
o The rights of the holders of each class of Class B Certificates to
receive distributions of interest and principal are subordinated to
the rights of the holders of the Class A Certificates and the holders
of each class of Class B Certificates with a lower numerical
designation. For example, the holders of the Class B-2 Certificates
will not receive principal or interest on a distribution date until
the holders of the Class A Certificates and Class B-1 Certificates
have received the amounts to which they are entitled on that date.
S-15
o Losses that are realized on the mortgage loans will be allocated first
to the Class B-6 Certificates, then to the Class B-5 Certificates and
so on, in reverse of the numerical order of the Class B Certificates,
until the outstanding balances of those classes have been reduced to
zero. After the outstanding balances of the Class B Certificates have
been reduced to zero, all losses will be allocated to the Class A
Certificates.
For a more detailed description of the subordination feature of the Class
B Certificates, see "Description of the Certificates -- Allocation of Losses"
and "Credit Support" in this prospectus supplement.
If you purchase Class 1-A-2 Certificates, you should consider the risk
that after the Class B Certificates are no longer outstanding, the principal
portion of losses realized on the group 1 mortgage loans that are allocated to
the Class 1-A-1 Certificates will be borne by your Class 1-A-2 Certificates, to
the extent of the Class 1-A-2A Component, rather than the Class 1-A-1
Certificates, for so long as your Class 1-A-2 Certificates are outstanding.
If you purchase Class 2-A-2 Certificates, you should consider the risk
that after the Class B Certificates are no longer outstanding, the principal
portion of losses realized on the group 2 mortgage loans that are allocated to
the Class 2-A-1 Certificates will be borne by your Class 2-A-2 Certificates, to
the extent of the Class 2-A-2A Component, rather than the Class 2-A-1
Certificates, for so long as your Class 2-A-2 Certificates are outstanding.
LIMITED SOURCE OF PAYMENTS -- NO RECOURSE TO DEPOSITOR, SELLER, SERVICER,
MASTER SERVICER, CERTIFICATE ADMINISTRATOR OR TRUSTEE
Proceeds of the mortgage loans will be the sole source of payments on the
certificates. The certificates do not represent an interest in or obligation of
the depositor, the seller, the servicer, the master servicer, the certificate
administrator, the trustee or any of their affiliates. There are, however,
limited obligations of the depositor with respect to certain breaches of its
representations and warranties, and limited obligations of the servicer with
respect to its servicing obligations.
Neither the certificates nor the mortgage loans will be guaranteed by or
insured by any governmental agency or instrumentality, the depositor, the
seller, the servicer, the master servicer, the certificate administrator, the
trustee or any of their affiliates. Consequently, if payments on the mortgage
loans are insufficient or otherwise unavailable to make all payments required
on the certificates, there will be no recourse to the depositor, the seller,
the servicer, the master servicer, the certificate administrator, the trustee,
any of their affiliates or any other entity.
LIMITED LIQUIDITY
The underwriters intend to make a market for purchase and sale of the
Class 1-A-1, Class 2-A-1 and Class 3-A-1 Certificates after their initial
issuance, but the underwriters have no obligation to do so. There is no
assurance that such a secondary market will develop or, if it does develop,
that it will provide you with liquidity of investment or that it will continue
for the life of the Class 1-A-1, Class 2-A-1 and Class 3-A-1 Certificates. As a
result, you may not be able to sell your certificates or you may not be able to
sell your certificates at a high enough price to produce your desired return on
investment.
The secondary market for mortgage-backed securities has experienced
periods of illiquidity and can be expected to do so in the future. Illiquidity
means that there may not be any purchasers for your class of certificates.
Although any class of certificates may experience illiquidity, it is more
likely that classes of certificates that are more sensitive to prepayment,
credit or interest rate risk (such as the Class B Certificates) will experience
illiquidity.
BALLOON MORTGAGE LOANS PRESENT A SPECIAL RISK
Balloon mortgage loans pose a risk because a mortgagor must make a large
lump sum payment of principal at the end of the loan term. If the mortgagor is
unable to pay the lump sum or refinance
S-16
such amount, you may suffer a loss. The servicer will not be required to
advance this lump sum. Approximately 1.04% of the group 1 mortgage loans (by
aggregate stated principal balance as of the cut-off date) are balloon mortgage
loans.
GEOGRAPHIC CONCENTRATION MAY INCREASE RISK OF LOSS DUE TO ADVERSE ECONOMIC
CONDITIONS OR NATURAL DISASTERS
At various times, certain geographic regions will experience weaker
economic conditions and housing markets and, consequently, will experience
higher rates of delinquency and loss on mortgage loans generally. In addition,
California, Florida and several other states have experienced natural
disasters, including earthquakes, fires, floods and hurricanes, which may
adversely affect property values. Any concentration of mortgaged properties in
a state or region may present unique risk considerations. All of the mortgage
loans in loan group 3 are located in the states of Florida, New York and Texas.
Due to the high concentration of the mortgage loans in such states, the Class
3-A-1 Certificates and the Class 2-A-2 Certificates (with respect to the Class
3-A-2A and Class 3-A-2B Components) may experience greater losses than
certificates and components relating to the other loan groups if such states
experience weaker economic conditions or natural disasters. See the tables on
pages S-22, S-29 and S-36 for a listing of the locations and concentrations of
mortgaged properties.
Any deterioration in housing prices in a state or region due to adverse
economic conditions, natural disaster or other factors, and any deterioration
of economic conditions in a state or region that adversely affects the ability
of borrowers to make payments on the mortgage loans, may result in losses on
the mortgage loans. Any losses may adversely affect the yield to maturity of
the offered certificates.
See "The Mortgage Pool" in this prospectus supplement for further
information regarding the geographic concentration of the mortgage loans.
RIGHTS OF BENEFICIAL OWNERS MAY BE LIMITED BY BOOK-ENTRY SYSTEM
All of the offered certificates are book-entry certificates and will be
held through the book-entry system of The Depository Trust Company.
Transactions in the these types of certificates generally can be effected only
through the Depository Trust Company and their participants. As a result:
o your ability to pledge book-entry certificates to entities that do not
participate in the Depository Trust Company system, or to otherwise
act with respect to book-entry certificates, may be limited due to the
lack of a physical certificate for your certificates; and
o under a book-entry format, you may experience delays in the receipt of
payments, since distributions will be made by the certificate
administrator to the Depository Trust Company, and not directly to
you.
For a more detailed discussion of the book-entry certificates, see
"Description of the Certificates -- Book-Entry Certificates" in this prospectus
supplement.
TAX CONSEQUENCES OF RESIDUAL CERTIFICATES
o The Class 1-A-R and Class 1-A-LR Certificates will be the sole
"residual interests" in the respective REMICs for federal income tax
purposes.
o The holders of the Class 1-A-R and Class 1-A-LR Certificates must
report as ordinary income or loss their pro rata share of the net
income or the net loss of the respective REMIC whether or not any cash
distributions are made to them. This allocation of income or loss may
result in a zero or negative after-tax return. No cash distributions
are expected to be made with respect to the Class 1-A-R and Class
1-A-LR Certificates other than the distribution of their respective
class balances and interest on those balances.
o Treasury regulations have been issued, generally effective February 4,
2000, that require a seller of the Class 1-A-R or Class 1-A-LR
Certificate to either pay the buyer a formula amount designed to
compensate the buyer for assuming the tax liability or transfer only
to certain eligible transferees should the seller wish to qualify for
"safe harbor" protection from possible disregard of such a transfer.
S-17
o Due to their tax consequences, the Class 1-A-R and Class 1-A-LR
Certificates will be subject to restrictions on transfer that may
affect their liquidity. In addition, the Class 1-A-R and Class 1-A-LR
Certificates may not be acquired by Plans.
See "Description of the Certificates -- Restrictions on Transfer of the
Class 1-A-R and Class 1-A-LR Certificates," "Prepayment and Yield
Considerations -- Yield on the Class 1-A-R and Class 1-A-LR Certificates,"
"ERISA Considerations" and "Federal Income Tax Consequences" in this prospectus
supplement.
ABSENCE OF ORIGINAL MORTGAGE NOTE MAY INCREASE RISK OF LOSS
In lieu of delivering original mortgage notes in respect of approximately
1.53% of the mortgage loans (by aggregate stated principal balance as of the
cut-off date), the depositor will deliver an affidavit stating that such
mortgage note has been lost. The absence of an original mortgage note may
impair the servicer's ability to foreclose on a defaulted mortgage loan in
certain jurisdictions. In such event, larger realized losses may be incurred
with respect to any such defaulted mortgage loan.
INCLUSION OF DELINQUENT MORTGAGE LOANS INCREASES RISK OF LOSS.
Approximately 0.95%, approximately 1.82% and approximately 0.83% of the
mortgage loans in loan group 1, loan group 2 and loan group 3 (each, by
aggregate stated principal balance as of the cut-off date) were 30 days
delinquent. As a result, loan group 1 may bear more risk than a pool of
mortgage loans without any delinquencies but with otherwise comparable
characteristics. It is possible that a delinquent mortgage loan will not ever
become current or, if it does become current, that the mortgagor may become
delinquent again.
FORWARD LOOKING STATEMENTS
This prospectus supplement and the accompanying prospectus contain
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended. Specifically, forward-looking statements, together
with related qualifying language and assumptions, are found in the material
(including tables) under the headings "Risk Factors" and "Prepayment and Yield
Considerations" in this prospectus supplement and "Risk Factors" and "Yield
Considerations" in the accompanying prospectus. Forward-looking statements are
also found in other places throughout this prospectus supplement and the
prospectus, and may be identified by, among other things, accompanying language
such as "expects," "intends," "anticipates," "estimates" or analogous
expressions, or by qualifying language or assumptions. These statements involve
known and unknown risks, uncertainties and other important factors that could
cause the actual results or performance to differ materially from the
forward-looking statements. These risks, uncertainties and other factors
include, among others, general economic and business conditions, competition,
changes in political, social and economic conditions, regulatory initiatives
and compliance with governmental regulations, customer preference and various
other matters, many of which are beyond the depositor's control. These
forward-looking statements speak only as of the date of this prospectus
supplement. The depositor expressly disclaims any obligation or undertaking to
disseminate any updates or revisions to any forward-looking statements to
reflect changes in the depositor's expectations with regard to those statements
or any change in events, conditions or circumstances on which any
forward-looking statement is based.
S-18
THE MORTGAGE POOL
The following descriptions of the Mortgage Loans and the mortgaged
properties are based upon the expected characteristics of the Mortgage Loans as
of the close of business on the Cut-off Date. The balances shown have been
adjusted for the scheduled principal payments due on or before the Cut-off
Date. Prior to the Closing Date, Mortgage Loans may be removed from Mortgage
Pool and other Mortgage Loans may be substituted for them. The Depositor
believes that the information set forth in this prospectus supplement is
representative of the characteristics of the Mortgage Pool as they will be
constituted on the Closing Date. Unless the context requires otherwise,
references below to percentages of the Mortgage Loans are approximate
percentages of the aggregate Stated Principal Balance of the Mortgage Loans as
of the Cut-off Date.
The Wachovia Asset Securitization 2002-1 Trust (the "TRUST") will consist
primarily of a pool (the "MORTGAGE POOL") of fixed-rate, conventional,
fully-amortizing and balloon mortgage loans (the "MORTGAGE LOANS") secured by
first liens on residential properties. The Mortgage Loans have been divided
into three loan groups ("LOAN GROUP 1," "LOAN GROUP 2" and "LOAN GROUP 3" and
each a "LOAN GROUP"). The Mortgage Loans in Loan Group 1 are referred to as the
"GROUP 1 MORTGAGE LOANS." The Mortgage Loans in Loan Group 2 are referred to as
the "GROUP 2 MORTGAGE LOANS." The Mortgage Loans in Group 3 are referred to as
the "GROUP 3 MORTGAGE LOANS." Borrowers may, however, prepay their Mortgage
Loans at any time. Accordingly, 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. The Mortgage Loans will have scheduled monthly payments
of interest and principal due on the first day of each month.
The Depositor will purchase the Mortgage Loans from Wachovia Bank,
National Association (the "SELLER") on the Closing Date pursuant to a mortgage
loan purchase agreement between the Seller and the Depositor (the "MORTGAGE
LOAN PURCHASE AGREEMENT"). The Mortgage Loan Purchase Agreement will provide
the Depositor with remedies against the Seller for breaches of representations
and warranties made by the Depositor with respect to the Mortgage Loans in the
Pooling Agreement and for the failure to deliver documentation with respect to
the Mortgage Loans under the Pooling Agreement.
As of the Cut-off Date, approximately 0.95%, approximately 1.82% and
approximately 0.83% of the Group 1 Mortgage Loans, Group 2 Mortgage Loans and
Group 3 Mortgage Loans, respectively, were delinquent and approximately 1.41%,
approximately 2.58% and approximately 6.32% of the Group 1 Mortgage Loans,
Group 2 Mortgage Loans and Group 3 Mortgage Loans, respectively, have been more
than 30 days delinquent more than once during the preceding twelve months. None
of the Mortgage Loans will be subject to any buydown agreement. A loan is
considered "30 days delinquent" if any scheduled payment of principal or
interest is delinquent past the end of the month in which such payment was due.
Approximately 1.04% of the Group 1 Mortgage Loans will not fully amortize
by their respective maturity dates (each, a "BALLOON MORTGAGE LOAN"). The
Monthly Payment for each Balloon Mortgage Loan is based on an amortization
schedule ranging from 180 months to 360 months, except for the final payment
(the "BALLOON PAYMENT") which is due and payable between the 60th month and the
180th month following origination of such Mortgage Loan, depending on the terms
of the related mortgage note. With respect to the majority of the Balloon
Mortgage Loans, the Monthly Payments for such Balloon Mortgage Loans amortize
over 360 months, but the Balloon Payment is due in the 180th month following
origination. The amount of the Balloon Payment on each Balloon Mortgage Loan is
substantially in excess of the amount of the scheduled Monthly Payment for such
Mortgage Loan.
As of the Cut-off Date, no Mortgage Loan had a current Loan-to-Value Ratio
of more than 100.00%. For more information on the Loan-to-Value Ratios of the
Mortgage Loans, see the "Current Loan-to-Value Ratios" tables below. At least
60% of the Mortgage Loans with a Loan-to-Value Ratio at origination in excess
of 80% will not be covered by a primary mortgage guaranty insurance policy. No
such primary mortgage insurance policy will be required with respect to any
such Mortgage Loan after the date on which the related Loan-to-Value Ratio is
less than 80%.
The "LOAN-TO-VALUE RATIO" of a Mortgage Loan at any time is the percentage
equal to (i) the principal balance of the related Mortgage Loan divided by (ii)
the lesser of (a) the appraised value of the related mortgaged property
determined in an appraisal obtained by the originator at origination of
S-19
the Mortgage Loan or an automated valuation model or tax assessed value (it
permitted by the applicable mortgage loan program) and (b) except for Mortgage
Loans made for refinancing purposes, the sales price for the mortgaged
property. The value of any mortgaged property generally will change from the
level that existed on the appraisal or sales date. If residential real estate
values generally or in a particular geographic area decline, the Loan-to-Value
Ratios might not be a reliable indicator of the rates of delinquencies,
foreclosures and losses that could occur with respect to the Mortgage Loans.
GROUP 1 MORTGAGE LOAN DATA
The following tables set forth certain characteristics of the Group 1
Mortgage Loans as of the Cut-off Date. The balances and percentages may not be
exact due to rounding.
GROUP 1 GROUP 1
ALL GROUP 1 DISCOUNT PREMIUM
MORTGAGE MORTGAGE MORTGAGE
LOANS LOANS LOANS
------------------------------ ------------------------------ ------------------------------
Number of Mortgage Loans ............ 1,797 411 1,386
Aggregate Stated Principal
Balance ............................ $613,181,313.59 $143,723,987.65 $469,457,325.94
Range of Original Terms to
Stated Maturity .................... 60 to 360 months 60 to 294 months 60 to 360 months
Range of Stated Principal
Balances ........................... $5,087.89 to $2,141,519.09 $6,968.92 to $1,731,592.34 $5,087.89 to $2,141,519.09
Average Stated Principal
Balance ............................ $341,224.99 $349,693.40 $338,713.80
Latest Stated Maturity Date ......... 1/1/30 3/1/17 1/1/30
Range of Mortgage Interest
Rates .............................. 5.125% to 13.000% 5.125% to 6.500% 6.600% to 13.000%
Weighted Average Mortgage
Interest Rate ...................... 6.876% 6.278% 7.059%
Range of Remaining Terms to
Stated Maturity .................... 2 to 316 months 7 to 175 months 2 to 316
Weighted Average Remaining
Term to Stated Maturity ............ 132 months 132 months 131 months
Range of Current Loan-to-Value
Ratios ............................. 2.13% to 97.34% 7.15% to 90.35% 2.13% to 97.34%
Weighted Average Current
Loan-to-Value Ratio ................ 53.92% 53.78% 53.97%
Geographic Concentration in
Excess of 5.00% ....................
Florida .......................... 26.72% 16.96% 29.71%
North Carolina ................... 12.45% 9.52% 13.35%
New Jersey ....................... 11.76% 11.59% 11.81%
Pennsylvania ..................... 7.59% 17.17% *
Georgia .......................... 6.05% 8.04% 5.44%
Virginia ......................... 5.84% 5.34% 6.00%
- ----------
* Less than 5% of the aggregate Stated Principal Balance.
S-20
OCCUPANCY OF MORTGAGED PROPERTIES(1)
NUMBER OF AGGREGATE % OF GROUP 1
GROUP 1 STATED PRINCIPAL CUT-OFF DATE
MORTGAGE BALANCE AS OF POOL PRINCIPAL
OCCUPANCY LOANS CUT-OFF DATE BALANCE
- ----------------------------- ----------- -------------------- ---------------
Primary Residence ........... 1,581 $529,939,426.79 86.42%
Second Home ................. 190 79,067,006.01 12.89
Investment Property ......... 25 4,086,401.50 0.67
Unknown ..................... 1 88,479.29 0.01
----- --------------- ------
TOTAL ...................... 1,797 $613,181,313.59 100.00%
===== =============== ======
- ----------
(1) Based solely on representations of the mortgagor at the time of
origination of the related Group 1 Mortgage Loan.
PROPERTY TYPES
NUMBER OF AGGREGATE % OF GROUP 1
GROUP 1 STATED PRINCIPAL CUT-OFF DATE
MORTGAGE BALANCE AS OF POOL PRINCIPAL
PROPERTY TYPE LOANS CUT-OFF DATE BALANCE
- --------------------------------- ----------- -------------------- ---------------
Single Family ................... 1,659 $567,623,798.38 92.57%
Condo ........................... 92 34,535,266.27 5.63
Multi-Family (5+ Units) ......... 10 3,283,533.67 0.54
Two to Four Family .............. 13 2,990,738.55 0.49
Cooperative ..................... 4 2,145,069.97 0.35
Townhouse ....................... 14 1,614,481.45 0.26
PUD ............................. 5 988,425.30 0.16
----- --------------- ------
TOTAL .......................... 1,797 $613,181,313.59 100.00%
===== =============== ======
MORTGAGE LOAN PURPOSE
NUMBER OF AGGREGATE % OF GROUP 1
GROUP 1 STATED PRINCIPAL CUT-OFF DATE
MORTGAGE BALANCE AS OF POOL PRINCIPAL
PURPOSE LOANS CUT-OFF DATE BALANCE
- ------------------------------- ----------- -------------------- ---------------
Refinance (Rate/Term) ......... 745 $250,986,625.24 40.93%
Purchase ...................... 595 206,115,802.93 33.61
Refinance (Cash-out) .......... 428 148,177,052.84 24.17
Debt Consolidation ............ 21 5,388,304.54 0.88
Construction .................. 5 1,993,536.63 0.33
Home Improvement .............. 3 519,991.41 0.08
----- --------------- ------
TOTAL ........................ 1,797 $613,181,313.59 100.00%
===== =============== ======
S-21
GEOGRAPHICAL DISTRIBUTION OF THE MORTGAGED PROPERTIES(1)
NUMBER OF AGGREGATE % OF GROUP 1
GROUP 1 STATED PRINCIPAL CUT-OFF DATE
MORTGAGE BALANCE AS OF POOL PRINCIPAL
GEOGRAPHIC AREA LOANS CUT-OFF DATE BALANCE
- ------------------------------ ----------- ------------------ ---------------
Alabama ...................... 7 $ 1,509,696.47 0.25%
Arizona ...................... 14 5,167,708.79 0.84
Arkansas ..................... 1 261,619.99 0.04
California ................... 69 22,631,476.89 3.69
Colorado ..................... 15 6,471,463.68 1.06
Connecticut .................. 68 26,310,171.28 4.29
Delaware ..................... 19 7,501,495.65 1.22
District of Columbia ......... 15 4,161,180.40 0.68
Florida ...................... 412 163,830,842.43 26.72
Georgia ...................... 124 37,108,406.94 6.05
Idaho ........................ 3 1,210,428.48 0.20
Illinois ..................... 13 5,398,807.29 0.88
Indiana ...................... 1 344,231.74 0.06
Kansas ....................... 2 363,173.57 0.06
Kentucky ..................... 2 642,942.05 0.10
Louisiana .................... 2 501,382.36 0.08
Maine ........................ 3 1,189,142.80 0.19
Maryland ..................... 48 15,749,687.33 2.57
Massachusetts ................ 15 5,204,408.17 0.85
Michigan ..................... 1 8,760.57 0.00
Minnesota .................... 1 348,459.45 0.06
Mississippi .................. 1 260,125.03 0.04
Missouri ..................... 4 736,748.45 0.12
Montana ...................... 2 515,571.68 0.08
Nevada ....................... 2 626,821.27 0.10
New Hampshire ................ 3 370,812.22 0.06
New Jersey ................... 225 72,123,585.68 11.76
New Mexico ................... 1 254,785.35 0.04
New York ..................... 54 23,307,748.26 3.80
North Carolina ............... 228 76,335,744.26 12.45
Ohio ......................... 7 1,475,594.57 0.24
Oregon ....................... 3 552,434.21 0.09
Pennsylvania ................. 167 46,540,010.07 7.59
Rhode Island ................. 4 1,004,334.48 0.16
South Carolina ............... 74 27,627,622.51 4.51
Tennessee .................... 19 5,069,663.84 0.83
Texas ........................ 27 8,611,292.52 1.40
Utah ......................... 2 997,128.25 0.16
Vermont ...................... 1 617,334.78 0.10
Virginia ..................... 127 35,835,325.33 5.84
Washington ................... 9 2,899,482.12 0.47
West Virginia ................ 1 429,684.13 0.07
Wisconsin .................... 1 1,073,978.25 0.18
----- --------------- ------
TOTAL ....................... 1,797 $613,181,313.59 100.00%
===== =============== ======
- ----------
(1) As of the Cut-off Date, no more than approximately 0.90% of the Group 1
Mortgage Loans are expected to be secured by mortgaged properties located
in any one five-digit postal zip code.
S-22
CURRENT MORTGAGE LOAN PRINCIPAL BALANCES(1)
NUMBER OF AGGREGATE % OF GROUP 1
GROUP 1 STATED PRINCIPAL CUT-OFF DATE
MORTGAGE BALANCE AS OF POOL PRINCIPAL
RANGE OF CURRENT MORTGAGE LOAN PRINCIPAL BALANCES LOANS CUT-OFF DATE BALANCE
- ----------------------------------------------------- ----------- ------------------ ---------------
$0.01 to $100,000.00................................. 163 $ 6,899,656.81 1.13%
$100,000.01 to $200,000.00........................... 188 29,711,213.51 4.85
$200,000.01 to $300,000.00........................... 485 127,427,373.10 20.78
$300,000.01 to $400,000.00........................... 457 156,879,183.07 25.58
$400,000.01 to $500,000.00........................... 230 102,127,077.57 16.66
$500,000.01 to $600,000.00........................... 139 75,287,077.23 12.28
$600,000.01 to $700,000.00........................... 53 33,990,202.91 5.54
$700,000.01 to $800,000.00........................... 19 14,064,754.24 2.29
$800,000.01 to $900,000.00........................... 26 21,995,204.82 3.59
$900,000.01 to $1,000,000.00......................... 19 18,183,889.48 2.97
$1,000,000.01 to $1,100,000.00....................... 1 1,073,978.25 0.18
$1,100,000.01 to $1,200,000.00....................... 2 2,394,830.04 0.39
$1,200,000.01 to $1,300,000.00....................... 7 8,734,013.64 1.42
$1,400,000.01 to $1,500,000.00....................... 1 1,454,337.21 0.24
$1,700,000.01 to $1,800,000.00....................... 4 6,970,122.65 1.14
$1,900,000.01 to $2,000,000.00....................... 2 3,846,879.97 0.63
$2,100,000.01 to $2,200,000.00....................... 1 2,141,519.09 0.35
----- --------------- ------
TOTAL .............................................. 1,797 $613,181,313.59 100.00%
===== =============== ======
- ----------
(1) As of the Cut-off Date, the average outstanding principal balance of the
Group 1 Mortgage Loans is expected to be approximately $341,224.99.
S-23
CURRENT LOAN-TO-VALUE RATIOS(1)(2)
NUMBER OF AGGREGATE % OF GROUP 1
GROUP 1 STATED PRINCIPAL CUT-OFF DATE
MORTGAGE BALANCE AS OF POOL PRINCIPAL
RANGE OF CURRENT LOAN-TO-VALUE RATIOS LOANS CUT-OFF DATE BALANCE
- --------------------------------------- ----------- ------------------ ---------------
Not Available ......................... 3 $ 1,392,430.53 0.23%
0.01% to 5.00% ........................ 5 97,706.05 0.02
5.01% to 10.00% ....................... 21 1,120,501.44 0.18
10.01% to 15.00% ...................... 33 3,732,825.06 0.61
15.01% to 20.00% ...................... 27 3,495,532.74 0.57
20.01% to 25.00% ...................... 53 12,516,792.18 2.04
25.01% to 30.00% ...................... 98 23,412,256.85 3.82
30.01% to 35.00% ...................... 132 37,001,992.98 6.03
35.01% to 40.00% ...................... 151 48,798,605.76 7.96
40.01% to 45.00% ...................... 164 58,633,514.47 9.56
45.01% to 50.00% ...................... 166 57,643,958.62 9.4
50.01% to 55.00% ...................... 162 60,335,655.22 9.84
55.01% to 60.00% ...................... 195 74,195,741.47 12.1
60.01% to 65.00% ...................... 187 70,685,160.80 11.53
65.01% to 70.00% ...................... 183 69,650,858.30 11.36
70.01% to 75.00% ...................... 92 37,714,468.91 6.15
75.01% to 80.00% ...................... 62 25,617,895.35 4.18
80.01% to 85.00% ...................... 15 8,107,048.37 1.32
85.01% to 90.00% ...................... 20 8,920,250.10 1.45
90.01% to 95.00% ...................... 20 7,395,422.33 1.21
95.01% to 100.00% ..................... 8 2,712,696.06 0.44
----- --------------- ------
TOTAL ................................ 1,797 $613,181,313.59 100.00%
===== =============== ======
- ----------
(1) Based on the principal balances of the Group 1 Mortgage Loans as of the
Cut-off Date.
(2) As of the Cut-off Date, the weighted average current Loan-to-Value Ratio
of the Group 1 Mortgage Loans is expected to be approximately 53.92%.
MORTGAGE INTEREST RATES(1)
NUMBER OF AGGREGATE % OF GROUP 1
GROUP 1 STATED PRINCIPAL CUT-OFF DATE
MORTGAGE BALANCE AS OF POOL PRINCIPAL
RANGE OF MORTGAGE INTEREST RATES LOANS CUT-OFF DATE BALANCE
- ---------------------------------- ----------- ------------------ ---------------
5.001% to 5.500% ................. 5 $ 1,359,779.71 0.22%
5.501% to 6.000% ................. 90 28,645,353.89 4.67
6.001% to 6.500% ................. 316 113,718,854.05 18.55
6.501% to 7.000% ................. 846 304,000,844.72 49.58
7.001% to 7.500% ................. 328 116,524,771.93 19
7.501% to 8.000% ................. 121 32,935,299.32 5.37
8.001% to 8.500% ................. 47 11,357,167.11 1.85
8.501% to 9.000% ................. 10 3,613,019.94 0.59
9.001% to 9.500% ................. 3 128,276.46 0.02
9.501% to 10.000% ................ 6 323,349.26 0.05
10.001% to 10.500% ............... 7 334,315.56 0.05
10.501% to 11.000% ............... 4 78,103.10 0.01
11.501% to 12.000% ............... 13 154,957.90 0.03
12.501% to 13.000% ............... 1 7,220.64 0.00
----- --------------- ------
TOTAL ........................... 1,797 $613,181,313.59 100.00%
===== =============== ======
- ----------
(1) As of the Cut-off Date, the weighted average mortgage interest rate of
the Group 1 Mortgage Loans is expected to be approximately 6.876% per
annum.
S-24
ORIGINAL TERMS TO STATED MATURITY
NUMBER OF AGGREGATE % OF GROUP 1
GROUP 1 STATED PRINCIPAL CUT-OFF DATE
MORTGAGE BALANCE AS OF POOL PRINCIPAL
RANGE OF ORIGINAL TERMS TO STATED MATURITY LOANS CUT-OFF DATE BALANCE
- -------------------------------------------- ----------- ------------------ ---------------
1 to 60 months ............................. 11 $ 3,348,494.10 0.55%
61 to 120 months ........................... 85 14,430,305.53 2.35
121 to 180 months .......................... 1,638 573,336,419.22 93.5
181 to 240 months .......................... 42 14,699,642.05 2.4
241 to 300 months .......................... 11 3,831,608.74 0.62
301 to 360 months .......................... 10 3,534,843.95 0.58
----- --------------- ------
TOTAL ..................................... 1,797 $613,181,313.59 100.00%
===== =============== ======
REMAINING TERMS TO STATED MATURITY(1)
NUMBER OF AGGREGATE % OF GROUP 1
GROUP 1 STATED PRINCIPAL CUT-OFF DATE
MORTGAGE BALANCE AS OF POOL PRINCIPAL
RANGE OF REMAINING TERMS TO STATED MATURITY LOANS CUT-OFF DATE BALANCE
- --------------------------------------------- ----------- ------------------ ---------------
1 to 60 months .............................. 160 $ 20,800,588.68 3.39%
61 to 120 months ............................ 387 93,049,301.39 15.17
121 to 180 months ........................... 1,244 497,894,018.08 81.2
241 to 300 months ........................... 5 883,451.28 0.14
301 to 360 months ........................... 1 553,954.16 0.09
----- --------------- ------
TOTAL ...................................... 1,797 $613,181,313.59 100.00%
===== =============== ======
- ----------
(1) As of the Cut-off Date, the weighted average remaining term to stated
maturity of the Group 1 Mortgage Loans is expected to be approximately
132 months.
CREDIT SCORING OF MORTGAGORS(1)
NUMBER OF AGGREGATE % OF GROUP 1
GROUP 1 STATED PRINCIPAL CUT-OFF DATE
MORTGAGE BALANCE AS OF POOL PRINCIPAL
RANGE OF CREDIT SCORES LOANS CUT-OFF DATE BALANCE
- ------------------------ ----------- ------------------ ---------------
Not Available .......... 20 $ 6,819,292.22 1.11%
451 to 500 ............. 1 250,116.54 0.04
501 to 550 ............. 23 4,686,723.60 0.76
551 to 600 ............. 64 14,596,680.05 2.38
601 to 650 ............. 152 43,447,279.87 7.09
651 to 700 ............. 334 127,169,722.26 20.74
701 to 750 ............. 522 182,729,410.04 29.8
751 to 800 ............. 638 220,542,069.09 35.97
801 to 850 ............. 42 12,421,002.69 2.03
851 to 900 ............. 1 519,017.23 0.08
----- --------------- ------
TOTAL ................. 1,797 $613,181,313.59 100.00%
===== =============== ======
- ----------
(1) The scores shown are Bureau Credit Scores from Experian (FICO), Equifax
(Beacon) and TransUnion (Empirica).
S-25
SEASONING
NUMBER OF AGGREGATE % OF GROUP 1
GROUP 1 STATED PRINCIPAL CUT-OFF DATE
MORTGAGE BALANCE AS OF POOL PRINCIPAL
RANGE OF SEASONING LOANS CUT-OFF DATE BALANCE
- --------------------------- ----------- -------------------- ---------------
1 to 60 months ............ 1,257 $495,532,318.36 80.81%
61 to 120 months .......... 448 105,956,287.99 17.28
121 to 180 months ......... 87 9,955,823.46 1.62
181 to 240 months ......... 4 1,613,237.15 0.26
241 to 300 months ......... 1 123,646.63 0.02
----- --------------- ------
TOTAL .................... 1,797 $613,181,313.59 100.00%
===== =============== ======
DOCUMENTATION TYPE
NUMBER OF AGGREGATE % OF GROUP 1
GROUP 1 STATED PRINCIPAL CUT-OFF DATE
MORTGAGE BALANCE AS OF POOL PRINCIPAL
DOCUMENTATION TYPE LOANS CUT-OFF DATE BALANCE
- --------------------- ----------- -------------------- ---------------
Full ................ 1,117 $393,543,728.45 64.18%
Alternative ......... 231 74,011,330.54 12.07
Stated .............. 239 86,858,858.25 14.17
Unknown ............. 210 58,767,396.35 9.58
----- --------------- ------
TOTAL .............. 1,797 $613,181,313.59 100.00%
===== =============== ======
S-26
GROUP 2 MORTGAGE LOAN DATA
The following tables set forth certain characteristics of the Group 2
Mortgage Loans as of the Cut-off Date. The balances and percentages may not be
exact due to rounding.
ALL GROUP 2
MORTGAGE
LOANS
------------------------------
Number of Mortgage Loans ............ 3,595
Aggregate Stated Principal
Balance ............................ $1,443,046,126.96
Range of Original Terms to
Stated Maturity .................... 120 to 414 months
Range of Stated Principal
Balances ........................... $5,019.86 to $2,809,025.77
Average Stated Principal
Balance ............................ $401,403.65
Latest Stated Maturity Date ......... 3/1/32
Range of Mortgage Interest
Rates .............................. 3.625% to 16.750%
Weighted Average Mortgage
Interest Rate ...................... 7.156%
Range of Remaining Terms to
Stated Maturity .................... 6 to 355 months
Weighted Average Remaining
Term to Stated Maturity ............ 317 months
Range of Current Loan-to-Value
Ratios ............................. 1.52% to 99.58%
Weighted Average Current
Loan-to-Value Ratio ................ 70.47 %
Geographic Concentration in
Excess of 5.00% ....................
Florida .......................... 16.79%
California ....................... 10.52%
New Jersey ....................... 9.65%
Virginia ......................... 7.27%
North Carolina ................... 6.82%
Pennsylvania ..................... 6.26%
Connecticut ...................... 5.53%
New York ......................... 5.28%
Georgia .......................... 5.20%
GROUP 2 GROUP 2
DISCOUNT PREMIUM
MORTGAGE MORTGAGE
LOANS LOANS
------------------------------- ------------------------------
Number of Mortgage Loans ............ 474 3,121
Aggregate Stated Principal
Balance ............................ $184,829,067.21 $1,258,217,059.75
Range of Original Terms to
Stated Maturity .................... 230 to 380 months 120 to 414 months
Range of Stated Principal
Balances ........................... $22,829.31 to $1,632,564.50 $5,019.86 to $2,809,025.77
Average Stated Principal
Balance ............................ $389,934.74 $403,145.49
Latest Stated Maturity Date ......... 3/1/32 3/1/32
Range of Mortgage Interest
Rates .............................. 3.625% to 6.500% 6.625% to 16.750%
Weighted Average Mortgage
Interest Rate ...................... 6.288% 7.283%
Range of Remaining Terms to
Stated Maturity .................... 9 to 355 months 6 to 355 months
Weighted Average Remaining
Term to Stated Maturity ............ 332 months 315 months
Range of Current Loan-to-Value
Ratios ............................. 21.43% to 99.26% 1.52% to 99.58%
Weighted Average Current
Loan-to-Value Ratio ................ 72.91% 70.12 %
Geographic Concentration in
Excess of 5.00% ....................
Florida .......................... 6.58% 18.29%
California ....................... 13.05% 10.15%
New Jersey ....................... 9.38% 9.69%
Virginia ......................... 9.41% 6.96%
North Carolina ................... 5.60% 7.00%
Pennsylvania ..................... 8.75% 5.90%
Connecticut ...................... 7.03% 5.31%
New York ......................... * 5.56%
Georgia .......................... * 5.36%
- ----------
* Less than 5% of the aggregate Stated Principal Balance.
OCCUPANCY OF MORTGAGED PROPERTIES(1)
NUMBER OF AGGREGATE % OF GROUP 2
GROUP 2 STATED PRINCIPAL CUT-OFF DATE
MORTGAGE BALANCE AS OF POOL PRINCIPAL
OCCUPANCY LOANS CUT-OFF DATE BALANCE
- ----------------------------- ----------- ---------------------- ---------------
Primary Residence ........... 3,372 $1,344,679,601.95 93.18%
Second Home ................. 187 85,103,686.42 5.90
Investment Property ......... 28 10,270,323.25 0.71
Unknown ..................... 8 2,992,515.34 0.21
----- ----------------- ------
TOTAL ...................... 3,595 $1,443,046,126.96 100.00%
===== ================= ======
- ----------
(1) Based solely on representations of the mortgagor at the time of
origination of the related Group 2 Mortgage Loan.
S-27
PROPERTY TYPES
NUMBER OF AGGREGATE % OF GROUP 2
GROUP 2 STATED PRINCIPAL CUT-OFF DATE
MORTGAGE BALANCE AS OF POOL PRINCIPAL
PROPERTY TYPE LOANS CUT-OFF DATE BALANCE
- --------------------------------- ----------- ---------------------- ---------------
Single Family ................... 3,310 $1,349,195,234.28 93.50%
Condo ........................... 146 50,430,233.88 3.49
Two to Four Family .............. 39 12,979,465.76 0.90
PUD ............................. 32 10,190,926.18 0.71
Multi-Family (5+ Units) ......... 15 7,915,723.34 0.55
Townhouse ....................... 48 7,948,786.50 0.55
Cooperative ..................... 5 4,385,757.02 0.30
----- ----------------- ------
TOTAL .......................... 3,595 $1,443,046,126.96 100.00%
===== ================= ======
MORTGAGE LOAN PURPOSE
NUMBER OF AGGREGATE % OF GROUP 2
GROUP 2 STATED PRINCIPAL CUT-OFF DATE
MORTGAGE BALANCE AS OF POOL PRINCIPAL
PURPOSE LOANS CUT-OFF DATE BALANCE
- ------------------------------- ----------- -------------------- ---------------
Purchase ...................... 2,405 $ 943,506,496.69 65.38%
Refinance (Rate/Term) ......... 697 287,697,810.58 19.94
Refinance (Cash-out) .......... 423 186,347,727.20 12.91
Debt Consolidation ............ 44 15,784,442.32 1.09
Home Improvement .............. 15 5,547,950.82 0.38
Construction .................. 9 3,886,931.59 0.27
Unknown ....................... 2 274,767.76 0.02
----- ----------------- ------
TOTAL ........................ 3,595 $1,443,046,126.96 100.00%
===== ================= ======
S-28
GEOGRAPHICAL DISTRIBUTION OF THE MORTGAGED PROPERTIES(1)
NUMBER OF AGGREGATE % OF GROUP 2
GROUP 2 STATED PRINCIPAL CUT-OFF DATE
MORTGAGE BALANCE AS OF POOL PRINCIPAL
GEOGRAPHIC AREA LOANS CUT-OFF DATE BALANCE
- ------------------------------ ----------- --------------------- ---------------
Alabama ...................... 11 $ 3,631,268.49 0.25%
Alaska ....................... 1 214,923.15 0.01
Arizona ...................... 37 14,832,405.40 1.03
Arkansas ..................... 3 946,664.91 0.07
California ................... 348 151,793,553.71 10.52
Colorado ..................... 72 31,398,973.69 2.18
Connecticut .................. 192 79,858,053.43 5.53
Delaware ..................... 18 6,320,974.64 0.44
District of Columbia ......... 36 10,805,864.98 0.75
Florida ...................... 528 242,343,812.28 16.79
Georgia ...................... 201 74,975,617.86 5.20
Idaho ........................ 2 429,191.16 0.03
Illinois ..................... 65 25,895,435.16 1.79
Indiana ...................... 23 8,430,760.44 0.58
Iowa ......................... 1 300,106.18 0.02
Kansas ....................... 7 2,449,073.35 0.17
Kentucky ..................... 6 2,660,612.28 0.18
Louisiana .................... 5 1,753,324.61 0.12
Maine ........................ 4 1,489,865.97 0.10
Maryland ..................... 119 45,914,057.82 3.18
Massachusetts ................ 144 58,596,588.72 4.06
Michigan ..................... 42 15,600,307.36 1.08
Minnesota .................... 24 8,479,789.99 0.59
Mississippi .................. 3 1,365,617.52 0.09
Missouri ..................... 19 7,281,231.98 0.50
Montana ...................... 1 386,279.93 0.03
Nevada ....................... 8 4,234,333.31 0.29
New Hampshire ................ 13 5,101,148.89 0.35
New Jersey ................... 358 139,248,169.43 9.65
New York ..................... 170 76,120,897.45 5.28
North Carolina ............... 243 98,375,778.76 6.82
Ohio ......................... 66 24,975,882.15 1.73
Oklahoma ..................... 1 385,472.27 0.03
Oregon ....................... 10 3,248,934.23 0.23
Pennsylvania ................. 267 90,359,703.93 6.26
Rhode Island ................. 10 3,648,798.03 0.25
South Carolina ............... 77 26,825,807.84 1.86
Tennessee .................... 30 10,184,174.52 0.71
Texas ........................ 84 32,932,831.90 2.28
Utah ......................... 4 1,325,345.39 0.09
Vermont ...................... 2 1,203,646.60 0.08
Virginia ..................... 285 104,950,654.86 7.27
Washington ................... 47 18,923,677.88 1.31
West Virginia ................ 1 318,777.33 0.02
Wisconsin .................... 6 2,167,978.94 0.15
Wyoming ...................... 1 359,758.24 0.02
----- ----------------- ------
TOTAL ....................... 3,595 $1,443,046,126.96 100.00%
===== ================= ======
- ----------
(1) As of the Cut-off Date, no more than approximately 0.68% of the Group 2
Mortgage Loans are expected to be secured by mortgaged properties located
in any one five-digit postal zip code.
S-29
CURRENT MORTGAGE LOAN PRINCIPAL BALANCES(1)
NUMBER OF AGGREGATE % OF GROUP 2
GROUP 2 STATED PRINCIPAL CUT-OFF DATE
MORTGAGE BALANCE AS OF POOL PRINCIPAL
RANGE OF CURRENT MORTGAGE LOAN PRINCIPAL BALANCES LOANS CUT-OFF DATE BALANCE
- --------------------------------------------------- ----------- --------------------- ---------------
$0.01 to $100,000.00............................... 193 $ 9,238,278.89 0.64%
$100,000.01 to $200,000.00......................... 88 13,181,715.94 0.91
$200,000.01 to $300,000.00......................... 371 103,981,721.66 7.21
$300,000.01 to $400,000.00......................... 1,553 534,107,481.58 37.01
$400,000.01 to $500,000.00......................... 706 313,017,441.91 21.69
$500,000.01 to $600,000.00......................... 300 164,240,414.89 11.38
$600,000.01 to $700,000.00......................... 176 112,152,495.68 7.77
$700,000.01 to $800,000.00......................... 75 55,626,667.42 3.85
$800,000.01 to $900,000.00......................... 47 39,963,715.16 2.77
$900,000.01 to $1,000,000.00....................... 54 51,611,240.07 3.58
$1,000,000.01 to $1,100,000.00..................... 6 6,314,197.63 0.44
$1,100,000.01 to $1,200,000.00..................... 7 8,105,225.94 0.56
$1,200,000.01 to $1,300,000.00..................... 5 6,370,055.23 0.44
$1,300,000.01 to $1,400,000.00..................... 2 2,615,450.89 0.18
$1,400,000.01 to $1,500,000.00..................... 2 2,972,249.48 0.21
$1,500,000.01 to $1,600,000.00..................... 1 1,537,873.56 0.11
$1,600,000.01 to $1,700,000.00..................... 3 5,010,723.06 0.35
$1,700,000.01 to $1,800,000.00..................... 1 1,783,326.89 0.12
$1,800,000.01 to $1,900,000.00..................... 1 1,828,623.26 0.13
$1,900,000.01 to $2,000,000.00..................... 1 1,983,152.89 0.14
$2,200,000.01 to $2,300,000.00..................... 1 2,262,399.89 0.16
$2,300,000.01 to $2,400,000.00..................... 1 2,332,649.27 0.16
$2,800,000.01 to $2,900,000.00..................... 1 2,809,025.77 0.19
----- ----------------- ------
TOTAL ............................................ 3,595 $1,443,046,126.96 100.00%
===== ================= ======
- ----------
(1) As of the Cut-off Date, the average outstanding principal balance of the
Group 2 Mortgage Loans is expected to be approximately $401,403.65.
S-30
CURRENT LOAN-TO-VALUE RATIOS(1)(2)
NUMBER OF AGGREGATE % OF GROUP 2
GROUP 2 STATED PRINCIPAL CUT-OFF DATE
MORTGAGE BALANCE AS OF POOL PRINCIPAL
RANGE OF CURRENT LOAN-TO-VALUE RATIOS LOANS CUT-OFF DATE BALANCE
- --------------------------------------- ----------- --------------------- ---------------
Unknown ............................... 2 $ 787,575.26 0.05%
0.01% to 5.00% ........................ 2 252,012.83 0.02
5.01% to 10.00% ....................... 1 46,858.34 0.00
10.01% to 15.00% ...................... 6 698,154.94 0.05
15.01% to 20.00% ...................... 6 1,025,024.38 0.07
20.01% to 25.00% ...................... 21 4,055,461.46 0.28
25.01% to 30.00% ...................... 24 11,018,033.35 0.76
30.01% to 35.00% ...................... 35 13,143,701.54 0.91
35.01% to 40.00% ...................... 54 21,792,014.60 1.51
40.01% to 45.00% ...................... 71 31,109,890.66 2.16
45.01% to 50.00% ...................... 119 47,045,243.92 3.26
50.01% to 55.00% ...................... 145 61,434,234.92 4.26
55.01% to 60.00% ...................... 201 83,944,302.45 5.82
60.01% to 65.00% ...................... 260 110,760,428.41 7.68
65.01% to 70.00% ...................... 372 154,280,270.83 10.69
70.01% to 75.00% ...................... 572 241,272,644.27 16.72
75.01% to 80.00% ...................... 1,085 448,218,488.98 31.06
80.01% to 85.00% ...................... 177 65,229,812.11 4.52
85.01% to 90.00% ...................... 257 94,628,919.90 6.56
90.01% to 95.00% ...................... 110 38,773,355.92 2.69
95.01% to 100.00% ..................... 75 13,529,697.89 0.94
----- ----------------- ------
TOTAL ................................ 3,595 $1,443,046,126.96 100.00%
===== ================= ======
- ----------
(1) Based on the principal balances of the Group 2 Mortgage Loans as of the
Cut-off Date.
(2) As of the Cut-off Date, the weighted average current Loan-to-Value Ratio
of the Group 2 Mortgage Loans is expected to be approximately 70.47%.
S-31
MORTGAGE INTEREST RATES(1)
NUMBER OF AGGREGATE % OF GROUP 2
GROUP 2 STATED PRINCIPAL CUT-OFF DATE
MORTGAGE BALANCE AS OF POOL PRINCIPAL
RANGE OF MORTGAGE INTEREST RATES LOANS CUT-OFF DATE BALANCE
- ---------------------------------- ----------- --------------------- ---------------
3.501% to 4.000% ................. 1 $ 977,682.79 0.07%
4.001% to 4.500% ................. 2 645,879.78 0.04
4.501% to 5.000% ................. 5 1,721,269.09 0.12
5.001% to 5.500% ................. 5 2,578,133.37 0.18
5.501% to 6.000% ................. 60 24,544,897.92 1.70
6.001% to 6.500% ................. 401 154,361,204.26 10.70
6.501% to 7.000% ................. 1,213 490,543,749.66 33.99
7.001% to 7.500% ................. 1,164 482,458,638.20 33.43
7.501% to 8.000% ................. 473 201,244,914.59 13.95
8.001% to 8.500% ................. 129 51,523,035.01 3.57
8.501% to 9.000% ................. 86 25,143,941.61 1.74
9.001% to 9.500% ................. 17 2,847,176.83 0.20
9.501% to 10.000% ................ 13 2,697,059.33 0.19
10.001% to 10.500% ............... 8 1,044,012.50 0.07
10.501% to 11.000% ............... 5 537,787.97 0.04
11.001% to 11.500% ............... 4 48,824.17 0.00
11.501% to 12.000% ............... 4 82,149.40 0.01
12.001% to 12.500% ............... 1 13,814.32 0.00
13.001% to 13.500% ............... 2 19,565.03 0.00
14.501% to 15.000% ............... 1 5,019.86 0.00
16.501% to 17.000% ............... 1 7,371.27 0.00
----- ----------------- ------
TOTAL ........................... 3,595 $1,443,046,126.96 100.00%
===== ================= ======
- ----------
(1) As of the Cut-off Date, the weighted average mortgage interest rate of
the Group 2 Mortgage Loans is expected to be approximately 7.156% per
annum.
S-32
ORIGINAL TERMS TO STATED MATURITY
NUMBER OF AGGREGATE % OF GROUP 2
GROUP 2 STATED PRINCIPAL CUT-OFF DATE
MORTGAGE BALANCE AS OF POOL PRINCIPAL
RANGE OF ORIGINAL TERMS TO STATED MATURITY LOANS CUT-OFF DATE BALANCE
- -------------------------------------------- ----------- -------------------- ---------------
61 to 120 months ........................... 1 $ 172,594.60 0.01%
121 to 180 months .......................... 1 233,912.18 0.02
181 to 240 months .......................... 85 19,276,366.38 1.34
241 to 300 months .......................... 31 4,887,110.54 0.34
301 to 360 months .......................... 3,470 1,416,349,157.07 98.15
361 to 420 months .......................... 7 2,126,986.19 0.15
----- ----------------- ------
TOTAL ..................................... 3,595 $1,443,046,126.96 100.00%
===== ================= ======
REMAINING TERMS TO STATED MATURITY(1)
NUMBER OF AGGREGATE % OF GROUP 2
GROUP 2 STATED PRINCIPAL CUT-OFF DATE
MORTGAGE BALANCE AS OF POOL PRINCIPAL
RANGE OF REMAINING TERMS TO STATED MATURITY LOANS CUT-OFF DATE BALANCE
- --------------------------------------------- ----------- -------------------- ---------------
1 to 60 months .............................. 37 $ 2,105,180.95 0.15%
61 to 120 months ............................ 32 3,379,868.92 0.23
121 to 180 months ........................... 50 11,488,784.79 0.80
181 to 240 months ........................... 119 41,937,541.42 2.91
241 to 300 months ........................... 497 175,635,726.60 12.17
301 to 360 months ........................... 2,860 1,208,499,024.28 83.75
----- ----------------- ------
TOTAL ...................................... 3,595 $1,443,046,126.96 100.00%
===== ================= ======
- ----------
(1) As of the Cut-off Date, the weighted average remaining term to stated
maturity of the Group 2 Mortgage Loans is expected to be approximately
317 months.
CREDIT SCORING OF MORTGAGORS(1)
NUMBER OF AGGREGATE % OF GROUP 2
GROUP 2 STATED PRINCIPAL CUT-OFF DATE
MORTGAGE BALANCE AS OF POOL PRINCIPAL
RANGE OF CREDIT SCORES LOANS CUT-OFF DATE BALANCE
- ------------------------ ----------- --------------------- ---------------
Unknown ................ 26 $ 11,194,082.67 0.78%
451 to 500 ............. 7 2,425,846.32 0.17
501 to 550 ............. 48 15,728,848.80 1.09
551 to 600 ............. 105 43,892,724.93 3.04
601 to 650 ............. 436 152,747,767.31 10.59
651 to 700 ............. 780 310,150,836.61 21.49
701 to 750 ............. 999 422,292,438.98 29.26
751 to 800 ............. 1,132 461,784,848.61 32.00
801 to 850 ............. 61 22,396,868.04 1.55
901 to 950 ............. 1 431,864.69 0.03
----- ----------------- ------
TOTAL ................. 3,595 $1,443,046,126.96 100.00%
===== ================= ======
- ----------
(1) The scores shown are Bureau Credit Scores from Experian (FICO), Equifax
(Beacon) and TransUnion (Empirica).
S-33
SEASONING
NUMBER OF AGGREGATE % OF GROUP 2
GROUP 2 STATED PRINCIPAL CUT-OFF DATE
MORTGAGE BALANCE AS OF POOL PRINCIPAL
RANGE OF SEASONING LOANS CUT-OFF DATE BALANCE
- --------------------------- ----------- ---------------------- ---------------
1 to 60 months ............ 2,893 $1,220,786,319.02 84.60%
61 to 120 months .......... 539 186,816,600.57 12.95
121 to 180 months ......... 111 32,303,345.61 2.24
181 to 240 months ......... 23 1,543,279.51 0.11
241 to 300 months ......... 13 192,896.41 0.01
301 to 360 months ......... 16 1,403,685.84 0.10
----- ----------------- ------
TOTAL .................... 3,595 $1,443,046,126.96 100.00%
===== ================= ======
DOCUMENTATION TYPE
NUMBER OF AGGREGATE % OF GROUP 2
GROUP 2 STATED PRINCIPAL CUT-OFF DATE
MORTGAGE BALANCE AS OF POOL PRINCIPAL
DOCUMENTATION TYPE LOANS CUT-OFF DATE BALANCE
- --------------------- ----------- -------------------- ---------------
Full ................ 1,986 $ 814,960,634.09 56.48%
Alternative ......... 827 323,131,617.72 22.39
Stated .............. 362 145,783,472.24 10.10
Unknown ............. 420 159,170,402.91 11.03
----- ----------------- ------
TOTAL .............. 3,595 $1,443,046,126.96 100.00%
===== ================= ======
S-34
GROUP 3 MORTGAGE LOAN DATA
The following tables set forth certain characteristics of the Group 3
Mortgage Loans as of the Cut-off Date. The balances and percentages may not be
exact due to rounding.
GROUP 3 GROUP 3
ALL GROUP 3 DISCOUNT PREMIUM
MORTGAGE MORTGAGE MORTGAGE
LOANS LOANS LOANS
---------------------------- ---------------------------- ----------------------------
Number of Mortgage Loans ............ 335 97 238
Aggregate Stated Principal
Balance ............................ $44,631,291.00 $14,025,269.62 $30,606,021.38
Range of Original Terms to
Stated Maturity .................... 120 to 360 months 120 to 360 months 133 to 360 months
Range of Stated Principal
Balances ........................... $5,066.82 to $249,132.16 $5,066.82 to $249,132.16 $7,904.93 to $247,940.46
Average Stated Principal
Balance ............................ $133,227.73 $144,590.41 $128,596.73
Latest Stated Maturity Date ......... 1/1/32 1/1/32 1/1/32
Range of Mortgage Interest
Rates .............................. 3.000% to 15.500% 3.000% to 6.750% 6.800% to 15.500%
Weighted Average Mortgage
Interest Rate ...................... 7.160% 6.473% 7.475%
Range of Remaining Terms to
Stated Maturity .................... 60 to 353 months 60 to 353 months 61 to 353 months
Weighted Average Remaining
Term to Stated Maturity ............ 153 months 128 months 165 months
Range of Current Loan-to-Value
Ratios ............................. 3.26% to 99.61% 6.76% to 97.44% 3.26% to 99.61%
Weighted Average Current
Loan-to-Value Ratio ................ 47.51% 45.20% 48.57%
Geographic Concentration in
Excess of 5.00% ....................
Florida .......................... 86.98% 90.61% 85.32%
New York ......................... 9.29% * 11.58%
- ----------
* Less than 5% of the aggregate Stated Principal Balance.
OCCUPANCY OF MORTGAGED PROPERTIES(1)
NUMBER OF AGGREGATE % OF GROUP 3
GROUP 3 STATED PRINCIPAL CUT-OFF DATE
MORTGAGE BALANCE AS OF POOL PRINCIPAL
OCCUPANCY LOANS CUT-OFF DATE BALANCE
- ----------------------------- ----------- ------------------ ---------------
Primary Residence ........... 308 $40,949,841.61 91.75%
Second Home ................. 19 2,669,763.69 5.98
Investment Property ......... 8 1,011,685.70 2.27
--- -------------- ------
TOTAL ...................... 335 $44,631,291.00 100.00%
=== ============== ======
- ----------
(1) Based solely on representations of the mortgagor at the time of
origination of the related Group 3 Mortgage Loan.
S-35
PROPERTY TYPES
NUMBER OF AGGREGATE % OF GROUP 3
GROUP 3 STATED PRINCIPAL CUT-OFF DATE
MORTGAGE BALANCE AS OF POOL PRINCIPAL
PROPERTY TYPE LOANS CUT-OFF DATE BALANCE
- --------------------------------- ----------- ------------------ ---------------
Single Family ................... 294 $40,095,296.83 89.84%
Condo ........................... 33 3,541,454.18 7.93
Two to Four Family .............. 2 364,735.63 0.82
Multi-Family (5+ Units) ......... 2 354,931.82 0.80
PUD ............................. 2 150,927.73 0.34
Townhouse ....................... 1 79,345.23 0.18
Cooperative ..................... 1 44,599.58 0.10
--- -------------- ------
TOTAL .......................... 335 $44,631,291.00 100.00%
=== ============== ======
MORTGAGE LOAN PURPOSE
NUMBER OF AGGREGATE % OF GROUP 3
GROUP 3 STATED PRINCIPAL CUT-OFF DATE
MORTGAGE BALANCE AS OF POOL PRINCIPAL
PURPOSE LOANS CUT-OFF DATE BALANCE
- ------------------------------- ----------- ------------------ ---------------
Purchase ...................... 159 $19,734,693.07 44.22%
Refinance (Rate/Term) ......... 114 15,642,463.57 35.05
Refinance (Cash-out) .......... 51 7,426,260.64 16.64
Construction .................. 7 1,339,819.44 3.00
Debt Consolidation ............ 2 261,740.61 0.59
Home Improvement .............. 2 226,313.67 0.51
--- -------------- ------
TOTAL ........................ 335 $44,631,291.00 100.00%
=== ============== ======
GEOGRAPHICAL DISTRIBUTION OF THE MORTGAGED PROPERTIES(1)
NUMBER OF AGGREGATE % OF GROUP 3
GROUP 3 STATED PRINCIPAL CUT-OFF DATE
MORTGAGE BALANCE AS OF POOL PRINCIPAL
GEOGRAPHIC AREA LOANS CUT-OFF DATE BALANCE
- ------------------ ----------- ------------------ ---------------
Florida .......... 300 $38,819,960.53 86.98%
New York ......... 25 4,144,996.66 9.29
Texas ............ 10 1,666,333.81 3.73
--- -------------- ------
TOTAL ........... 335 $44,631,291.00 100.00%
=== ============== ======
- ----------
(1) As of the Cut-off Date, no more than approximately 2.26% of the Group 3
Mortgage Loans are expected to be secured by mortgaged properties located
in any one five-digit postal zip code.
S-36
CURRENT MORTGAGE LOAN PRINCIPAL BALANCES(1)
NUMBER OF AGGREGATE % OF GROUP 3
GROUP 3 STATED PRINCIPAL CUT-OFF DATE
MORTGAGE BALANCE AS OF POOL PRINCIPAL
RANGE OF CURRENT MORTGAGE LOAN PRINCIPAL BALANCES LOANS CUT-OFF DATE BALANCE
- --------------------------------------------------- ----------- ------------------ ---------------
$0.01 to $25,000.00................................ 35 $ 450,262.65 1.01%
$25,000.01 to $50,000.00........................... 42 1,512,871.92 3.39
$50,000.01 to $75,000.00........................... 23 1,410,324.95 3.16
$75,000.01 to $100,000.00.......................... 29 2,451,810.94 5.49
$100,000.01 to $125,000.00......................... 22 2,540,266.50 5.69
$125,000.01 to $150,000.00......................... 19 2,608,779.57 5.85
$150,000.01 to $175,000.00......................... 34 5,562,170.13 12.46
$175,000.01 to $200,000.00......................... 47 8,829,732.15 19.78
$200,000.01 to $225,000.00......................... 29 6,190,721.49 13.87
$225,000.01 to $250,000.00......................... 55 13,074,350.70 29.29
-- -------------- ------
TOTAL ............................................ 335 $44,631,291.00 100.00%
=== ============== ======
- ----------
(1) As of the Cut-off Date, the average outstanding principal balance of the
Group 3 Mortgage Loans is expected to be approximately $133,227.73.
CURRENT LOAN-TO-VALUE RATIO(1)(2)
NUMBER OF AGGREGATE % OF GROUP 3
GROUP 3 STATED PRINCIPAL CUT-OFF DATE
MORTGAGE BALANCE AS OF POOL PRINCIPAL
RANGE OF CURRENT LOAN-TO-VALUE RATIOS LOANS CUT-OFF DATE BALANCE
- --------------------------------------- ----------- ------------------ ---------------
Not Available ......................... 1 $ 204,011.83 0.46%
0.01% to 5.00% ........................ 3 88,798.60 0.20
5.01% to 10.00% ....................... 6 396,547.74 0.89
10.01% to 15.00% ...................... 7 587,932.35 1.32
15.01% to 20.00% ...................... 16 1,943,563.15 4.35
20.01% to 25.00% ...................... 23 3,226,331.24 7.23
25.01% to 30.00% ...................... 16 2,283,905.29 5.12
30.01% to 35.00% ...................... 27 4,126,298.13 9.25
35.01% to 40.00% ...................... 48 6,989,185.05 15.66
40.01% to 45.00% ...................... 37 5,334,112.10 11.95
45.01% to 50.00% ...................... 20 2,810,002.73 6.30
50.01% to 55.00% ...................... 16 2,490,881.63 5.58
55.01% to 60.00% ...................... 17 3,389,020.60 7.59
60.01% to 65.00% ...................... 12 2,648,325.27 5.93
65.01% to 70.00% ...................... 19 1,505,131.19 3.37
70.01% to 75.00% ...................... 5 465,666.84 1.04
75.01% to 80.00% ...................... 14 1,755,951.51 3.93
80.01% to 85.00% ...................... 6 466,643.45 1.05
85.01% to 90.00% ...................... 7 625,396.11 1.40
90.01% to 95.00% ...................... 19 1,740,892.32 3.90
95.01% to 100.00% ..................... 16 1,552,693.87 3.48
--- -------------- ------
TOTAL ................................ 335 $44,631,291.00 100.00%
=== ============== ======
- ----------
(1) Based on the principal balances of the Group 3 Mortgage Loans as of the
Cut-off Date.
(2) As of the Cut-off Date, the weighted average current Loan-to-Value Ratio
of the Group 3 Mortgage Loans is expected to be approximately 47.51%.
S-37
MORTGAGE INTEREST RATES(1)
NUMBER OF AGGREGATE % OF GROUP 3
GROUP 3 STATED PRINCIPAL CUT-OFF DATE
MORTGAGE BALANCE AS OF POOL PRINCIPAL
RANGE OF MORTGAGE INTEREST RATES LOANS CUT-OFF DATE BALANCE
- ---------------------------------- ----------- ------------------ ---------------
2.501% to 3.000% ................. 16 $ 113,428.38 0.25%
5.001% to 5.500% ................. 2 300,510.12 0.67
5.501% to 6.000% ................. 6 1,094,004.33 2.45
6.001% to 6.500% ................. 31 5,161,950.58 11.57
6.501% to 7.000% ................. 106 16,329,536.30 36.59
7.001% to 7.500% ................. 85 12,656,187.85 28.36
7.501% to 8.000% ................. 42 4,643,255.57 10.40
8.001% to 8.500% ................. 17 2,131,770.43 4.78
8.501% to 9.000% ................. 15 1,321,884.19 2.96
9.001% to 9.500% ................. 5 381,388.68 0.85
9.501% to 10.000% ................ 3 311,321.87 0.70
10.001% to 10.500% ............... 1 43,377.12 0.10
10.501% to 11.000% ............... 2 41,467.67 0.09
12.001% to 12.500% ............... 1 28,138.12 0.06
12.501% to 13.000% ............... 2 55,922.86 0.13
15.001% to 15.500% ............... 1 17,146.93 0.04
--- -------------- ------
TOTAL ........................... 335 $44,631,291.00 100.00%
=== ============== ======
- ----------
(1 As of the Cut-off Date, the weighted average mortgage interest rate of
the Group 3 Mortgage Loans is expected to be approximately 7.160% per
annum.
ORIGINAL TERMS TO STATED MATURITY
NUMBER OF AGGREGATE % OF GROUP 3
GROUP 3 STATED PRINCIPAL CUT-OFF DATE
MORTGAGE BALANCE AS OF POOL PRINCIPAL
RANGE OF ORIGINAL TERMS TO STATED MATURITY LOANS CUT-OFF DATE BALANCE
- -------------------------------------------- ----------- ------------------ ---------------
61 to 120 months ........................... 1 $ 212,522.05 0.48%
121 to 180 months .......................... 165 25,185,939.69 56.43
181 to 240 months .......................... 57 5,701,909.99 12.78
241 to 300 months .......................... 13 1,219,228.49 2.73
301 to 360 months .......................... 99 12,311,690.78 27.59
--- -------------- ------
TOTAL ..................................... 335 $44,631,291.00 100.00%
=== ============== ======
REMAINING TERMS TO STATED MATURITY(1)
NUMBER OF AGGREGATE % OF GROUP 3
GROUP 3 STATED PRINCIPAL CUT-OFF DATE
MORTGAGE BALANCE AS OF POOL PRINCIPAL
RANGE OF REMAINING TERMS TO STATED MATURITY LOANS CUT-OFF DATE BALANCE
- --------------------------------------------- ----------- ------------------ ---------------
1 to 60 months .............................. 1 $ 139,523.92 0.31%
61 to 120 months ............................ 154 20,416,969.87 45.75
121 to 180 months ........................... 86 12,091,926.63 27.09
181 to 240 months ........................... 16 2,340,786.10 5.24
241 to 300 months ........................... 24 3,484,324.05 7.81
301 to 360 months ........................... 54 6,157,760.43 13.80
--- -------------- ------
TOTAL ...................................... 335 $44,631,291.00 100.00%
=== ============== ======
- ----------
(1) As of the Cut-off Date, the weighted average remaining term to stated
maturity of the Group 3 Mortgage Loans is expected to be approximately
153 months.
S-38
CREDIT SCORING OF MORTGAGORS(1)
NUMBER OF AGGREGATE % OF GROUP 3
GROUP 3 STATED PRINCIPAL CUT-OFF DATE
MORTGAGE BALANCE AS OF POOL PRINCIPAL
RANGE OF CREDIT SCORES LOANS CUT-OFF DATE BALANCE
- ------------------------ ----------- ------------------ ---------------
Not Available .......... 2 $ 372,638.45 0.83%
451 to 500 ............. 1 26,156.51 0.06
501 to 550 ............. 12 631,061.57 1.41
551 to 600 ............. 22 1,098,991.10 2.46
601 to 650 ............. 57 5,176,265.21 11.60
651 to 700 ............. 73 9,485,597.96 21.25
701 to 750 ............. 78 12,663,294.73 28.37
751 to 800 ............. 88 14,704,459.44 32.95
801 to 850 ............. 2 472,826.03 1.06
-- -------------- ------
TOTAL ................. 335 $44,631,291.00 100.00%
=== ============== ======
- ----------
(1) The scores shown are Bureau Credit Scores from Experian (FICO), Equifax
(Beacon) and TransUnion (Empirica).
SEASONING
NUMBER OF AGGREGATE % OF GROUP 3
GROUP 3 STATED PRINCIPAL CUT-OFF DATE
MORTGAGE BALANCE AS OF POOL PRINCIPAL
RANGE OF SEASONING LOANS CUT-OFF DATE BALANCE
- --------------------------- ----------- ------------------ ---------------
1 to 60 months ............ 105 $13,735,828.35 30.78%
61 to 120 months .......... 177 26,559,673.63 59.51
121 to 180 months ......... 43 3,868,737.64 8.67
181 to 240 months ......... 6 207,304.52 0.46
241 to 300 months ......... 4 259,746.86 0.58
--- -------------- ------
TOTAL .................... 335 $44,631,291.00 100.00%
=== ============== ======
DOCUMENTATION TYPE
NUMBER OF AGGREGATE % OF GROUP 3
GROUP 3 STATED PRINCIPAL CUT-OFF DATE
MORTGAGE BALANCE AS OF POOL PRINCIPAL
DOCUMENTATION TYPE LOANS CUT-OFF DATE BALANCE
- --------------------- ----------- ------------------ ---------------
Full ................ 213 $28,560,687.15 63.99%
Alternative ......... 33 3,975,303.52 8.91
Stated .............. 36 4,466,060.58 10.01
Unknown ............. 53 7,629,239.75 17.09
--- -------------- ------
TOTAL .............. 335 $44,631,291.00 100.00%
=== ============== ======
S-39
WACHOVIA BANK, NATIONAL ASSOCIATION
Wachovia Bank, National Association ("WACHOVIA BANK") is a direct
wholly-owned subsidiary of Wachovia Corporation, a North Carolina corporation
and a multi-bank holding company registered under the Bank Holding Company Act.
Wachovia Bank is engaged in general commercial banking business, offering a
full range of financial services to corporations and individuals. Wachovia
Bank's headquarters and its executive offices are located at 301 South College
Street, Charlotte, North Carolina 28288.
SERVICING OF THE MORTGAGE LOANS
All of the Mortgage Loans will be serviced (in its capacity as servicer,
the "SERVICER") and master serviced (in its capacity as master servicer, the
"MASTER SERVICER") by Wachovia Bank in accordance with the terms of the Pooling
Agreement. The Servicer may perform any of its obligations under the Pooling
Agreement through one or more subservicers. Despite the existence of
subservicing arrangements, the Servicer will be liable for its servicing duties
and obligations under the Pooling Agreement as if the Servicer alone were
servicing the Mortgage Loans. See "The Pooling and Servicing Agreement" in the
Prospectus.
FORECLOSURE AND DELINQUENCY EXPERIENCE OF WACHOVIA BANK
Certain information concerning recent delinquency and foreclosure
experience on the portfolio of first lien residential mortgage loans originated
or acquired by Wachovia Bank is set forth in the table below. There can be no
assurance that the delinquency and foreclosure experience set forth in the
table will be representative of the results that may be experienced with
respect to the Mortgage Loans included in the Trust.
AT JUNE 30, 2002 AT DECEMBER 31, 2001
--------------------------------- ---------------------------------
NUMBER/ OUTSTANDING NUMBER/ OUTSTANDING
% OF LOANS BALANCE % OF LOANS BALANCE
------------ -------------------- ------------ --------------------
Total Portfolio ................... 75,662 $ 12,759,535,744 77,946 $ 12,406,359,032
Delinquencies* ....................
One Installment Delinquent ....... 2,297 241,990,277 3,233 310,496,788
Percent One Installment
Delinquent ..................... 3.04% 1.90% 4.15% 2.50%
Two Installments Delinquent ...... 537 51,243,451 713 60,251,242
Percent Two Installments
Delinquent ..................... 0.71% 0.40% 0.91% 0.49%
Three or More Installments
Delinquent ...................... 398 33,524,013 550 51,128,231
Percent Three or More
Installments Delinquent ........ 0.53% 0.26% 0.71% 0.41%
In Foreclosure .................... 288 29,798,785 516 48,949,653
Percent in Foreclosure ........... 0.38% 0.23% 0.66% 0.39%
Delinquent and In Foreclosure ..... 3,520 356,556,526 5,012 470,825,914
Percent Delinquent and in
Foreclosure** ................... 4.65% 2.79% 6.43% 3.80%
AT DECEMBER 31, 2000
---------------------------------
NUMBER/ OUTSTANDING
% OF LOANS BALANCE
------------ --------------------
Total Portfolio ................... 303,010 $ 32,808,993,803
Delinquencies* ....................
One Installment Delinquent ....... 7,334 601,008,078
Percent One Installment
Delinquent ..................... 2.42% 1.83%
Two Installments Delinquent ...... 1,179 86,742,810
Percent Two Installments
Delinquent ..................... 0.39% 0.26%
Three or More Installments
Delinquent ...................... 874 69,955,348
Percent Three or More
Installments Delinquent ........ 0.29% 0.21%
In Foreclosure .................... 909 75,733,563
Percent in Foreclosure ........... 0.30% 0.23%
Delinquent and In Foreclosure ..... 10,296 833,439,799
Percent Delinquent and in
Foreclosure** ................... 3.40% 2.54%
* A mortgage loan is deemed to have "one installment delinquent" if any
scheduled payment of principal or interest is delinquent past the end of
the month in which such payment was due, "two installments delinquent" if
such delinquency persists past the end of the month following the month
in which such payment was due, and so forth.
** The sums of the Percent Delinquent and Percent in Foreclosure set forth
in this table may not equal the Percent Delinquent and in Foreclosure due
to rounding.
S-40
UNDERWRITING STANDARDS
All of the Mortgage Loans were originated or acquired by Wachovia Bank and
all of the Mortgage Loans were underwritten generally in accordance with
Wachovia Bank's fixed-rate jumbo underwriting guidelines. Some of the Mortgage
Loans were underwritten with exceptions to these guidelines. Any Mortgage Loans
that were underwritten with exceptions to these guidelines were approved when
other compensating factors existed.
Wachovia Bank's underwriting standards are applied to evaluate prospective
borrowers' credit standing and repayment ability as well as the value and
adequacy of the mortgaged property as collateral. Initially the prospective
borrower is required to provide information concerning assets, liabilities,
income credit, employment history and other demographic and personal
information. If the application demonstrates the prospective borrower's ability
to repay the debt as well as sufficient income and equity, loan processing
personnel obtain and review an independent tri-merged credit bureau report and
on the credit history of the borrower. The credit report should reflect all
delinquencies 30 days or more, repossessions, judgements, foreclosures,
bankruptcies and similar adverse credit practices that can be discovered by a
search of public records. Once all applicable employment, credit and property
information is obtained, a determination is made as to whether sufficient
unencumbered equity in the property exists and whether the prospective borrower
has sufficient monthly income available and the willingness to meet the
prospective borrower's monthly obligations. A debt-to-income ratio assists in
determining whether the prospective borrower has sufficient monthly income to
support the payments on the mortgage loan in addition to any other monthly
credit obligations. The maximum debt to income ratio is 38%. Variations in the
monthly debt-to-income ratio limits are permitted based on compensating
factors. The maximum Loan-to-Value Ratio generally may not exceed 95% for a
primary residence and 90% for a second home.
Wachovia Bank uses alternative sets of underwriting guidelines with
respect to jumbo mortgage loans originated under its Full Documentation
Program, Alternate Documentation Program and its Stated Documentation Program.
Generally, the Full Documentation Program will provide a complete and executed
Verification(s) of Employment covering a two-year period for salaried borrowers
or two years tax returns for self-employed borrowers. In addition the borrower
must verify assets by providing their last two months of bank statements. The
Alternate Documentation Program permits a salaried borrower to provide paystubs
that cover the borrower's earnings for the most recent 30-day period and W-2
forms for the most recent one- or two-year period. Both the Full Documentation
Program and the Alternate Documentation Program require a fee-based full
appraisal performed by an independent third party Wachovia Bank approved
appraiser. Under the Alternate Documentation Program, paystubs, payroll
earnings statements, and W-2 forms must contain the information listed in the
bullet points below.
o All documentation must clearly identify the borrower as the employee.
o Generally, they must have been computer generated or typed by the
borrower's employer(s); however, paystubs or payroll earnings
statements that the borrower downloads from the Internet are also
acceptable.
o Paystubs or payroll earnings statements must show the borrower's gross
earnings for both the most recent 30-day period and year to date.
o If these documents are faxed to Wachovia Bank or the borrower
downloaded them from the Internet, the documents must clearly identify
the employer's name and source of information.
The Stated Documentation Program places more emphasis on property
underwriting and borrower creditworthiness than on income documentation.
Therefore, certain credit underwriting documentation concerning income and
employment is waived. Under the Stated Documentation Program, written
verification of the applicant's employment history or income is not required.
Wachovia Bank will verify employment by telephone. If the mortgagor is
dependent on secondary sources of income to qualify for the mortgage loan, such
as alimony, child support or
S-41
interest/dividends, the underwriter must justify the strength of the mortgage
loan and its submission under this program. If secondary income is the sole
source of income, it must be verified. A Verification of Deposit, most recent
bank statement or portfolio statements are required to verify assets.
For all jumbo programs, a Request for Verification of Deposit may be sent
directly to the borrower's depositories or account holders. The depositories or
account holders must complete all fields on the form and return the completed
form directly to Wachovia Bank. If a Verification of Deposit is not utilized,
copies of bank statements or investment portfolio statements that cover
activity in the borrower's account(s) for the most recent two-month period and,
if applicable, copies of the most recent retirement account statement that is
available, which may be obtained directly from the borrower, may be used.
For all loans that Wachovia Bank originates, an attorney's title opinion or an
ALTA title insurance policy is required. Additionally, the applicant is
required to secure property insurance in an amount sufficient to cover the new
loan.
S-42
THE POOLING AND SERVICING AGREEMENT
The Certificates will be issued pursuant to a Pooling and Servicing
Agreement to be dated September 27, 2002 (the "POOLING AGREEMENT"), among the
Depositor, the Servicer, the Master Servicer, the Certificate Administrator and
the Trustee. The prospectus contains important additional information regarding
the terms and conditions of the Pooling Agreement and the Certificates. See
"Description of the Agreements" in the prospectus.
The following summaries do not purport to be complete and are subject to
the provisions of the Pooling Agreement which are incorporated by reference.
The Depositor plans to file a final copy of the Pooling Agreement with the
Securities and Exchange Commission pursuant to a Current Report on Form 8-K
after the Closing Date.
ASSIGNMENT OF MORTGAGE LOANS
In connection with the transfer and assignment of the Mortgage Loans to
the Trustee, the Depositor will deliver or cause to be delivered to Wachovia
Bank, as custodian (the "CUSTODIAN") for the Trustee, among other things, with
respect to each Mortgage Loan (collectively, the "MORTGAGE FILE"):
o the original Mortgage Note endorsed without recourse in blank or to
the order of the Trustee (or its nominee) or an affidavit signed by an
officer of the Seller certifying that the related original Mortgage
Note has been lost;
o the original or a certified copy of the Mortgage with evidence of
recording indicated thereon (except for any Mortgage not returned from
the public recording office, which will be delivered to the Custodian
as soon as the same is available to the Depositor);
o except as described below, an assignment in recordable form of the
Mortgage (or a copy, if such assignment has been submitted for
recording); and
o if applicable, any riders or modifications to such Mortgage Note and
Mortgage.
Assignments of the Mortgages to the Trustee (or its nominee) will be
recorded in the appropriate public office for real property records, except (i)
in states where, in the opinion of counsel, such recording is not required to
protect the Trustee's interests in the Mortgage Loan against the claim of any
subsequent transferee or any successor to or creditor of the Depositor or the
Seller, (ii) in states where recordation is not required by either Rating
Agency to obtain the initial ratings on the Certificates described under
"Certificate Ratings" in this prospectus supplement or (iii) with respect to
any Mortgage which has been recorded in the name of Mortgage Electronic
Registration Systems, Inc. ("MERS") or its designee. Based on information
provided by the Rating Agencies, the Depositor does not expect to record
assignments of any Mortgages to the Trustee, except with respect to mortgaged
properties located in the States of Florida or Maryland. With respect to any
Mortgage which has been recorded in the name of MERS or its designee, no
mortgage assignment in favor of the Trustee will be required to be prepared or
delivered. Instead, the Servicer will be required to take all actions as are
necessary to cause the Trust to be shown as the owner of the related Mortgage
Loan on the records of MERS for purposes of the system of recording transfers
of beneficial ownership of mortgages maintained by MERS. The Trustee, or the
Custodian on behalf of the Trustee, will promptly review each Mortgage File
after the Closing Date (or promptly after the Trustee's receipt of any document
permitted to be delivered after the Closing Date) to determine if any of the
documents described in the first and second bullet points above and, with
respect to Mortgages relating to properties located in the States of Florida
and Maryland, the third bullet point above, is missing.
REPURCHASES OF MORTGAGE LOANS
If any portion of the Mortgage File is not delivered to Wachovia Bank, as
custodian for the Trustee or if a Mortgage Loan breaches any of the
representations made by the Depositor in the Pooling Agreement in any material
respect and the Depositor does not cure such omission or defect
S-43
within 90 days, the Depositor will be required on the Distribution Date in the
month following the expiration of the 90-day period either (i) to repurchase
the related Mortgage Loan (or any property acquired in respect thereof) at a
price (the "PURCHASE PRICE") equal to 100% of the unpaid principal balance of
such Mortgage Loan plus accrued and unpaid interest on such principal balance
at the related mortgage interest rate together with any unreimbursed servicing
advances made by the Servicer, or (ii) to substitute an Eligible Substitute
Mortgage Loan; however, such substitution generally is permitted only within
two years of the Closing Date. Any Mortgage Loan repurchased or subject to a
substitution as described in this paragraph is referred to as a "DELETED
MORTGAGE LOAN."
An "ELIGIBLE SUBSTITUTE MORTGAGE LOAN" generally will:
o have a principal balance, after deduction of all Monthly Payments due
in the month of substitution, not in excess of, and not more than 10%
less than, the Stated Principal Balance of the Deleted Mortgage Loan
(the amount of any shortfall to be deposited by the Seller and held
for distribution to the certificateholders on the related Distribution
Date (a "SUBSTITUTION ADJUSTMENT AMOUNT"));
o have a Net Mortgage Interest Rate equal to that of the Deleted
Mortgage Loan;
o have a Loan-to-Value Ratio not higher than that of the Deleted
Mortgage Loan;
o have a remaining term to maturity not greater than (and not more than
one year less than) that of the Deleted Mortgage Loan; and
o comply with all of the representations and warranties in the Pooling
Agreement as of the date of substitution.
This cure, repurchase or substitution obligation constitutes the sole
remedy available to certificateholders or the Certificate Administrator for
omission of, or a material defect in, a Mortgage Loan document.
OPTIONAL REPURCHASES OF CERTAIN MORTGAGE LOANS
The Depositor, in its sole discretion, may repurchase from the Trust any
Mortgage Loan as to which the originator or prior owner of such Mortgage Loan
has breached a representation or warranty to the Seller regarding the
characteristics of such Mortgage Loan. Any such repurchase will be at the
Purchase Price.
PAYMENTS ON MORTGAGE LOANS; ACCOUNTS
On or prior to the Closing Date, the Servicer will establish an account
(the "SERVICER CUSTODIAL ACCOUNT"), which will be maintained as a separate
trust account by the Servicer in trust for the benefit of certificateholders.
Funds credited to the Servicer Custodial Account may be invested for the
benefit and at the risk of the Servicer in certain eligible investments, as
described in the Pooling Agreement, that are scheduled to mature on or prior to
the business day preceding the next Distribution Date. On or prior to the
second business day immediately preceding each Distribution Date, based on
information provided by the Master Servicer, the Servicer will withdraw from
the Servicer Custodial Account the Pool Distribution Amount and will deposit
such amounts in an account established and maintained with the Certificate
Administrator on behalf of certificateholders (the "CERTIFICATE ACCOUNT").
Funds credited to the Certificate Account may be invested for the benefit and
at the risk of the Certificate Administrator in certain eligible investments,
as described in the Pooling Agreement.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
The Administrative Fees with respect to the Trust are payable out of the
interest payments received on each Mortgage Loan. The "ADMINISTRATIVE FEES"
consist of (a) servicing compensation payable to the Servicer in respect of its
servicing activities (the "SERVICING FEE"), (b) servicing
S-44
compensation payable to the Master Servicer in respect of its master servicing
activities (the "MASTER SERVICING FEE") and (c) fees paid to the Certificate
Administrator. The Administrative Fees will accrue on the Stated Principal
Balance of each Mortgage Loan at a rate (the "ADMINISTRATIVE FEE RATE") equal
to the sum of the Servicing Fee Rate for such Mortgage Loan, the Master
Servicing Fee Rate for such Mortgage Loan and the Certificate Administrator Fee
Rate. The "CERTIFICATE ADMINISTRATOR FEE RATE" with respect to each Mortgage
Loan will be 0.006% per annum. The "SERVICING FEE RATE" with respect to each
Mortgage Loan will be 0.23% per annum. The "MASTER SERVICING FEE RATE" with
respect to each Mortgage Loan will be 0.02% per annum. Compensation payable to
the Trustee for its responsibilities under the Pooling Agreement will be
payable by the Certificate Administrator.
The Servicer is obligated to pay certain ongoing expenses associated with
the Trust and incurred by the Servicer in connection with its responsibilities
under the Pooling Agreement. Those amounts will be paid by the Servicer out of
its Servicing Fee. The amount of the Servicer's Servicing Fee is subject to
adjustment with respect to prepaid Mortgage Loans, as described below under
"-- Compensating Interest." The Servicer is also entitled to receive all late
payment fees, assumption fees and other similar charges and all investment
income earned on amounts on deposit in the Servicer Custodial Account.
The Certificate Administrator is also entitled to receive all investment
income earned on amounts on deposit in the Certificate Account.
Each of the Certificate Administrator and the Trustee is entitled to be
reimbursed from and indemnified by the Trust for certain expenses incurred by
the Certificate Administrator or the Trustee as applicable, in connection with
their respective responsibilities under the Pooling Agreement.
COMPENSATING INTEREST
When a Mortgage Loan is subject to a partial prepayment or is prepaid in
full between due dates, the mortgagor is required to pay interest on the amount
prepaid only to the date of prepayment in the case of a prepayment in full or
to the due date in the month in which a partial prepayment is made. No interest
will be paid by the mortgagor on the amount prepaid after those dates.
Prepayments will be distributed to certificateholders on the Distribution Date
in the month following the month of receipt.
Pursuant to the Pooling Agreement, the aggregate Servicing Fee payable to
the Servicer for any month will be reduced by an amount equal to the lesser of
(i) one-twelfth of 0.23% of the balance of the Mortgage Loans and (ii) the
excess of (x) 30 days' interest at the mortgage interest rate (less the
Servicing Fee Rate) on the amount of each prepayment on the Mortgage Loans over
(y) the amount of interest actually paid by the related mortgagors on the
amount of such prepayments during the preceding month (any such reduction,
"COMPENSATING INTEREST"). Any such shortfalls in interest as a result of
prepayments on the Mortgage Loans in excess of the amount of the related
Compensating Interest for a month will reduce the amount of interest available
to be distributed on the Certificates from what would have been the case in the
absence of such prepayments. See "Description of the Certificates -- Interest"
in this prospectus supplement.
ADVANCES
Subject to the following limitations, the Servicer will be required to
advance (any such advance, an "ADVANCE") prior to each Distribution Date an
amount equal to the aggregate of payments of principal and interest (net of the
related Servicing Fee) which were due on the related due date on the Mortgage
Loans and which were delinquent on the related Determination Date. Advances by
the Servicer will be made from its own funds or funds in the Servicer Custodial
Account that do not constitute a portion of the Pool Distribution Amount for
such Distribution Date. The obligation to make an Advance with respect to any
Mortgage Loan will continue until the ultimate disposition of the REO Property
or mortgaged property relating to such Mortgage Loan. An "REO PROPERTY" is a
mortgaged property that has been acquired by the Servicer on behalf of the
Trust through foreclosure or grant of a deed in lieu of foreclosure. With
respect to any Distribution Date, the "DETERMINATION
S-45
DATE" will be the eighteenth day of the month in which such Distribution Date
occurs or, if such day is not a business day, the immediately preceding
business day. With respect to Balloon Mortgage Loans, the Servicer will not
make an Advance of a delinquent Balloon Payment but will instead advance an
assumed monthly payment that would have been due on the related Due Date based
on the original principal amortization schedule for such Balloon Mortgage Loan.
Advances are intended to maintain a regular flow of scheduled interest and
principal payments on the Certificates rather than to guarantee or insure
against losses. The Servicer is obligated to make Advances if the Advances are,
in its judgment, reasonably recoverable from future payments and collections or
insurance payments or proceeds of liquidation of the related Mortgage Loan. If
the Servicer determines on any Determination Date to make an Advance, such
Advance will be included with the distribution to certificateholders on the
related Distribution Date. Any failure by the Servicer to make a required
Advance will constitute an event of default and the Trustee, solely in its
capacity as successor Servicer (if it succeeds to the obligations of the
Servicer under the Pooling Agreement) or the successor servicer will be
obligated to make the Advance, in accordance with the terms of the Pooling
Agreement.
OPTIONAL TERMINATION
The circumstances under which the obligations created by the Pooling
Agreement will terminate in respect of the Certificates are described in
"Description of the Securities -- Termination; Optional Purchase of Mortgage
Loans" in the prospectus. In addition, the Servicer will have the option to
purchase all remaining Mortgage Loans and other assets in the Trust when the
scheduled balance of the Mortgage Pool as of the Distribution Date on which the
purchase proceeds are to be distributed is less than 10% of the initial balance
of the Mortgage Pool. This percentage may be reduced through an amendment to
the Pooling Agreement under the circumstances described below. The purchase
price will generally be equal to the sum of the Stated Principal Balances of
the Mortgage Loans and the fair market value of any REO Properties held by the
Trust together with the amount of any unpaid interest shortfalls on the
Certificates and one month's interest on the Stated Principal Balance of each
Mortgage Loan.
Distributions in respect of an optional purchase described above will be
paid to certificateholders in order of their priority of distribution as
described below under "Description of the Certificates -- Priority of
Distributions." The proceeds from such a distribution may not be sufficient to
distribute the full amount to which each class is entitled if the purchase
price is based in part on the fair market value of the REO Property and such
fair market value is less than the scheduled balance of the related Mortgage
Loan.
The Pooling Agreement may be amended without the consent of
certificateholders in order to reduce the percentage of the initial balance of
the Mortgage Pool at which the Depositor will have the option to purchase all
the remaining Mortgage Loans, if such reduction is considered necessary by the
Depositor, as evidenced by an officer's certificate delivered to the
Certificate Administrator and the Trustee, to preserve the treatment of the
transfer of the Mortgage Loans to the Depositor by the Seller or to the Trust
by the Depositor as a sale for accounting purposes.
In no event will the Trust created by the Pooling Agreement continue
beyond the later of (a) the repurchase described above, if it results in the
Trust no longer owning any Mortgage Loans, (b) the expiration of 21 years from
the death of the survivor of the person named in the Pooling Agreement and (c)
the final distribution to certificateholders of amounts received in respect of
the assets of the Trust. The termination of the Trust will be effected in a
manner consistent with applicable federal income tax regulations and the REMIC
status of the Trust.
SPECIAL SERVICING AGREEMENTS
The Pooling Agreement will permit the Servicer to enter into a special
servicing agreement with an unaffiliated holder of a class of Class B
Certificates or of a class of securities representing interests
S-46
in one or more classes of Class B Certificates alone or together with other
subordinated mortgage pass-through certificates. Pursuant to such an agreement,
such holder may instruct the Servicer to commence or delay foreclosure
proceedings with respect to delinquent Mortgage Loans.
THE TRUSTEE
JPMorgan Chase Bank, a New York banking corporation, will be the trustee
(the "TRUSTEE") under the Pooling Agreement. The Trustee's office is located at
450 West 33rd Street, 14th Floor,
New York, New York 10011, Attention: Institutional Trust Services, Wachovia
Series 2002-1. The Depositor, the Seller, the Servicer, the Master Servicer and
the Certificate Administrator may maintain other banking relationships in the
ordinary course of business with the Trustee. The Trustee may appoint one or
more co-trustees if necessary to comply with the fiduciary requirements imposed
by any jurisdiction in which a mortgaged property is located.
THE CERTIFICATE ADMINISTRATOR
Wachovia Bank, National Association, a national banking association, will
be the certificate administrator (in such capacity, the "CERTIFICATE
ADMINISTRATOR") under the Pooling Agreement. The Certificate Administrator's
office is located at 401 South Tryon Street, Charlotte, NC 28288, Attention:
Structured Finance Trust Services (the "CORPORATE TRUST OFFICE"). Certificate
transfer services are conducted at the Corporate Trust Office of the
Certificate Administrator. The Certificate Administrator may make available
each month, to any interested party, the monthly statements to
certificatholders via the Certificate Administrator's website located at
www.firstlinkabs.com.
VOTING RIGHTS
Voting rights for certain actions specified in the Pooling Agreement will
be allocated as follows:
o 99% of all voting rights will be allocated among the holders of the
Class A Certificates (other than the Class 1-A-R and Class 1-A-LR
Certificates) and Subordinate Certificates based on the outstanding
balances of their Certificates.
o 1% of all voting rights will be allocated to the holders of the Class
1-A-R and Class 1-A-LR Certificates.
The voting rights allocated to each class will be allocated among the
Certificates of such class based on their Percentage Interests.
The "PERCENTAGE INTEREST" of a Certificate of a class is the percentage
obtained by dividing the initial principal balance (or notional amount) of such
Certificate by the aggregate initial class balance (or aggregate initial
notional amount) of such class.
REPORTS TO CERTIFICATEHOLDERS
The Certificate Administrator will prepare (based solely upon information
provided to the Certificate Administrator by the Master Servicer) and make
available to the Certificateholders a report containing the information set
forth under "Description of the Securities -- Reports to Securityholders" in
the prospectus.
DESCRIPTION OF THE CERTIFICATES
The Certificates will consist of (i) the ten classes of Offered
Certificates listed in the table beginning on page S-4 of this prospectus
supplement (the "OFFERED CERTIFICATES") and (ii) the Class B-4, Class B-5 and
Class B-6 Certificates, which are not offered by this prospectus supplement
(collectively, the "CERTIFICATES"). The Class 1-A-2 and Class 2-A-2
Certificates will be deemed to consist of multiple components (each, a
"COMPONENT") described in the table beginning page S-4. The Components of a
class of Certificates are not severable.
S-47
As described under "The Mortgage Pool" in this prospectus supplement, the
Mortgage Loans have been divided into three Loan Groups. The following table
illustrates the relationship between the Loan Groups and the Senior
Certificates or Components of the Senior Certificates that represent beneficial
interests in the Loan Groups.
LOAN GROUP RELATED SENIOR CERTIFICATES AND COMPONENTS
- ---------- ------------------------------------------
1 .......... Class 1-A-1, Class 1-A-R and Class 1-A-LR Certificates
Class 1-A-2A, Class 1-A-2B and Class 1-A-2C Components
2 .......... Class 2-A-1 Certificates
Class 2-A-2A, Class 2-A-2B and Class 2-A-2C Components
3 .......... Class 3-A-1 Certificates
Class 3-A-2A and Class 3-A-2B Components
The Class B Certificates represent beneficial interests in each Loan
Group.
DENOMINATIONS AND FORM
The Offered Certificates will be issuable in book-entry form only (the
"BOOK-ENTRY CERTIFICATES"). The Class 1-A-R and Class 1-A-LR Certificates will
be issued in definitive, fully-registered form (such form, the "DEFINITIVE
CERTIFICATES"). The following table sets forth the original Certificate form,
the minimum denomination and the incremental denomination of the Offered
Certificates. The Offered Certificates are not intended to be and should not be
directly or indirectly held or beneficially owned in amounts lower than such
minimum denominations. A single certificate of each class may be issued in an
amount different than described above.
FORM AND DENOMINATIONS OF OFFERED CERTIFICATES
ORIGINAL MINIMUM INCREMENTAL
CLASS CERTIFICATE FORM DENOMINATION DENOMINATION
- ----- ---------------- ------------ ------------
Classes 1-A-1, 1-A-2, 2-A-1, 2-A-2 and 3-A-1 ......... Book-Entry $25,000 $1,000
Classes 1-A-R and 1-A-LR ............................. Definitive $ 50 N/A
Classes B-1, B-2 and B-3 ............................. Book-Entry $25,000 $1,000
BOOK-ENTRY CERTIFICATES
Persons acquiring beneficial ownership interests in the Book-Entry
Certificates ("CERTIFICATE OWNERS") will hold such Certificates through The
Depository Trust Company ("DTC") in the United States, or Clearstream or
Euroclear (in Europe) if they are participants of such systems (the
"PARTICIPANTS"), or indirectly through organizations which are participants in
such systems (the "INDIRECT PARTICIPANTS"). Each class of the Book-Entry
Certificates initially will be represented by one or more physical certificates
registered in the name of Cede & Co., the nominee of DTC. Clearstream and
Euroclear will hold omnibus positions on behalf of their Participants through
customers' securities accounts in Clearstream's and Euroclear's names on the
books of their respective depositaries which in turn will hold such positions
in customers' securities accounts in the depositaries' names on the books of
DTC. Citibank will act as depositary for Clearstream and JPMorgan Chase Bank
will act as depositary for Euroclear (in such capacities, individually the
"RELEVANT DEPOSITARY" and collectively the "EUROPEAN DEPOSITARIES"). Investors
may hold such beneficial interest in the Book-Entry Certificates in minimum
denominations of $1,000. Except as described below, no person acquiring a
Book-Entry Certificate (each, a "BENEFICIAL OWNER") will be entitled to receive
a Definitive Certificate. Unless and until Definitive Certificates are issued,
it is anticipated that the only "CERTIFICATEHOLDER" of the Book-Entry
Certificates will be Cede & Co., as nominee of DTC. Certificate Owners will not
be Certificateholders as that term is used in the Pooling Agreement.
Certificate Owners are only permitted to exercise their rights indirectly
through Participants and DTC.
The beneficial owner's ownership of a Book-Entry Certificate will be
recorded on the records of the brokerage firm, bank, thrift institution or
other financial intermediary (each, a "FINANCIAL INTERMEDIARY") that maintains
the beneficial owner's account for such purpose. In turn, the Financial
Intermediary's ownership of such Book-Entry Certificate will be recorded on the
records of DTC (or of a participating firm that acts as agent for the Financial
Intermediary, whose interest will in turn be
S-48
recorded on the records of DTC, if the beneficial owner's Financial
Intermediary is not a DTC Participant, and on the records of Clearstream or
Euroclear, as appropriate).
Certificate Owners will receive all distributions of principal of and
interest on the Book-Entry Certificates from the Certificate Administrator
through DTC and DTC Participants. While the Book-Entry Certificates are
outstanding (except under the circumstances described below), under the rules,
regulations and procedures creating and affecting DTC and its operations (the
"RULES"), DTC is required to make book-entry transfers among Participants on
whose behalf it acts with respect to the Book-Entry Certificates and is
required to receive and transmit distributions of principal of, and interest
on, the Book-Entry Certificates. Participants and Indirect Participants with
whom Certificate Owners have accounts with respect to Book-Entry Certificates
are similarly required to make book-entry transfers and receive and transmit
such distributions on behalf of their respective Certificate Owners.
Accordingly, although Certificate Owners will not possess certificates
representing their respective interests in the Book-Entry Certificates, the
Rules provide a mechanism by which Certificate Owners will receive
distributions and will be able to transfer their interest.
Certificateholders will not receive or be entitled to receive certificates
representing their respective interests in the Book-Entry Certificates, except
under the limited circumstances described below. Unless and until Definitive
Certificates are issued, Certificateholders who are not Participants may
transfer ownership of Book-Entry Certificates only through Participants and
Indirect Participants by instructing such Participants and Indirect
Participants to transfer Book-Entry Certificates, by book-entry transfer,
through DTC, for the account of the purchasers of such Book-Entry Certificates,
which account is maintained with their respective Participants. Under the Rules
and in accordance with DTC's normal procedures, transfers of ownership of
Book-Entry Certificates will be executed through DTC and the accounts of the
respective 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
Certificateholders.
Because of time zone differences, credits of securities received in
Clearstream or Euroclear as a result of a transaction with a Participant will
be made during subsequent securities settlement processing and dated the
business day following the DTC settlement date. Such credits or any
transactions in such securities settled during such processing will be reported
to the relevant Euroclear or Clearstream Participants on such business day.
Cash received in Clearstream or Euroclear as a result of sales of securities by
or through a Clearstream Participant or Euroclear Participant to a DTC
Participant will be received with value on the DTC settlement date but will be
available in the relevant Clearstream or Euroclear cash account only as of the
business day following settlement in DTC. For information with respect to tax
documentation procedures relating to the Certificates see "Federal Income Tax
Consequences -- REMICs -- Taxation of Certain Foreign Investors" in the
prospectus and "Global Clearance, Settlement and Tax Documentation Procedures
- -- Certain U.S. Federal Income Tax Documentation Requirements" in Annex I to
this prospectus supplement.
Transfers between Participants will occur in accordance with DTC Rules.
Transfers between Clearstream Participants and Euroclear Participants will
occur in accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Clearstream
Participants or Euroclear Participants, on the other, will be effected in
accordance with DTC Rules on behalf of the relevant European international
clearing system by the Relevant Depositary; however, such cross-market
transfers will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in accordance
with its rules and procedures and within established deadlines (European time).
The relevant European international clearing system will, if the transaction
meets its settlement requirements, deliver instructions to the Relevant
Depositary to take action to effect final settlement on its behalf by
delivering or receiving securities in DTC, and making or receiving payment in
accordance with normal procedures for same day funds settlement applicable to
DTC. Clearstream Participants and Euroclear Participants may not deliver
instructions directly to the European Depositaries.
S-49
DTC which is a New York-chartered limited purpose trust company, performs
services for its Participants, some of which (and/or their representatives) own
DTC. In accordance with its normal procedures, DTC is expected to record the
positions held by each DTC Participant in the Book-Entry Certificates, whether
held for its own account or as a nominee for another person. In general,
beneficial ownership of Book-Entry Certificates will be subject to the Rules,
as in effect from time to time.
Clearstream International, 67 Bd Grande-Duchesse Charlotte, L-1331
Luxembourg ("CLEARSTREAM"), a Luxembourg limited liability company, was formed
in January 2000 through the merger of Cedel International and Deutsche Boerse
Clearing, the shareholders of which comprise 93 of the world's major financial
institutions.
Clearstream is registered as a bank in Luxembourg, and as such is subject
to regulation by the Banque centrale due Luxembourg, which supervises
Luxembourg banks.
Clearstream holds securities for its customers ("CLEARSTREAM
PARTICIPANTS") and facilitates the clearance and settlement of securities
transactions by electronic book-entry transfers between their accounts.
Clearstream provides various services, including safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. Clearstream also deals with domestic securities markets
in several countries through established depository and custodial
relationships. Clearstream has established an electronic bridge with Euroclear
Bank S.A./N.V. as the Euroclear Operator in Brussels to facilitate settlement
of trades between systems. Clearstream currently accepts over 200,000
securities issues on its books.
Clearstream's customers are world-wide financial institutions including
underwriters, securities brokers and dealers, banks, trust companies and
clearing corporations. Clearstream's United States customers are limited to
securities brokers and dealers and banks. Currently, Clearstream has
approximately 2,500 customers located in over 80 countries, including all major
European countries, Canada and the United States. Indirect access to
Clearstream is available to other institutions which clear through or maintain
custodial relationship with an account holder of Clearstream.
The Euroclear System ("EUROCLEAR") was created in 1968 to hold securities
for its participants ("EUROCLEAR PARTICIPANTS") and to clear and settle
transactions between Euroclear Participants through simultaneous electronic
book-entry delivery against payment, thereby eliminating the need for physical
movement of certificates and any risk from lack of simultaneous transfers of
securities and cash. Transactions may be settled in a variety of currencies,
including United States dollars. Euroclear includes various other securities,
including securities lending and borrowing and interfaces with domestic markets
in several countries generally similar to the arrangements for cross-market
transfers with DTC described above. Euroclear is operated by Euroclear Bank
S.A./N.V. (the "EUROCLEAR OPERATOR"). All operations are conducted by the
Euroclear Operator, and all Euroclear securities clearance accounts and
Euroclear cash accounts are accounts with the Euroclear Operator. Euroclear plc
establishes policy for Euroclear on behalf of Euroclear Participants. Euroclear
Participants include banks (including central banks), securities brokers and
dealers and other professional financial intermediaries. Indirect access to
Euroclear is also available to other firms that clear through or maintain a
custodial relationship with a Euroclear Participant, either directly or
indirectly.
Securities clearance accounts and cash accounts with the Euroclear
Operator are governed by the Terms and Conditions Governing Use of Euroclear
and the related Operating Procedures of the Euroclear System and applicable
Belgian law (collectively, the "TERMS AND CONDITIONS"). The Terms and
Conditions govern transfers of securities and cash within Euroclear,
withdrawals of securities and cash from Euroclear, and receipts of payments
with respect to securities in Euroclear. All securities in Euroclear are held
on a fungible basis without attribution of specific certificates to specific
securities clearance accounts. The Euroclear Operator acts under the Terms and
Conditions only on behalf of Euroclear Participants, and has no record of or
relationship with persons holding through Euroclear Participants.
Distributions on the Book-Entry Certificates will be made on each
Distribution Date by the Certificate Administrator to Cede & Co., as nominee of
DTC. DTC will be responsible for crediting the amount of such payments to the
accounts of the applicable DTC Participants in accordance with DTC's normal
procedures. Each DTC Participant will be responsible for disbursing such
payments to
S-50
the beneficial owners of the Book-Entry Certificates that it represents and to
each Financial Intermediary for which it acts as agent. Each such Financial
Intermediary will be responsible for disbursing funds to the beneficial owners
of the Book-Entry Certificates that it represents.
Under a book-entry format, beneficial owners of the Book-Entry
Certificates may experience some delay in their receipt of payments, since such
payments will be forwarded by the Certificate Administrator to Cede & Co.
Distributions with respect to Certificates held through Clearstream or
Euroclear will be credited to the cash accounts of Clearstream Participants or
Euroclear Participants in accordance with the relevant system's rules and
procedures, to the extent received by the Relevant Depositary. Such
distributions will be subject to tax reporting in accordance with relevant
United States tax laws and regulations. See "Federal Income Tax Consequences --
REMICs -- Taxation of Certain Foreign Investors" in the prospectus. Because DTC
can only act on behalf of DTC Participants, the ability of a beneficial owner
to pledge Book-Entry Certificates to persons or entities that do not
participate in the depository system, or otherwise take actions in respect of
such Book-Entry Certificates, may be limited due to the lack of physical
certificates for such Book-Entry Certificates. In addition, issuance of the
Book-Entry Certificates in book-entry form may reduce the liquidity of such
Certificates in the secondary market since certain potential investors may be
unwilling to purchase Certificates for which they cannot obtain physical
certificates.
DTC has advised the Depositor that, unless and until Definitive
Certificates are issued, DTC will take any action the holders of the Book-Entry
Certificates are permitted to take under the Pooling Agreement only at the
direction of one or more Financial Intermediaries to whose DTC accounts the
Book-Entry Certificates are credited, to the extent that such actions are taken
on behalf of Financial Intermediaries whose holdings include such Book-Entry
Certificates. Clearstream or the Euroclear Operator, as the case may be, will
take any other action permitted to be taken by a Certificateholder under the
Pooling Agreement on behalf of a Clearstream Participant or Euroclear
Participant only in accordance with its relevant rules and procedures and
subject to the ability of the Relevant Depositary to effect such actions on its
behalf through DTC. DTC may take actions, at the direction of the related
Participants, with respect to some Book-Entry Certificates which conflict with
actions taken with respect to other Book-Entry Certificates.
Definitive Certificates will be issued to beneficial owners of the
Book-Entry Certificates, or their nominees, rather than to DTC, only if (a) DTC
or the Depositor advises the Certificate Administrator in writing that DTC is
no longer willing, qualified or able to discharge properly its responsibilities
as nominee and depository with respect to the Book-Entry Certificates and the
Depositor or the Certificate Administrator is unable to locate a qualified
successor, (b) the Depositor, at its sole option, elects to terminate a
book-entry system through DTC or (c) after the occurrence of an event of
default under the Pooling Agreement, beneficial owners having voting rights
aggregating not less than 51% of all voting rights evidenced by each class of
the Book-Entry Certificates advise the Certificate Administrator and DTC
through the Financial Intermediaries and the DTC Participants in writing that
the continuation of a book-entry system through DTC (or a successor thereto) is
no longer in the best interests of beneficial owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Certificate Administrator will be required to notify
all beneficial owners of the occurrence of such event and the availability
through DTC of Definitive Certificates. Upon surrender by DTC of the global
certificate or certificates representing the Book-Entry Certificates and
instructions for re-registration, the Trust will issue Definitive Certificates,
and thereafter the holders of such Definitive Certificates will be recognized
as Certificateholders for all purposes under the Pooling Agreement.
Although DTC, Clearstream and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of Book-Entry Certificates among
participants of DTC, Clearstream and Euroclear, they are under no obligation to
perform or continue to perform such procedures and such procedures may be
discontinued at any time.
None of the Depositor, the Servicer, the Master Servicer, the Certificate
Administrator or the Trustee will have any responsibility for any aspect of the
records relating to or payments made on
S-51
account of beneficial ownership interests of the Book-Entry Certificates held
by Cede & Co., as nominee for DTC, or for maintaining, supervising or reviewing
any records relating to such beneficial ownership interests. In the event of
the insolvency of DTC, a DTC Participant or an Indirect DTC Participant in
whose name Book-Entry Certificates are registered, the ability of the
Beneficial Owners of such Book-Entry Certificates to obtain timely payment and,
if the limits of applicable insurance coverage by the Securities Investor
Protection Corporation are exceeded or if such coverage is otherwise
unavailable, ultimate payment, of amounts distributable with respect to such
Book-Entry Certificates may be impaired.
DISTRIBUTIONS
Distributions on the Certificates will be remitted by the Certificate
Administrator on the 25th day of each month (or, if not a business day, the
next business day), commencing in October 2002 (each, a "DISTRIBUTION DATE"),
to the persons in whose names such Certificates are registered at the close of
business on the last business day of the month preceding the month of such
Distribution Date (the "RECORD DATE").
Distributions on each Distribution Date will be made by check mailed to
your address as it appears on the applicable certificate register or, if you
hold 100% of a class of Certificates or if you hold Certificates with an
aggregate initial denomination of $1,000,000 or more and have notified the
Certificate Administrator in writing in accordance with the Pooling Agreement,
by wire transfer in immediately available funds to your account at a bank or
other depository institution having appropriate wire transfer facilities.
However, the final distribution in retirement of a Certificate will be made
only upon presentment and surrender of the Certificate at the Corporate Trust
Office of the Certificate Administrator. If you own a Book-Entry Certificate,
distributions will be made to you through the facilities of DTC, as described
above under "-- Book-Entry Certificates."
POOL DISTRIBUTION AMOUNT
The "POOL DISTRIBUTION AMOUNT" for each Loan Group with respect to any
Distribution Date will be determined by reference to amounts received and
expenses incurred in connection with the Mortgage Loans in such Loan Group and
will be equal to the sum of:
(i) all scheduled installments of interest (net of the related
Servicing Fee and Master Servicing Fee) and principal due on the Mortgage
Loans in such Loan Group on the due date in the month in which such
Distribution Date occurs and received prior to the related Determination
Date, together with any Advances in respect thereof or any Compensating
Interest;
(ii) all proceeds of any primary mortgage guaranty insurance
policies and any other insurance policies with respect to the Mortgage
Loans in such Loan Group to the extent such proceeds are not applied to the
restoration of the related mortgaged property or released to the mortgagor
in accordance with the Servicer's normal servicing procedures and all other
cash amounts received and retained in connection with the liquidation of
defaulted Mortgage Loans in such Loan Group by foreclosure or otherwise
(collectively, "LIQUIDATION PROCEEDS"), during the calendar month preceding
the month of such Distribution Date (in each case, net of unreimbursed
expenses incurred in connection with a liquidation or foreclosure and
unreimbursed Advances, if any);
(iii) all partial or full prepayments received on the Mortgage Loans
in such Loan Group during the calendar month preceding the month of such
Distribution Date; and
(iv) amounts received with respect to such Distribution Date as the
Substitution Adjustment Amount or Purchase Price in respect of any Deleted
Mortgage Loan in such Loan Group or amounts received in connection with the
optional termination of the Trust as of such Distribution Date; reduced by
amounts in reimbursement for Advances previously made and other amounts as
to which the Servicer is entitled to be reimbursed pursuant to the Pooling
Agreement;
S-52
reduced by (i) amounts in reimbursement for Advances previously made by the
Servicer, (ii) any compensation payable to the Servicer or the Master Servicer
and (iii) any amounts reimbursable to the Depositor, the Master Servicer, the
Servicer, the Trustee or the Certificate Administrator under the Pooling
Agreement.
The Pool Distribution Amounts also will not include any profit received by
the Servicer on the foreclosure of a Mortgage Loan. Such amounts, if any, will
be retained by the Servicer as additional servicing compensation.
PRIORITY OF DISTRIBUTIONS
As more fully described herein, distributions will be made on each
Distribution Date from the Pool Distribution Amounts in the following order of
priority (the "POOL DISTRIBUTION AMOUNT ALLOCATION"):
(a) From the applicable Pool Distribution Amount for each Loan
Group:
(i) to the Certificate Administrator an amount in payment for
its services for such Distribution Date;
(ii) to each class of Senior Certificates and Components
relating to such Loan Group (other than the PO Components) to pay
interest;
(iii) pro rata (a) to the PO Component relating to each Loan
Group, based on the related PO Principal Amount, and (b) to the
other classes of Senior Certificates and Components relating to
such Loan Group entitled to receive distributions of principal,
based on the applicable Senior Principal Distribution Amount, as
described below under "-- Principal," to pay principal;
(iv) to PO Component relating to each Loan Group, to pay any
related PO Deferred Amounts, but only from amounts that would
otherwise be distributable on such Distribution Date as principal
of the Subordinate Certificates; and
(b) From the remaining Pool Distribution Amounts, to each class of
Subordinate Certificates, first to pay interest and then to pay principal
in the order of their numerical class designations, beginning with the
Class B-1 Certificates.
The Class 1-A-R and Class 1-A-LR Certificates will be entitled to any
remaining amounts in the Upper-Tier REMC and Lower-Tier REMIC, respectively,
subject to the limitations set forth below under "-- Interest" and "--
Principal."
INTEREST
The pass-through rate for each class of Offered Certificates (other than
the Class 1-A-2 and Class 2-A-2 Certificates) and for each component of the
Class 1-A-2 and Class 2-A-2 Certificates for each Distribution Date is as set
forth or described in the table beginning on page S-4 of this prospectus
supplement.
On each Distribution Date, to the extent of the Pool Distribution Amount,
each class of Certificates will be entitled to receive interest (as to each
such class, the "INTEREST DISTRIBUTION AMOUNT") with respect to the related
Interest Accrual Period. The Interest Distribution Amount for any class of
Certificates (other than the Class 1-A-2 and Class 2-A-2 Certificates) will be
equal to the sum of (i) interest accrued during the related Interest Accrual
Period at the applicable pass-through rate on the related class balance and
(ii) the sum of the amounts, if any, by which the amount described in clause
(i) above on each prior Distribution Date exceeded the amount actually
distributed in respect of interest on such prior Distribution Dates and not
subsequently distributed.
The Interest Distribution Amount for the Class 1-A-2 and Class 2-A-2
Certificates will equal the sum of the Component Interest Distribution Amounts
for the related Components that bears interest. The "COMPONENT INTEREST
DISTRIBUTION AMOUNT" for any component will be equal to the sum of (i) interest
accrued during the related interest accrual period at the applicable
pass-through rate on the
S-53
related component balance or notional amount and (ii) the sum of the amounts,
if any, by which the amount described in clause (i) above on each prior
Distribution Date exceeded the amount actually distributed in respect on such
prior Distribution Dates.
The Class 1-A-2B, Class 2-A-2B and Class 3-A-2A Components (collectively,
the "PO COMPONENTS") are principal only Components and will not bear interest.
The interest entitlement described in clause (i) of the Interest
Distribution Amount and Component Interest Distribution Amount for each class
of Certificates and each Component will be reduced by the amount of Net
Interest Shortfalls for such Distribution Date. With respect to any
Distribution Date, the "NET INTEREST SHORTFALL" is equal to the sum of (i) the
shortfall in interest received with respect to any Mortgage Loan as a result of
a Relief Act Reduction and (ii) any Non-Supported Interest Shortfalls. Net
Interest Shortfalls on any Distribution Date will be allocated pro rata among
all classes of interest-bearing Certificates (other than the Class 1-A-2 and
2-A-2 Certificates) and Components based on the amount of interest accrued on
each such class of Certificates and each such Component on such Distribution
Date before taking into account any reduction in such amounts resulting from
such Net Interest Shortfalls. A "RELIEF ACT REDUCTION" is a reduction in the
amount of monthly interest payment on a Mortgage Loan pursuant to the Soldiers'
and Sailors' Civil Relief Act of 1940, as amended (the "RELIEF ACT") or similar
state laws. See "Certain Legal Aspects of the Mortgage Loans -- Soldiers' and
Sailors' Civil Relief Act of 1940 and Similar Laws" in the prospectus. With
respect to any Distribution Date, the "NON-SUPPORTED INTEREST SHORTFALL" is the
amount by which the aggregate of Prepayment Interest Shortfalls during the
calendar month preceding the month of such Distribution Date exceeds the
Compensating Interest for such period. A "PREPAYMENT INTEREST SHORTFALL" is the
amount by which interest paid by a mortgagor in connection with a prepayment of
principal on a Mortgage Loan is less than one month's interest at the related
mortgage interest rate (net of the related Servicing Fee Rate and Master
Servicing Fee Rate) on the amount of such prepayment.
Accrued interest to be distributed on any Distribution Date will be
calculated for each class of Certificates (other than the Class 1-A-2 and 2-A-2
Certificates) and Components on the basis of the related class balance,
component balance or notional amount with respect to such Distribution Date.
Interest will be calculated and payable on the basis of a 360-day year
consisting of twelve 30-day months.
If on a particular Distribution Date, the amount available to be
distributed in respect of interest on a class of Certificates or Components
applied in the order described above under "-- Priority of Distributions" is
not sufficient to make a full distribution of the Interest Distribution Amount
for each class of Certificates or, in the case of the Class 1-A-2 or Class
2-A-2 Certificates, to make a full distribution of the Component Interest
Distribution Amount for each Component (other than the PO Components), interest
will be distributed on each class of Certificates of equal priority pro rata
based on the Interest Distribution Amount the class would otherwise have been
entitled to receive in the absence of such shortfall. Any unpaid amount will be
carried forward and added to the Interest Distribution Amount of that class of
Certificates on the next Distribution Date. In the case of the Class 1-A-2 and
Class 2-A-2 Certificates, any unpaid amount carried forward will be allocated
pro rata among the Component Interest Distribution Amounts of the components
entitled to interest. Such a shortfall could occur, for example, if Realized
Losses on the Mortgage Loans were exceptionally high or were concentrated in a
particular month. Any such unpaid amount will not bear interest.
Under certain circumstances, the unpaid interest amounts for the Senior
Certificates or Components relating to a Loan Group will be payable from
amounts otherwise distributable as principal on the Subordinate Certificates in
reverse order of numerical designation. See "--Cross-Collateralization" in this
prospectus supplement.
Interest will accrue on each class of Certificates (other than the Class
1-A-2 and Class 2-A-2 Certificates) and each Component during each one-month
period ending on the last day of the month preceding the month in which each
Distribution Date occurs (each, an "INTEREST ACCRUAL PERIOD"). The initial
Interest Accrual Period will be deemed to have commenced on September 1, 2002.
Interest
S-54
which accrues on each class of Certificates or Component during an Interest
Accrual Period will be calculated on the assumption that distributions in
reduction of the principal balances thereof on the Distribution Date in that
Interest Accrual Period are made on the first day of the Interest Accrual
Period.
The Class 1-A-2C Component is an interest only Component and has no
component balance. The "CLASS 1-A-2C NOTIONAL AMOUNT" with respect to each
Distribution Date will be equal to the aggregate of the Stated Principal
Balances of the Premium Mortgage Loans in Loan Group 1 as of the due date in
the month preceding the month of such Distribution Date. The Class 1-A-2C
Notional Amount with respect to the first Distribution Date will be
approximately $469,457,326.
The Class 2-A-2C Component is an interest only Component and has no
component balance. The "CLASS 2-A-2C NOTIONAL AMOUNT" with respect to each
Distribution Date will be equal to the aggregate of the Stated Principal
Balances of the Premium Mortgage Loans in Loan Group 2 as of the due date in
the month preceding the month of such Distribution Date. The Class 2-A-2C
Notional Amount with respect to the first Distribution Date will be
approximately $1,258,217,060.
The Class 3-A-2B Component (and, together with the Class 1-A-2C and Class
2-A-2C Components, the "IO COMPONENTS") is an interest only Component and has
no component balance. The "CLASS 3-A-2B NOTIONAL AMOUNT" with respect to each
Distribution Date will be equal to the aggregate of the Stated Principal
Balances of the Premium Mortgage Loans in Loan Group 3 as of the due date in
the month preceding the month of such Distribution Date. The Class 3-A-2B
Notional Amount with respect to the first Distribution Date will be
approximately $30,606,021.
The class balance of a class of Certificates (other than the Class 1-A-2
and Class 2-A-2 Certificates) and the component balance of Class 1-A-2A, Class
1-A-2B, Class 2-A-2A, Class 2-A-2B and Class 3-A-2A Components at any time will
equal its initial class balance or component balance less (i) all distributions
of principal made to such class or Component, (ii) losses allocated to such
class or component as described under "-- Allocation of Losses" and (iii) other
adjustments made to such class balance or component balance as described under
"-- Allocation of Losses" below. The class balance of the Class 1-A-2 and the
Class 2-A-2 Certificates at any time will equal the sum of the component
balances of the related Components.
The "GROUP SUBORDINATE AMOUNT" for any Distribution Date and any Loan
Group is equal to the excess of the Pool Principal Balance (Non-PO Portion) for
such Loan Group over the aggregate class balance and component balance of the
Senior Certificates and Components (other than the PO Components) relating to
such Loan Group immediately prior to such date.
After the Senior Credit Support Depletion Date, for so long as the Class
1-A-2 Certificates are outstanding, the amount that would have reduced the
class balance of the Class 1-A-1 Certificates as a result of adjustments
described under "--Allocation of Losses," will instead reduce the component
balance of the Class 1-A-2A Component. As a result, after the Senior Credit
Support Depletion Date, the Class 1-A-2 Certificates will bear the principal
portion of all Realized Loses allocable to the Class 1-A-1 Certificates for so
long as the component balance of the Class 1-A-2A Component is greater than
zero.
After the Senior Credit Support Depletion Date, for so long as the Class
2-A-2 Certificates are outstanding, the amount that would have reduced the
class balance of the Class 2-A-1 Certificates as a result of adjustments
described under "--Allocation of Losses," will instead reduce the component
balance of the Class 2-A-2A Component. As a result, after the Senior Credit
Support Depletion Date, the Class 2-A-2 Certificates will bear the principal
portion of all Realized Loses allocable to the Class 2-A-1 Certificates for so
long as the component balance of the Class 2-A-2A Component is greater than
zero.
PRINCIPAL
On each Distribution Date, certificateholders will be entitled to receive
principal distributions from the applicable Pool Distribution Amount to the
extent described below and in accordance with
S-55
the priorities set forth under "-- Priority of Distributions" above. The
principal distributions distributed to a class on any Distribution Date will be
allocated among the holders of such class pro rata in accordance with their
respective Percentage Interests.
All payments and other amounts received in respect of principal of the
Mortgage Loans in a related Loan Group will be allocated between (i) the
related Senior Certificates and Components (other than the Class 1-A-2B, Class
2-A-2B and Class 3-A-2A Components) and the Subordinate Certificates and (ii)
the applicable PO Component in each case based on the applicable Non-PO
Percentage and the applicable PO Percentage, respectively, of such amounts.
The "NON-PO PERCENTAGE" with respect to any Group 1 Mortgage Loan with a
Net Mortgage Interest Rate less than 6.250% (each such Mortgage Loan, a "GROUP
1 DISCOUNT MORTGAGE LOAN") will be equal to the Net Mortgage Interest Rate
thereof divided by 6.250%. The Non-PO Percentage with respect to any Group 1
Mortgage Loan with a Net Mortgage Interest Rate greater than or equal to 6.250%
(each such Mortgage Loan, a "GROUP 1 PREMIUM MORTGAGE LOAN") will be 100%.
The "NON-PO PERCENTAGE" with respect to any Group 2 Mortgage Loan with a
Net Mortgage Interest Rate less than 6.250% (each such Mortgage Loan, a "GROUP
2 DISCOUNT MORTGAGE LOAN") will be equal to the Net Mortgage Interest Rate
thereof divided by 6.250%. The Non-PO Percentage with respect to any Group 2
Mortgage Loan with a Net Mortgage Interest Rate greater than or equal to 6.250%
(each such Mortgage Loan, a "GROUP 2 PREMIUM MORTGAGE LOAN") will be 100%.
The "NON-PO PERCENTAGE" with respect to any Group 3 Mortgage Loan with a
Net Mortgage Interest Rate less than 6.500% (each such Mortgage Loan, a "GROUP
3 DISCOUNT MORTGAGE LOAN" and, together with the Group 1 Discount Mortgage
Loans and the Group 2 Discount Mortgage Loans, the "DISCOUNT MORTGAGE LOANS")
will be equal to the Net Mortgage Interest Rate thereof divided by 6.500%. The
Non-PO Percentage with respect to any Group 3 Mortgage Loan with a Net Mortgage
Interest Rate greater than or equal to 6.500% (each such Mortgage Loan, a
"GROUP 3 PREMIUM MORTGAGE LOAN" and, together with the Group 1 Premium Mortgage
Loans and the Group 2 Premium Mortgage Loans, the "PREMIUM MORTGAGE LOANS")
will be 100%.
The "PO PERCENTAGE" with respect to any Discount Mortgage Loan will be
equal to 100% minus the Non-PO Percentage for such Mortgage Loan. The PO
Percentage with respect to any Premium Mortgage Loan will be 0%.
The "NET MORTGAGE INTEREST RATE" of a Mortgage Loan is its mortgage
interest rate minus the Administrative Fee Rate.
Non-PO Principal Amount
On each Distribution Date, the Non-PO Principal Amount for a Loan Group
will be distributed (i) as principal of the related Senior Certificates and
Components (other than the Class 1-A-2B, Class 2-A-2B and Class 3-A-2A
Components) in an amount up to the Senior Principal Distribution Amount for
such Loan Group and (ii) as principal of the Subordinate Certificates in an
amount up to the Subordinate Principal Distribution Amount.
The "NON-PO PRINCIPAL AMOUNT" for any Distribution Date and any Loan Group
will equal the sum of the applicable Non-PO Percentage of:
(a) all monthly payments of principal due on each Mortgage Loan in
such Loan Group on the related Due Date;
(b) the principal portion of the Purchase Price of each Mortgage
Loan in such Loan Group that was repurchased by the Depositor pursuant to
the Pooling Agreement as of that Distribution Date;
(c) any Substitution Adjustment Amount in connection with a Deleted
Mortgage Loan in such Loan Group received with respect to that Distribution
Date;
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(d) any Liquidation Proceeds allocable to recoveries of principal of
Mortgage Loans in such Loan Group that are not yet Liquidated Mortgage
Loans received during the calendar month preceding the month of that
Distribution Date;
(e) with respect to each Mortgage Loan in such Loan Group that
became a Liquidated Mortgage Loan during the calendar month preceding the
month of that Distribution Date, the amount of the Liquidation Proceeds
allocable to principal received with respect to that Mortgage Loan; and
(f) all partial and full principal prepayments on the Mortgage Loans
in such Loan Group by mortgagors received during the calendar month
preceding the month of that Distribution Date.
The amounts described in clauses (a) through (d) are referred to as
"SCHEDULED PRINCIPAL PAYMENTS." The amounts described in clauses (e) and (f)
are referred to as "UNSCHEDULED PRINCIPAL PAYMENTS."
Senior Principal Distribution Amount
On each Distribution Date, an amount equal to the lesser of (a) the Senior
Principal Distribution Amount for Loan Group 1 for such Distribution Date and
(b) the product of (1) the Pool Distribution Amount for Loan Group 1 remaining
after payment of funds due to the Certificate Administrator and distributions
of interest on the Senior Certificates and Components relating to Loan Group 1
and (2) a fraction, the numerator of which is the Senior Principal Distribution
Amount for Loan Group 1 and the denominator of which is the sum of the PO
Principal Amount and the Senior Principal Distribution Amount for Loan Group 1,
will be distributed as principal to the following classes of Senior
Certificates and Components, sequentially, as follows:
first, concurrently, to the Class 1-A-R and Class 1-A-LR
Certificates, pro rata until their class balances have been reduced to
zero; and
second, concurrently to the Class 1-A-1 Certificates and Class 1-A-2A
Component, pro rata, until their respective class balance and component
balance have been reduced to zero.
On each Distribution Date, an amount equal to the lesser of (a) the Senior
Principal Distribution Amount for Loan Group 2 for such Distribution Date and
(b) the product of (1) the Pool Distribution Amount for Loan Group 2 remaining
after payment of funds to the Certificate Administrator and distributions of
interest on the Senior Certificates and Components relating to Loan Group 2 and
(2) a fraction, the numerator of which is the Senior Principal Distribution
Amount for Loan Group 2 and the denominator of which is the sum of the PO
Principal Amount and the Senior Principal Distribution Amount for Loan Group 2,
will be distributed as principal to the following classes of Senior
Certificates, concurrently, to the Class 2-A-1 Certificates and Class 2-A-2A
Component, pro rata, until their respective class balance and component balance
have been reduced to zero.
On each Distribution Date, an amount equal to the lesser of (a) the Senior
Principal Distribution Amount for Loan Group 3 for such Distribution Date and
(b) the product of (1) the Pool Distribution Amount for Loan Group 3 remaining
after payment of funds to the Certificate Administrator and distributions of
interest on the Senior Certificates and Components relating to Loan Group 3 and
(2) a fraction, the numerator of which is the Senior Principal Distribution
Amount for Loan Group 3 and the denominator of which is the sum of the PO
Principal Amount and the Senior Principal Distribution Amount for Loan Group 3,
will be distributed as principal to the Class 3-A-1 Certificates.
The preceding distribution priorities will not apply on any Distribution
Date on or after the Senior Credit Support Depletion Date. On each of those
Distribution Dates, the amount to be distributed as principal to the Senior
Certificates and Components relating to each Loan Group (other than the PO
Components) will be distributed, concurrently, as principal of the classes of
Senior Certificates and Components relating to such Loan Group pro rata in
accordance with their respective class and component balances immediately prior
to that Distribution Date.
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The "SENIOR CREDIT SUPPORT DEPLETION DATE" is the date on which the
aggregate balance of the Subordinate Certificates has been reduced to zero.
The "SENIOR PRINCIPAL DISTRIBUTION AMOUNT" for a Loan Group for any
Distribution Date will equal the sum of:
(a) the Senior Percentage for such Loan Group of the applicable
Non-PO Percentage of the Scheduled Principal Payments for that Distribution
Date; and
(b) the Senior Prepayment Percentage for such Loan Group of the
applicable Non-PO Percentage of the Unscheduled Principal Payments for that
Distribution Date.
"STATED PRINCIPAL BALANCE" means, as to any Mortgage Loan and due date,
the unpaid principal balance of such Mortgage Loan as of such due date, as
specified in the amortization schedule at the time relating thereto (before any
adjustment to such amortization schedule by reason of any moratorium or similar
waiver or grace period), after giving effect to any previous partial principal
prepayments and Liquidation Proceeds received and to the payment of principal
due on such due date and irrespective of any delinquency in payment by the
related mortgagor and after giving effect to any Deficient Valuation.
The "POOL PRINCIPAL BALANCE" for a Loan Group with respect to any
Distribution Date equals the aggregate of the Stated Principal Balances of the
Mortgage Loans in such Loan Group outstanding on the due date in the month
preceding the month of such Distribution Date.
The "POOL PRINCIPAL BALANCE (NON-PO PORTION)" for a Loan Group with
respect to any Distribution Date equals the sum of the product, for each
Mortgage Loan in such Loan Group, of the Non-PO Percentage of such Mortgage
Loan multiplied by its Stated Principal Balance on the due date in the month
preceding the month of such Distribution Date.
The "SENIOR PERCENTAGE" for a Loan Group for any Distribution Date will
equal (i) (A) the aggregate class balance of the Senior Certificates and the
component balance of the Components (other than the PO Components) relating to
such Loan Group immediately prior to such date, divided by (ii) the Pool
Principal Balance (Non-PO Portion) of the related Loan Group for such date.
The "SUBORDINATE PERCENTAGE" for any Distribution Date will equal 100%
minus the Senior Percentage for such date.
As of the Cut-off Date, the Senior Percentage and the Subordinate
Percentage for the Certificates relating to Loan Group 1 are expected to be
approximately 96.47% and 3.53%, respectively, the Senior Percentage and the
Subordinate Percentage for the Certificates relating to Loan Group 2 are
expected to be approximately 96.48% and 3.52%, respectively, and the Senior
Percentage and Subordinate Percentage for the Certificates relating to Loan
Group 3 are expected to be approximately 96.45% and 3.55%, respectively.
The "SENIOR PREPAYMENT PERCENTAGE" for a Loan Group for any Distribution
Date occurring during the periods set forth below will be as follows:
DISTRIBUTION DATE OCCURRING IN SENIOR PREPAYMENT PERCENTAGE
- ------------------------------ ----------------------------
October 2002 through September 2007 ......... 100%
October 2007 through September 2008 ......... the applicable Senior Percentage, plus 70% of the
applicable Subordinate Percentage;
October 2008 through September 2009 ......... the applicable Senior Percentage, plus 60% of the
applicable Subordinate Percentage;
October 2009 through September 2010 ......... the applicable Senior Percentage, plus 40% of the
applicable Subordinate Percentage;
October 2010 through September 2011 ......... the applicable Senior Percentage, plus 20% of the
applicable Subordinate Percentage; and
October 2011 and thereafter ................. the applicable Senior Percentage;
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provided, however, that if on any Distribution Date the percentage equal to (x)
the sum of the class and component balances of the Class 1-A-1, Class 1-A-R and
Class 1-A-LR Certificates, Class 1-A-2A Component, Class 2-A-1 Certificates,
Class 2-A-2A Component and Class 3-A-1 Certificates divided by (y) the
aggregate Pool Principal Balance (Non-PO Portion) for all Loan Groups (such
percentage, the "TOTAL SENIOR PERCENTAGE") exceeds such percentage calculated
as of the Closing Date, then the Senior Prepayment Percentage for each Loan
Group for such Distribution Date will equal 100%.
No decrease in the Senior Prepayment Percentage for a Loan Group will
occur, however, if as of the first Distribution Date as to which any such
decrease applied, (i) the outstanding principal balance of all Mortgage Loans
(including, for this purpose, any Mortgage Loans in bankruptcy or foreclosure
or any REO Property) delinquent 60 days or more (averaged over the preceding
six-month period), as a percentage of the aggregate class balance of the
Subordinate Certificates, is equal to or greater than 50%, or (ii) cumulative
Realized Losses with respect to the Mortgage Loans exceed the percentages of
the aggregate balance of the Subordinate Certificates as of the Closing Date
(the "ORIGINAL SUBORDINATE PRINCIPAL BALANCE") indicated below:
PERCENTAGE OF
ORIGINAL SUBORDINATE
DISTRIBUTION DATE OCCURRING IN PRINCIPAL BALANCE
--------------------------- --------------------
October 2007 through September 2008 ......... 30%
October 2008 through September 2009 ......... 35%
October 2009 through September 2010 ......... 40%
October 2010 through September 2011 ......... 45%
October 2011 and thereafter ................. 50%
This disproportionate allocation of certain unscheduled payments in
respect of principal will have the effect of accelerating the amortization of
the Senior Certificates and Components relating to a Loan Group (other than the
PO Components) while, in the absence of Realized Losses on the Mortgage Loans
in the related Loan Group, increasing the relative interest in the Pool
Principal Balance evidenced by the Subordinate Certificates. Increasing the
respective interest of the Subordinate Certificates relative to that of the
Senior Certificates and Components (other than the PO Components) relating to
such Loan Group is intended to preserve the availability of the subordination
provided by the Subordinate Certificates.
The "SUBORDINATE PREPAYMENT PERCENTAGE" for a Loan Group as of any
Distribution Date will equal 100% minus the Senior Prepayment Percentage for
such Loan Group for such date.
If on any Distribution Date the allocation to any class of Senior
Certificates (other than the Class 1-A-2 Certificates, with respect to the
Class 1-A-2B Component, and the Class 2-A-2 Certificates, with respect to the
Class 2-A-2B and Class 3-A-2A Components) then entitled to distributions of
full and partial principal prepayments and other amounts to be allocated in
accordance with the applicable Senior Prepayment Percentage, as described
above, would reduce the outstanding class balance of such class below zero, the
distribution to that class of the applicable Senior Prepayment Percentage of
those amounts for such Distribution Date will be limited to the percentage
necessary to reduce the related class balance to zero.
Class A-PO Principal Distribution Amount
On each Distribution Date, distributions of principal of the PO Component
related to each Loan Group will be made in an amount (the "PO PRINCIPAL
DISTRIBUTION AMOUNT") equal to the lesser of:
(a) the PO Principal Amount for such Loan Group for such
Distribution Date; and
(b) the product of (1) the Pool Distribution Amount remaining after
distribution of funds due to the Certificate Administrator and interest on
the related Senior Certificates and Components and (2) a fraction, the
numerator of which is the PO Principal Amount for such
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Loan Group and the denominator of which is the sum of the PO Principal
Amount for such Loan Group and the Senior Principal Distribution Amount for
such Loan Group.
The "PO PRINCIPAL AMOUNT" for any Distribution Date and any Loan Group
will equal the sum of the applicable PO Percentage of:
(a) all monthly payments of principal due on each Discount Mortgage
Loan in the related Loan Group on the related Due Date;
(b) the principal portion of the Purchase Price of each Discount
Mortgage Loan in the related Loan Group that was repurchased by the
Depositor pursuant to the Pooling Agreement as of such Distribution Date;
(c) any Substitution Adjustment Amount in connection with a Deleted
Mortgage Loan in the related Loan Group that was a Discount Mortgage Loan
received with respect to such Distribution Date;
(d) any Liquidation Proceeds allocable to recoveries of principal of
Discount Mortgage Loans in the related Loan Group that are not yet
Liquidated Mortgage Loans received during the calendar month preceding the
month of such Distribution Date;
(e) with respect to each Discount Mortgage Loan in the related Loan
Group that became a Liquidated Mortgage Loan during the calendar month
preceding the month of such Distribution Date, the amount of Liquidation
Proceeds allocable to principal received with respect to such Discount
Mortgage Loan; and
(f) all partial and full principal prepayments by mortgagors on
Discount Mortgage Loans in the related Loan Group received during the
calendar month preceding such Distribution Date.
Subordinate Principal Distribution Amount
On each Distribution Date, each class of Subordinate Certificates that is
entitled to receive a principal distribution will receive its pro rata share
(based on the class balances of all the Subordinate Certificates that are
entitled to receive a principal distribution) of the Subordinate Principal
Distribution Amount, to the extent that the remaining Pool Distribution Amounts
from all Loan Groups are sufficient therefor. With respect to each class of
Subordinate Certificates, if on any Distribution Date the Fractional Interest
is less than the Fractional Interest for that class on the Closing Date, no
classes junior to that class will be entitled to receive a principal
distribution.
Distributions of principal on the Subordinate Certificates that are
entitled to receive a principal distribution on a Distribution Date will be
made sequentially to each class of Subordinate Certificates in the order of
their numerical class designations, beginning with the Class B-1 Certificates,
until each such class has received its respective pro rata share for the
Distribution Date. However, the Class PO Deferred Amounts will be paid to the
related PO Components from amounts otherwise distributable as principal to the
Subordinate Certificates, beginning with the amounts otherwise distributable as
principal to the class of Subordinate Certificates with the highest numerical
designation.
The "FRACTIONAL INTEREST" with respect to any Distribution Date and each
class of Subordinate Certificates will equal (i) the aggregate of the class
balances immediately prior to such Distribution Date of all classes of
Subordinate Certificates that have higher numerical class designations than
such class, divided by (ii) the aggregate principal balance of all the
Certificates minus the sum of the component balances of the PO Components
immediately prior to such Distribution Date.
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The approximate Fractional Interests for the Subordinate Certificates on
the Closing Date are expected to be as follows:
Class B-1 ................................ 2.11%
Class B-2 ................................ 1.41%
Class B-3 ................................ 0.86%
Class B-4 ................................ 0.50%
Class B-5 ................................ 0.25%
Class B-6 ................................ 0.00%
The "SUBORDINATE PRINCIPAL DISTRIBUTION AMOUNT" for a Loan Group for any
Distribution Date will equal the sum of:
(a) the Subordinate Percentage for such Loan Group of the applicable
Non-PO Percentage of the Scheduled Principal Payments for such Distribution
Date; and
(b) the Subordinate Prepayment Percentage for such Loan Group of the
applicable Non-PO Percentage of the Unscheduled Principal Payments for such
Distribution Date.
Residual Certificates
The Residual Certificates will remain outstanding for so long as the Trust
exists, whether or not they are receiving current distributions of principal or
interest. In addition to distributions of interest and principal as described
above, on each Distribution Date, the holder of the Class 1-A-LR Certificate
will be entitled to receive any Pool Distribution Amount for a Loan Group
remaining after the payment of (i) interest and principal on the Senior
Certificates, (ii) PO Deferred Amounts on the PO Components and (iii) interest
and principal on the Subordinate Certificates, as described above. It is not
anticipated that there will be any significant amounts remaining for any such
distribution.
CROSS-COLLATERALIZATION
On each Distribution Date prior to the Senior Credit Support Depletion
Date but on or after the date on which the class balances of the Senior
Certificates and the component balances of the Components (other than the PO
Components) relating to a Loan Group (such related Senior Certificates and
Components, the "RELATED GROUP") have been reduced to zero, amounts otherwise
distributable as Unscheduled Principal Payments on the Subordinate Certificates
will be paid as principal to the remaining Related Groups in accordance with
the priorities set forth for the applicable Related Group under "--Principal --
Senior Principal Distribution Amount," provided that on such Distribution Date
(a) the Aggregate Subordinate Percentage for such Distribution Date is less
than twice the initial Aggregate Subordinate Percentage or (b) the average
outstanding principal balance of the Mortgage Loans delinquent 60 days or more
(including for this purpose, any Mortgage Loans in bankruptcy or foreclosure or
any REO Property) over the last six months as a percentage of the aggregate
class balance of the Subordinate Certificates is greater than or equal to 50%.
If more than one Related Group remains outstanding, the distributions described
above will be made to the Related Groups, pro rata, in proportion to the
aggregate class balances and component balances of the Senior Certificates and
Components (other than the PO Components) of each such Related Group.
The "AGGREGATE SUBORDINATE PERCENTAGE" at any time will equal the sum of
the class balances of the Class B Certificates divided by the sum of the Pool
Principal Balances (Non-PO Portion) of each Loan Group.
In addition, if on any Distribution Date the aggregate class balance of
the Senior Certificates and the component balances of the Components relating
to a Loan Group (excluding the PO Components and after giving effect to
distributions to be made on such Distribution Date), is greater than the Pool
Principal Balance (Non-PO Portion) of the related Loan Group (any such related
Senior Certificates and Components, the "UNDERCOLLATERALIZED GROUP" and any
such excess, the "UNDERCOLLATERALIZED
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AMOUNT"), all amounts otherwise distributable as principal on the Subordinate
Certificates, in reverse order of their numerical designations will be paid as
principal to the Senior Certificates and Components (other than the PO
Components) of the Undercollateralized Group in accordance with the priorities
set forth under "--Principal -- Senior Principal Distribution Amount," until
the aggregate class balances and component balances of the Senior Certificates
(excluding the PO Components) of the Undercollateralized Group equals the Pool
Principal Balance (Non-PO Portion) of the related Loan Group. Also, the amount
of any unpaid interest shortfall amounts with respect to the
Undercollateralized Group (including any interest shortfall amount for such
Distribution Date) will be paid to the Undercollateralized Group prior to the
payment of any Undercollateralized Amount from amounts otherwise distributable
as principal on the Subordinate Certificates, in reverse order of their
numerical designations; such amount will be paid pro rata to the Senior
Certificates and Components of such Undercollateralized Group up to their
Interest Distribution Amounts for such Distribution Date. If there is more than
one Undercollateralized Group, the distributions described above will be made
pro rata in proportion to the amount by which the aggregate class balance of
the Senior Certificates and the component balance of the Components (other than
the PO Components) of each such Undercollateralized Group exceeds the Pool
Principal Balance (Non-PO Portion) of the related Loan Group.
ALLOCATION OF LOSSES
On each Distribution Date, the applicable PO Percentage of any Realized
Loss on a Discount Mortgage Loan in a Loan Group will be allocated to the PO
Component relating to such Loan Group until the component balance of such
Component is reduced to zero. In addition, on each Distribution Date, the
component balance of the PO Components will be reduced if and to the extent
that such component balance (after taking into account the amount of all
distributions to be made on such Distribution Date and the allocation of
Realized Losses on such Distribution Date) exceeds the Adjusted Pool Amount (PO
Portion) for the related Loan Group for such Distribution Date. The amount of
any such Realized Loss allocated on or prior to the Senior Credit Support
Depletion Date will be treated as a "PO DEFERRED AMOUNT" for the related PO
Component. To the extent funds are available on such Distribution Date or on
any future Distribution Date from amounts that would otherwise be allocable to
the Subordinate Principal Distribution Amount, PO Deferred Amounts will be paid
on the PO Components prior to distributions of principal on the Subordinate
Certificates. Any distribution of the Pool Distribution Amounts in respect of
unpaid PO Deferred Amounts will not further reduce the principal balance of
such PO Components. The PO Deferred Amounts will not bear interest. The class
balance of the class of Subordinate Certificates then outstanding with the
highest numerical class designation will be reduced by the amount of any
payments in respect of PO Deferred Amounts. Any excess of these PO Deferred
Amounts over the class balance of that class will be allocated to the next most
subordinate class to reduce its class balance and so on, as necessary. After
the Senior Credit Support Depletion Date, no new PO Deferred Amounts will be
created.
On each Distribution Date, the applicable Non-PO Percentage of any
Realized Loss will be allocated first to the Subordinate Certificates, in the
reverse order of their numerical class designations (beginning with the class
of Subordinate Certificates then outstanding with the highest numerical class
designation), in each case until the class balance of the respective class of
Certificates has been reduced to zero, and then to the Senior Certificates and
Components (other than the PO Components) relating to the applicable Loan Group
pro rata based on their respective class balances.
In addition, on each such Distribution Date, the class balance of the
class of Subordinate Certificates then outstanding with the highest numerical
class designation will be reduced if and to the extent that the aggregate of
the class balances of all classes of Certificates (after taking into account
the amount of all distributions to be made on such Distribution Date and the
allocation of Realized Losses on such Distribution Date) exceeds the sum of the
Adjusted Pool Amounts for such Distribution Date.
After the applicable Senior Credit Support Depletion Date, on each
Distribution Date, the aggregate of the class balances and component balances
of all classes of Senior Certificates and
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Components relating to a Loan Group (other than the PO Components) then
outstanding will be reduced if and to the extent that such aggregate balance
(after taking into account the amount of all distributions to be made on such
Distribution Date and the allocation of Realized Losses on the Mortgage Loans
in the related Loan Group on such Distribution Date) exceeds the difference
between the Adjusted Pool Amount and the Adjusted Pool Amount (PO Portion) for
such Loan Group for such Distribution Date. The amount of any such reduction
will be allocated among the Senior Certificates and Components relating to a
Loan Group (other than the PO Components) pro rata based on their respective
class balances and component balances.
After the Senior Credit Support Depletion Date, the principal portion of
Realized Losses on the Group 1 Mortgage Loans allocated to the Class 1-A-1
Certificates and any reduction allocated to the Class 1-A-1 Certificates
pursuant to the preceding paragraph will be borne by the Class 1-A-2A Component
(in addition to the other Realized Losses allocated to the Class 1-A-2A
Component), rather than the Class 1-A-1 Certificates, for so long as the Class
1-A-2 Certificates are outstanding. Therefore, the class balance of the Class
1-A-2 Certificates will be reduced by such Realized Losses, to the extent of
the component balance of the Class 1-A-2A Component, rather than the class
balance of the Class 1-A-1 Certificates.
After the Senior Credit Support Depletion Date, the principal portion of
Realized Losses on the Group 2 Mortgage Loans allocated to the Class 2-A-1
Certificates and any reduction allocated to the Class 2-A-1 Certificates
pursuant to the second preceding paragraph will be borne by the Class 2-A-2A
Component (in addition to the other Realized Losses allocated to the Class
2-A-2A Component), rather than the Class 2-A-1 Certificates, for so long as the
Class 2-A-2 Certificates are outstanding. Therefore, the class balance of the
Class 2-A-2 Certificates will be reduced by such Realized Losses, to the extent
of the component balance of the Class 2-A-2A Component, rather than the class
balance of the Class 2-A-1 Certificates.
In general, a "REALIZED LOSS" means, (a) with respect to a Liquidated
Mortgage Loan, the amount by which the remaining unpaid principal balance of
the Mortgage Loan exceeds the amount of Liquidation Proceeds applied to the
principal balance of the related Mortgage Loan and (b) a Bankruptcy Loss.
"BANKRUPTCY LOSSES" are losses that are incurred as a result of Debt
Service Reductions or Deficient Valuations. As used in this prospectus
supplement, a "DEFICIENT VALUATION" occurs when a bankruptcy court establishes
the value of a mortgaged property at an amount less than the then-outstanding
principal balance of the Mortgage Loan secured by such mortgaged property or
reduces the then-outstanding principal balance of a Mortgage Loan. In the case
of a reduction in the value of the related mortgaged property, the amount of
the secured debt could be reduced to such value, and the holder of such
Mortgage Loan thus would become an unsecured creditor to the extent the
then-outstanding principal balance of such Mortgage Loan exceeds the value so
assigned to the mortgaged property by the bankruptcy court. In addition,
certain other modifications of the terms of a Mortgage Loan can result from a
bankruptcy proceeding, including the reduction (a "DEBT SERVICE REDUCTION") of
the amount of the Monthly Payment on the related Mortgage Loan. However, none
of these events shall be considered a Debt Service Reduction or Deficient
Valuation so long as the Servicer is pursuing any other remedies that may be
available with respect to the related Mortgage Loan and (i) such Mortgage Loan
is not in default with respect to any payment due thereunder or (ii) scheduled
Monthly Payments are being advanced by the Servicer without giving effect to
any Debt Service Reduction.
A "LIQUIDATED MORTGAGE LOAN" is a defaulted Mortgage Loan as to which the
Servicer has determined that all recoverable Liquidation Proceeds have been
received. See "Credit Support" in this prospectus supplement.
With respect to any Distribution Date, the "ADJUSTED POOL AMOUNT" for a
Loan Group will equal the aggregate unpaid principal balance of the Mortgage
Loans in such Loan Group as of the Cut-off Date minus the sum of (i) all
amounts in respect of principal received in respect of the Mortgage Loans in
such Loan Group (including amounts received as Advances, principal prepayments
and
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Liquidation Proceeds in respect of principal) and distributed on the
Certificates on such Distribution Date and all prior Distribution Dates and
(ii) the principal portion of all Realized Losses (other than Debt Service
Reductions) incurred on the Mortgage Loans in such Loan Group from the Cut-off
Date through the end of the month preceding such Distribution Date.
With respect to any Distribution Date, the "ADJUSTED POOL AMOUNT (PO
PORTION)" for a Loan Group will equal the sum as to each Mortgage Loan
outstanding in such Loan Group at the Cut-off Date of the product of (A) the PO
Percentage for such Mortgage Loan and (B) the principal balance of such
Mortgage Loan as of the Cut-off Date less the sum of (i) all amounts in respect
of principal received in respect of such Mortgage Loan (including amounts
received as Advances, principal prepayments and Liquidation Proceeds in respect
of principal) and distributed on the Certificates on such Distribution Date and
all prior Distribution Dates and (ii) the principal portion of any Realized
Loss (other than a Debt Service Reduction) incurred on such Mortgage Loan from
the Cut-off Date through the end of the month preceding the month in which such
Distribution Date occurs.
RESTRICTIONS ON TRANSFER OF THE CLASS 1-A-R AND CLASS 1-A-LR CERTIFICATES
The Class 1-A-R and Class 1-A-LR Certificates will be subject to the
following restrictions on transfer and will contain a legend describing such
restrictions.
The REMIC provisions of the Code impose certain taxes on (i) transferors
of residual interests to, or agents that acquire residual interests on behalf
of, Disqualified Organizations (as defined in the prospectus) and (ii) certain
Pass-Through Entities (as defined in the prospectus) that have Disqualified
Organizations as beneficial owners. No tax will be imposed on a Pass-Through
Entity (other than an "electing large partnership" (as defined in the
prospectus)) with respect to the Class 1-A-R or Class 1-A-LR Certificate to the
extent it has received an affidavit from the owner thereof that such owner is
not a Disqualified Organization or a nominee for a Disqualified Organization.
The Pooling Agreement will provide that no legal or beneficial interest in
the Class 1-A-R or Class 1-A-LR Certificate may be transferred to or registered
in the name of any person unless:
o the proposed purchaser provides to the Certificate Administrator an
affidavit to the effect that, among other items, such transferee is
not a Disqualified Organization and is not purchasing the Class 1-A-R
or Class 1-A-LR Certificate as an agent for a Disqualified
Organization (i.e., as a broker, nominee or other middleman thereof);
and
o the transferor states in writing to the Certficate Administrator that
it has no actual knowledge that such affidavit is false.
Further, such affidavit will require the transferee to affirm that it (a)
historically has paid its debts as they have come due and intends to do so in
the future, (b) understands that it may incur tax liabilities with respect to
the Class 1-A-R or Class 1-A-LR Certificate in excess of cash flows generated
thereby, (c) intends to pay taxes associated with holding the Class 1-A-R or
Class 1-A-LR Certificate as such taxes become due, (d) will not cause income
from the Class 1-A-R or Class 1-A-LR Certificate to be attributable to a
foreign permanent establishment or fixed base (within the meaning of an
applicable income tax treaty) of its own or of any other person, and (e) will
not transfer the Class 1-A-R or Class 1-A-LR Certificate to any person or
entity that does not provide a similar affidavit. The transferor must certify
in writing to the Certificate Administrator that, as of the date of the
transfer, it had no knowledge or reason to know that the affirmations made by
the transferee pursuant to the preceding sentence were false.
In addition, Treasury regulations have been issued establishing a safe
harbor for transfers of noneconomic residual interests. See "Federal Income Tax
Consequences--REMICs--Taxation of Owners of Residual Securities--Tax Related
Restrictions on Transfers of Residual Securities--
Noneconomic Residual Interests" in the prospectus.
The Pooling Agreement will not require that transfers of the Class 1-A-R
or Class 1-A-LR Certificate meet all of the requirements for the safe harbor.
The holder of the Class 1-A-R or Class 1-A-LR Certificate is advised to consult
its tax advisor regarding the advisability of meeting the safe harbor.
S-64
In addition, neither the Class 1-A-R nor the Class 1-A-LR Certificate may
be purchased by or transferred to any person that is not a U.S. Person, unless:
o such person holds the Class 1-A-R or Class 1-A-LR Certificate in
connection with the conduct of a trade or business within the United
States and furnishes the transferor and the Certificate Administrator
with an effective Internal Revenue Service Form W-8ECI; or
o the transferee delivers to both the transferor and the Certificate
Administrator an opinion of a nationally-recognized tax counsel to the
effect that such transfer is in accordance with the requirements of
the Code and the regulations promulgated thereunder and that such
transfer of the Class 1-A-R or Class 1-A-LR Certificate will not be
disregarded for federal income tax purposes.
The term "U.S. PERSON" means a citizen or resident of the United States, a
corporation or partnership (unless, in the case of a partnership, Treasury
regulations are adopted that provide otherwise) created or organized in or
under the laws of the United States, any state thereof or the District of
Columbia, including an entity treated as a corporation or partnership for
federal income tax purposes, an estate whose income is subject to United States
federal income tax regardless of its source, or a trust if a court within the
United States is able to exercise primary supervision over the administration
of such trust, and one or more such U.S. Persons have the authority to control
all substantial decisions of such trust (or, to the extent provided in
applicable Treasury regulations, certain trusts in existence on August 20, 1996
which are eligible to elect to be treated as U.S. Persons).
THE POOLING AGREEMENT WILL PROVIDE THAT ANY ATTEMPTED OR PURPORTED
TRANSFER IN VIOLATION OF THESE TRANSFER RESTRICTIONS WILL BE NULL AND VOID AND
WILL VEST NO RIGHTS IN ANY PURPORTED TRANSFEREE.
Any transferor or agent to whom the Certificate Administrator provides
information as to any applicable tax imposed on such transferor or agent may be
required to bear the cost of computing or providing such information.
See "Federal Income Tax Consequences -- REMICs -- Taxation of Owners of
Residual Securities -- Tax-Related Restrictions on Transfer of Residual
Securities" in the prospectus.
NEITHER THE CLASS 1-A-R NOR THE CLASS 1-A-LR CERTIFICATE MAY BE PURCHASED
BY OR TRANSFERRED TO ANY PLAN OR ANY PERSON ACTING ON BEHALF OF OR INVESTING
THE ASSETS OF SUCH PLAN.
See "ERISA Considerations" in this prospectus supplement and in the
prospectus.
S-65
PREPAYMENT AND YIELD CONSIDERATIONS
Delinquencies on the Mortgage Loans in a Loan Group which are not advanced
by or on behalf of the Servicer (because amounts, if advanced, would be
nonrecoverable), will adversely affect the yield on the Certificates relating
to such Loan Group. Because of the priority of distributions, shortfalls
resulting from delinquencies not so advanced will be borne first by the
Subordinate Certificates (in the reverse order of their priority of their
numerical designations), and then by the Senior Certificates and Components
relating to such Loan Group.
Net Interest Shortfalls will adversely affect the yields on the Offered
Certificates. In addition, losses generally will be borne by the Subordinate
Certificates, as described in this prospectus supplement under "Description of
the Certificates -- Allocation of Losses." As a result, the yields on the
Offered Certificates will depend on the rate and timing of Realized Losses on
the Mortgage Loans in the related Loan Groups, on the Discount Mortgage Loans
in Loan Group 1, in the case of the Class 1-A-2 Certificates (with respect to
the Class 1-A-2B Component), on the Discount Mortgage Loans in Loan Group 2 and
Loan Group 3 in the case of the Class 2-A-2 Certificates (with respect to the
Class 2-A-2B and Class 3-A-2A Components) and on all the Mortgage Loans in the
case of the Subordinate Certificates.
The effective yields to investors will be lower than the yields otherwise
produced by the applicable rate at which interest is passed through to
investors and the purchase price of their Certificates because monthly
distributions will not be payable to investors until the 25th day (or, if not a
business day, the next business day) of the month following the month in which
interest accrues on the Mortgage Loans (without any additional distribution of
interest or earnings thereon in respect of such delay).
PREPAYMENT CONSIDERATIONS AND RISKS
Because principal payments on the Mortgage Loans in a Loan Group will be
distributed on the Senior Certificates and Components relating to such Loan
Group and the Subordinate Certificates currently, the rate of principal
payments on the Certificates entitled to payments of principal, the aggregate
amount of each interest payment on the Certificates entitled to interest
payments, and the yield to maturity of Certificates purchased at a price other
than par are directly related to the rate of payments of principal on the
Mortgage Loans in the related Loan Group or Mortgage Loans in all Loan Groups,
in the case of the Subordinate Certificates (or, in the case of the PO
Components, the Discount Mortgage Loans in the related Loan Group or, in the
case of the IO Components, the Premium Mortgage Loans in the related Loan
Group). The principal payments on the Mortgage Loans may be in the form of
scheduled principal payments or principal prepayments (for this purpose, the
term "principal prepayment" includes prepayments and any other recovery of
principal in advance of its scheduled due date, including repurchases and
liquidations due to default, casualty, condemnation and the like). Any such
prepayments will result in distributions to you of amounts that would otherwise
be distributed over the remaining term of the Mortgage Loans. See "Yield
Considerations" in the prospectus.
The rate at which mortgage loans in general prepay may be influenced by a
number of factors, including general economic conditions, mortgage market
interest rates, availability of mortgage funds and homeowner mobility.
o In general, if prevailing mortgage interest rates fall significantly
below the mortgage interest rates on the Mortgage Loans, the Mortgage
Loans are likely to prepay at higher rates than if prevailing mortgage
interest rates remain at or above the mortgage interest rates on the
Mortgage Loans.
o Conversely, if prevailing mortgage interest rates rise above the
mortgage interest rates on the Mortgage Loans, the rate of prepayment
would be expected to decrease.
The Class 1-A-2 Certificates are comprised of three Components and the
Class 2-A-2 Certificates are comprised of five Components, each of which may be
affected differently by the rate and timing
S-66
of principal payments (including prepayments) on the Mortgage Loans in the
related Loan Groups, which rates may fluctuate significantly from time to time,
which in turn may affect the yield to investors in such Certificates.
After the Senior Credit Support Depletion Date, the yield to maturity on
the Class 1-A-2 Certificates will be more sensitive to losses due to
liquidations on the Mortgage Loans in the related Loan Group (and the timing
thereof) because the principal portion of all Realized Loses allocated to the
Class 1-A-1 Certificates will be borne by the Class 1-A-2A Component, rather
than the Class 1-A-1 Certificates, for so long as the Class 1-A-2 Certificates
are outstanding.
After the Senior Credit Support Depletion Date, the yield to maturity on
the Class 2-A-2 Certificates will be more sensitive to losses due to
liquidations on the Mortgage Loans in the related Loan Group (and the timing
thereof) because the principal portion of all Realized Loses allocated to the
Class 2-A-1 Certificates will be borne by the Class 2-A-2A Component, rather
than the Class 2-A-1 Certificates, for so long as the Class 2-A-2 Certificates
are outstanding.
The timing of changes in the rate of prepayments may significantly affect
the actual yield to you, even if the average rate of principal prepayments is
consistent with your expectations. In general, the earlier the payment of
principal of the Mortgage Loans the greater the effect on your yield to
maturity. As a result, the effect on your yield of principal prepayments
occurring at a rate higher (or lower) than the rate you anticipate during the
period immediately following the issuance of the Certificates will not be
offset by a subsequent like reduction (or increase) in the rate of principal
prepayments. You should also consider the risk, in the case of an Offered
Certificate purchased at a discount, that a slower than anticipated rate of
payments in respect of principal (including prepayments) on the Mortgage Loans
in the related Loan Group, or on the Discount Mortgage Loans in the related
Loan Group or Groups, in the case of the 1-A-2 Certificates, with respect to
the Class 1-A-2B Component, and the Class 2-A-2 Certificates, with respect to
the Class 2-A-2B and Class 3-A-3A Components, or all the Mortgage Loans in the
case of the Subordinate Certificates will have a negative effect on the yield
to maturity of such Offered Certificate. You should also consider the risk, in
the case of an Offered Certificate purchased at a premium, that a faster than
anticipated rate of payments in respect of principal (including prepayments) on
the Mortgage Loans, or on the Premium Mortgage Loans in the related Loan Group
or Groups in the case of the Class 1-A-2 Certificates, with respect to the
Class 1-A-2C Component, and the Class 2-A-2 Certificates with respect to the
Class 2-A-2C and Class 3-A-2B Components, or all the Mortgage Loans, in the
case of the Subordinate Certificates, will have a negative effect on the yield
to maturity of such Offered Certificate. You must make your own decisions as to
the appropriate prepayment assumptions to be used in deciding whether to
purchase Offered Certificates.
Mortgagors are permitted to prepay the Mortgage Loans, in whole or in
part, at any time. The rate of payment of principal may also be affected by any
repurchase of the Mortgage Loans permitted or required by the Pooling Agreement
including any optional termination of the Trust Fund by the Servicer. See "The
Pooling and Servicing Agreement -- Optional Termination" in this prospectus
supplement for a description of the Servicer's option to purchase the Mortgage
Loans when the scheduled balance of the Mortgage Loans is less than 10% of the
initial balance of the Mortgage Loans. In addition, the Depositor may be
required to repurchase Mortgage Loans because of defective documentation or
material breaches in its representations and warranties with respect to such
Mortgage Loans. Any repurchases will shorten the weighted average lives of the
classes of Offered Certificates.
All of the Mortgage Loans will include "due-on-sale" clauses which allow
the holder of the Mortgage Loan to demand payment in full of the remaining
principal balance upon sale or certain transfers of the property securing such
Mortgage Loan. To the extent that the Servicer has knowledge of the conveyance
or proposed conveyance of the underlying mortgaged property, the Servicer will
enforce "due-on-sale" clauses to the extent permitted by applicable law.
However, the Servicer will not take any action in relation to the enforcement
of any "due-on-sale" provisions which would impair or threaten to impair any
recovery under any related primary mortgage insurance policy. See "Yield
S-67
Considerations" in the prospectus. Acceleration of Mortgage Loans as a result
of enforcement of such "due-on-sale" provisions in connection with transfers of
the related mortgaged properties or the occurrence of certain other events
resulting in acceleration would affect the level of prepayments on the Mortgage
Loans, thereby affecting the weighted average lives of the classes of the
Offered Certificates.
As described in this prospectus supplement under "Description of the
Certificates -- Principal," the Senior Prepayment Percentage for a Loan Group
of the applicable Non-PO Percentage of all principal prepayments (excluding for
this purpose, liquidations due to default, casualty, condemnation and the like)
initially will be distributed to the classes of Senior Certificates and
Components relating to such Loan Group (other than the PO Components) then
entitled to receive principal prepayment distributions. This may result in all
(or a disproportionate percentage) of those principal prepayments being
distributed to the Senior Certificates and Components relating to such Loan
Group (other than the PO Components) and none (or less than their pro rata
share) of such principal prepayments being distributed to holders of the
Subordinate Certificates during the periods of time described in the definition
of "Senior Prepayment Percentage."
ASSUMPTIONS RELATING TO TABLES
The tables beginning on page S-71 (the "DECREMENT TABLES") have been
prepared on the basis of the following assumptions (the "MODELING
ASSUMPTIONS"):
(a) the Mortgage Pool consists of the hypothetical mortgage loans
presented below having the following characteristics:
LOAN GROUP 1
REMAINING
UNPAID PRINCIPAL MORTGAGE TERM AGE MONTHS
BALANCE ($) INTEREST RATE (%) (MONTHS) (MONTHS) TO BALLOON
- ------------------ ------------------- ---------- ---------- -----------
3,985,646.98 6.2328 78 39 n/a
7,424,891.19 6.9551 70 50 n/a
131,144,786.11 6.2763 135 44 n/a
442,172,525.80 7.0522 133 47 n/a
4,946,135.23 6.3447 134 83 n/a
9,753,506.82 7.2137 127 91 n/a
1,820,162.38 6.3956 135 119 n/a
2,011,446.36 6.9566 129 119 n/a
3,534,843.95 7.1182 205 146 n/a
1,827,256.95 6.1952 264 42 32
4,560,111.82 7.5968 272 48 23
S-68
LOAN GROUP 2
REMAINING
UNPAID PRINCIPAL MORTGAGE TERM AGE MONTHS
BALANCE ($) INTEREST RATE (%) (MONTHS) (MONTHS) TO BALLOON
----------- ----------------- -------- -------- ----------
172,594.60 8.5000 23 97 n/a
233,912.18 6.6250 57 86 n/a
3,128,783.75 6.2679 166 71 n/a
16,147,582.63 7.3479 157 79 n/a
336,817.57 6.3750 189 63 n/a
4,550,292.97 7.7268 208 83 n/a
181,025,434.29 6.2912 336 24 n/a
1,235,323,722.78 7.2802 318 42 n/a
338,031.60 4.7000 257 123 n/a
1,788,954.59 7.7904 281 95 n/a
LOAN GROUP 3
REMAINING
UNPAID PRINCIPAL MORTGAGE TERM AGE MONTHS
BALANCE ($) INTEREST RATE (%) (MONTHS) (MONTHS) TO BALLOON
- ------------------ ------------------- ---------- ---------- -----------
212,522.05 6.0000 110 10 n/a
9,016,290.27 6.5352 97 81 n/a
16,169,649.42 7.2514 95 84 n/a
2,625,588.83 6.3738 117 109 n/a
3,076,321.16 7.4579 128 100 n/a
231,884.91 6.5000 135 152 n/a
987,343.58 7.6839 143 123 n/a
1,938,983.56 6.3644 292 59 n/a
10,372,707.22 7.8078 287 71 n/a
(b) the initial balances and pass-through rates for the Offered
Certificates are as set forth or described in the table on page S-4;
(c) there are no Net Interest Shortfalls, delinquencies or Realized
Losses with respect to the Mortgage Loans;
(d) scheduled payments of principal and interest with respect to the
Mortgage Loans are received on the applicable due date beginning on October
1, 2002;
(e) prepayments are received, together with a 30 days' interest
thereon, on the last day of each month beginning in September 2002;
(f) the Mortgage Loans prepay at the indicated percentages of CPR;
(g) optional termination of the Trust does not occur;
(h) no Mortgage Loans are required to be repurchased from the Trust
and no Mortgage Loans are substituted for the Mortgage Loans included in
the Trust on the Closing Date;
(i) the Certificates are issued on the Closing Date; and
(j) cash payments on the Certificates are received on the 25th day
of each month beginning in October 2002 in accordance with the priorities
and amounts described in this prospectus supplement under "Description of
the Certificates."
Although the characteristics of the mortgage loans for the Decrement
Tables have been prepared on the basis of the weighted average characteristics
of the Mortgage Loans which are expected to be in the Mortgage Pool, there is
no assurance that the Modeling Assumptions will reflect the actual
S-69
characteristics or performance of the Mortgage Loans or that the performance of
the Offered Certificates will conform to the results set forth in the tables.
WEIGHTED AVERAGE LIVES OF THE OFFERED CERTIFICATES
Weighted average life of a class of Offered Certificates refers to the
average amount of time that will elapse from the date of issuance of the
Certificate until each dollar in reduction of its balance is distributed to
investors. The weighted average lives of classes of Offered Certificates will
be influenced by, among other things, the rate at which principal of the
Mortgage Loans in the related Loan Group, or both Loan groups in the case of
the Subordinate Certificates, is paid, which may be in the form of scheduled
principal payments or principal prepayments (for this purpose, the term
"prepayments" includes prepayments and liquidations due to default, casualty,
condemnation and the like), the timing of changes in such rate of principal
payments and the priority sequence of distributions of principal of such
Offered Certificates. The interaction of the foregoing factors may have
different effects on each class of Offered Certificates and the effects on any
such class may vary at different times during the life of such class.
Accordingly, no assurance can be given as to the weighted average life of any
such class of Offered Certificates. For an example of how the weighted average
lives of the Offered Certificates are affected by the foregoing factors at
various constant percentages of CPR, see the Decrement Tables set forth below.
Prepayments on mortgage loans are commonly measured relative to a
prepayment standard or model. The prepayment model used in this prospectus
supplement is the Constant Prepayment Rate ("CPR"), which represents an assumed
rate of principal prepayment each year relative to the then-outstanding
principal balance of a pool of mortgage loans for the life of such mortgage
loans. A prepayment assumption of 5% CPR assumes constant prepayment rates of
5% per annum of the then-outstanding principal balance of such mortgage loans.
As used in the table below, "0% CPR" assumes prepayment rates equal to 0% of
CPR, i.e., no prepayments. Correspondingly, "25% CPR" assumes prepayment rates
equal to 25% of CPR, and so forth. CPR does not purport to be a historical
description of prepayment experience or a prediction of the anticipated rate of
prepayment of any pool of mortgage loans, including the Mortgage Loans. The
Depositor believes that no existing statistics of which it is aware provide a
reliable basis for investors to predict the amount or the timing of receipt of
prepayments on the Mortgage Loans.
The Decrement Tables set forth below have been prepared on the basis of
the Modeling Assumptions described above under "-- Assumptions Relating to
Tables." There will likely be discrepancies between the characteristics of the
actual Mortgage Loans included in each Loan Group and the characteristics of
the Mortgage Loans assumed in preparing the Decrement Tables. Any such
discrepancy may have an effect upon the percentages of initial class balances
outstanding set forth in the Decrement Tables (and the weighted average lives
of the Offered Certificates). In addition, to the extent that the Mortgage
Loans that actually are included in a Loan Group have characteristics that
differ from those assumed in preparing the following Decrement Tables, the
class balance of a class of Offered Certificates could be reduced to zero
earlier or later than indicated by such Decrement Tables.
Furthermore, the information contained in the Decrement Tables with
respect to the weighted average life of any Offered Certificate is not
necessarily indicative of the weighted average life of that class of Offered
Certificates that might be calculated or projected under different or varying
prepayment assumptions.
It is not likely that (i) all of the Mortgage Loans in a Loan Group will
have the interest rates or remaining terms to maturity assumed or (ii) the
Mortgage Loans in a Loan Group will prepay at the indicated percentage of CPR
until maturity. In addition, the diverse remaining terms to maturity of the
Mortgage Loans in a Loan Group could produce slower or faster reductions of the
class balances or notional amount than indicated in the Decrement Tables at the
various percentages of CPR specified.
S-70
Based upon the Modeling Assumptions, the following Decrement Tables
indicate the projected weighted average life of each class of the Offered
Certificates and set forth the percentages of the initial class balance of each
class that would be outstanding after each of the dates shown at various
constant percentages of the CPR.
PERCENTAGE OF INITIAL CLASS BALANCE OUTSTANDING
AT THE RESPECTIVE PERCENTAGES OF CPR SET FORTH BELOW:
CLASS 1-A-1 CLASS 1-A-2
---------------------------------------------- --------------------------------------------
DISTRIBUTION DATE 0% 15% 30% 45% 60% 0% 15% 30% 45% 60%
- ----------------- -------- -------- -------- --------- --------- -------- -------- -------- -------- --------
Initial Percentage ...... 100 100 100 100 100 100 100 100 100 100
September 25, 2003 ...... 94 79 65 50 35 94 79 65 50 35
September 25, 2004 ...... 86 61 41 24 11 86 61 41 24 11
September 25, 2005 ...... 79 47 25 11 2 79 47 25 11 2
September 25, 2006 ...... 71 36 15 4 0 71 36 15 4 *
September 25, 2007 ...... 63 27 9 1 0 63 27 9 1 *
September 25, 2008 ...... 54 19 5 0 0 54 19 5 * *
September 25, 2009 ...... 45 13 3 0 0 45 13 3 * *
September 25, 2010 ...... 35 9 1 0 0 35 9 1 * *
September 25, 2011 ...... 25 5 1 0 0 25 5 1 * *
September 25, 2012 ...... 14 2 * 0 0 14 2 * * *
September 25, 2013 ...... 2 * * 0 0 2 * * * *
September 25, 2014 ...... * * * 0 0 * * * 0 0
September 25, 2015 ...... * * * 0 0 * * * 0 0
September 25, 2016 ...... * * * 0 0 * * * 0 0
September 25, 2017 ...... * * * 0 0 * * * 0 0
September 25, 2018 ...... * * * 0 0 * * * 0 0
September 25, 2019 ...... * * * 0 0 * * * 0 0
September 25, 2020 ...... 0 0 0 0 0 0 0 0 0 0
Weighted Average Life
(in years)(1) .......... 6.21 3.52 2.14 1.38 0.94 6.21 3.52 2.14 1.38 0.94
- ----------
(1) The weighted average life of a class of Certificates is determined by (i)
multiplying the amount of each distribution in reduction of the class
balance thereof by the number of years from the date of the issuance of
such class to the related Distribution Date, (ii) adding the results and
(iii) dividing the sum by the initial balance of that class.
* Less than 0.5%, but greater than zero.
S-71
PERCENTAGE OF INITIAL CLASS BALANCE OUTSTANDING
AT THE RESPECTIVE PERCENTAGES OF CPR SET FORTH BELOW:
CLASS 1-A-R CLASS 1-A-LR
------------------------------------------------- -------------------------------------------------
DISTRIBUTION DATE 0% 15% 30% 45% 60% 0% 15% 30% 45% 60%
- ----------------- --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Initial Percentage ...... 100 100 100 100 100 100 100 100 100 100
September 25, 2003 ...... 0 0 0 0 0 0 0 0 0 0
September 25, 2004 ...... 0 0 0 0 0 0 0 0 0 0
September 25, 2005 ...... 0 0 0 0 0 0 0 0 0 0
September 25, 2006 ...... 0 0 0 0 0 0 0 0 0 0
September 25, 2007 ...... 0 0 0 0 0 0 0 0 0 0
September 25, 2008 ...... 0 0 0 0 0 0 0 0 0 0
September 25, 2009 ...... 0 0 0 0 0 0 0 0 0 0
September 25, 2010 ...... 0 0 0 0 0 0 0 0 0 0
September 25, 2011 ...... 0 0 0 0 0 0 0 0 0 0
September 25, 2012 ...... 0 0 0 0 0 0 0 0 0 0
September 25, 2013 ...... 0 0 0 0 0 0 0 0 0 0
September 25, 2014 ...... 0 0 0 0 0 0 0 0 0 0
September 25, 2015 ...... 0 0 0 0 0 0 0 0 0 0
September 25, 2016 ...... 0 0 0 0 0 0 0 0 0 0
September 25, 2017 ...... 0 0 0 0 0 0 0 0 0 0
September 25, 2018 ...... 0 0 0 0 0 0 0 0 0 0
September 25, 2019 ...... 0 0 0 0 0 0 0 0 0 0
September 25, 2020 ...... 0 0 0 0 0 0 0 0 0 0
Weighted Average Life
(in years)(1) .......... 0.08 0.08 0.08 0.08 0.08 0.08 0.08 0.08 0.08 0.08
- ----------
(1) The weighted average life of a class of Certificates is determined by (i)
multiplying the amount of each distribution in reduction of the class
balance thereof by the number of years from the date of the issuance of
such class to the related Distribution Date, (ii) adding the results and
(iii) dividing the sum by the initial balance of that class.
S-72
PERCENTAGE OF INITIAL CLASS BALANCE OUTSTANDING
AT THE RESPECTIVE PERCENTAGES OF CPR SET FORTH BELOW:
CLASS 2-A-1 CLASS 2-A-2
------------------------------------------------ ----------------------------------------------
DISTRIBUTION DATE 0% 15% 30% 45% 60% 0% 15% 30% 45% 60%
- ----------------- ---------- -------- -------- --------- --------- ---------- -------- -------- -------- --------
Initial Percentage ...... 100 100 100 100 100 100 100 100 100 100
September 25, 2003 ...... 99 83 68 53 37 99 83 68 53 37
September 25, 2004 ...... 97 69 46 27 13 97 69 46 27 13
September 25, 2005 ...... 96 57 31 13 3 96 57 31 13 3
September 25, 2006 ...... 94 47 20 5 0 94 47 20 6 *
September 25, 2007 ...... 92 39 13 1 0 92 39 13 1 *
September 25, 2008 ...... 90 32 8 0 0 90 32 8 * *
September 25, 2009 ...... 88 26 5 0 0 88 26 5 * *
September 25, 2010 ...... 86 22 3 0 0 86 22 3 * *
September 25, 2011 ...... 84 18 2 0 0 84 18 2 * *
September 25, 2012 ...... 81 15 1 0 0 81 15 1 * *
September 25, 2013 ...... 78 12 1 0 0 78 12 1 * *
September 25, 2014 ...... 75 10 1 0 0 75 10 1 * *
September 25, 2015 ...... 72 8 * 0 0 72 8 * * *
September 25, 2016 ...... 69 7 * 0 0 69 7 * * *
September 25, 2017 ...... 65 5 * 0 0 65 5 * * *
September 25, 2018 ...... 62 4 * 0 0 62 4 * * *
September 25, 2019 ...... 58 3 * 0 0 58 3 * * *
September 25, 2020 ...... 53 3 * 0 0 53 3 * * 0
September 25, 2021 ...... 49 2 * 0 0 49 2 * * 0
September 25, 2022 ...... 44 2 * 0 0 44 2 * * 0
September 25, 2023 ...... 38 1 * 0 0 38 1 * * 0
September 25, 2024 ...... 33 1 * 0 0 33 1 * * 0
September 25, 2025 ...... 27 1 * 0 0 27 1 * * 0
September 25, 2026 ...... 20 * * 0 0 20 * * * 0
September 25, 2027 ...... 13 * * 0 0 13 * * 0 0
September 25, 2028 ...... 5 * * 0 0 5 * * 0 0
September 25, 2029 ...... 1 * * 0 0 1 * * 0 0
September 25, 2030 ...... 0 0 0 0 0 0 0 0 0 0
Weighted Average Life
(in years)(1) .......... 17.21 5.20 2.50 1.48 0.98 17.21 5.20 2.50 1.48 0.98
- ----------
(1) The weighted average life of a class of Certificates is determined by (i)
multiplying the amount of each distribution in reduction of the class
balance thereof by the number of years from the date of the issuance of
such class to the related Distribution Date, (ii) adding the results and
(iii) dividing the sum by the initial balance of that class.
* Less than 0.5%, but greater than zero.
S-73
PERCENTAGE OF INITIAL CLASS BALANCE OUTSTANDING
AT THE RESPECTIVE PERCENTAGES OF CPR SET FORTH BELOW:
CLASS 3-A-1
---------------------------------------------
DISTRIBUTION DATE 0% 15% 30% 45% 60%
- ----------------- -------- -------- -------- -------- ---------
Initial Percentage ................. 100 100 100 100 100
September 25, 2003 ................. 93 79 64 50 35
September 25, 2004 ................. 86 61 40 24 11
September 25, 2005 ................. 78 47 25 11 2
September 25, 2006 ................. 69 35 15 4 0
September 25, 2007 ................. 60 25 8 1 0
September 25, 2008 ................. 50 18 4 0 0
September 25, 2009 ................. 39 12 2 0 0
September 25, 2010 ................. 28 7 1 0 0
September 25, 2011 ................. 25 5 1 0 0
September 25, 2012 ................. 23 4 * 0 0
September 25, 2013 ................. 21 3 * 0 0
September 25, 2014 ................. 20 3 * 0 0
September 25, 2015 ................. 19 2 * 0 0
September 25, 2016 ................. 18 2 * 0 0
September 25, 2017 ................. 16 1 * 0 0
September 25, 2018 ................. 15 1 * 0 0
September 25, 2019 ................. 14 1 * 0 0
September 25, 2020 ................. 12 1 * 0 0
September 25, 2021 ................. 10 * * 0 0
September 25, 2022 ................. 9 * * 0 0
September 25, 2023 ................. 7 * * 0 0
September 25, 2024 ................. 5 * * 0 0
September 25, 2025 ................. 2 * * 0 0
September 25, 2026 ................. * * * 0 0
September 25, 2027 ................. 0 0 0 0 0
Weighted Average Life (in years)(1) 7.70 3.58 2.11 1.37 0.94
- ----------
(1) The weighted average life of a class of Certificates is determined by (i)
multiplying the amount of each distribution in reduction of the class
balance thereof by the number of years from the date of the issuance of
such class to the related Distribution Date, (ii) adding the results and
iii) dividing the sum by the initial balance of that class.
* Less than 0.5%, but greater than zero.
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PERCENTAGE OF INITIAL CLASS BALANCE OUTSTANDING
AT THE RESPECTIVE PERCENTAGES OF CPR SET FORTH BELOW:
CLASS B-1, CLASS B-2 AND CLASS B-3
---------------------------------------------
DISTRIBUTION DATE 0% 15% 30% 45% 60%
- ----------------- ---------- -------- -------- -------- -------
Initial Percentage ...................... 100 100 100 100 100
September 25, 2003 ...................... 97 97 97 97 97
September 25, 2004 ...................... 94 94 94 94 94
September 25, 2005 ...................... 90 90 90 90 90
September 25, 2006 ...................... 87 87 87 87 63
September 25, 2007 ...................... 83 83 83 83 24
September 25, 2008 ...................... 79 75 71 62 9
September 25, 2009 ...................... 74 67 58 32 3
September 25, 2010 ...................... 70 57 44 17 1
September 25, 2011 ...................... 65 46 31 9 *
September 25, 2012 ...................... 60 36 20 4 *
September 25, 2013 ...................... 55 28 13 2 *
September 25, 2014 ...................... 52 23 9 1 *
September 25, 2015 ...................... 50 19 6 1 *
September 25, 2016 ...................... 48 15 4 * *
September 25, 2017 ...................... 45 12 3 * *
September 25, 2018 ...................... 43 10 2 * *
September 25, 2019 ...................... 40 8 1 * *
September 25, 2020 ...................... 37 6 1 * *
September 25, 2021 ...................... 34 5 * * *
September 25, 2022 ...................... 30 4 * * *
September 25, 2023 ...................... 27 3 * * *
September 25, 2024 ...................... 23 2 * * *
September 25, 2025 ...................... 18 1 * * *
September 25, 2026 ...................... 14 1 * * *
September 25, 2027 ...................... 9 * * * 0
September 25, 2028 ...................... 4 * * * 0
September 25, 2029 ...................... 1 * * * 0
September 25, 2030 ...................... 0 0 0 0 0
Weighted Average Life (in years)(1) ..... 13.80 9.20 7.65 6.31 4.39
- ----------
(1) The weighted average life of a class of Certificates is determined by (i)
multiplying the amount of each distribution in reduction of the class
balance thereof by the number of years from the date of the issuance of
such class to the related Distribution Date, (ii) adding the results and
(iii) dividing the sum by the initial balance of that class.
* Less than 0.5%, but greater than zero.
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YIELD ON THE CLASS 1-A-2 AND CLASS 2-A-2 CERTIFICATES
THE CLASS 1-A-2 CERTIFICATES ARE COMPRISED OF THREE COMPONENTS AND THE
CLASS 2-A-2 CERTIFICATES ARE COMPRISED OF FIVE COMPONENTS, EACH OF WHICH MAY BE
AFFECTED DIFFERENTLY BY THE RATE AND TIMING OF PRINCIPAL PAYMENTS (INCLUDING
PREPAYMENTS) ON THE MORTGAGE LOANS IN THE RELATED LOAN GROUP OR GROUPS, WHICH
RATES MAY FLUCTUATE SIGNIFICANTLY FROM TIME TO TIME, WHICH IN TURN MAY AFFECT
THE YIELD TO INVESTORS IN SUCH CERTIFICATES.
The significance of the effects of prepayments on the Class 1-A-2 and
Class 2-A-2 Certificates is illustrated in the following tables which show the
pre-tax yields (on a corporate bond equivalent basis) to the holders of Class
1-A-2 and Class 2-A-2 Certificates under different constant percentages of CPR.
The yields set forth were calculated using the Modeling Assumptions and the
additional assumption that the Class 1-A-2 and Class 2-A-2 Certificates are
purchased on the Closing Date at an assumed purchase price equal to 103.4375%
and 102.9060%, respectively, of their class balance plus accrued interest from
September 1, 2002 to (but not including) the Closing Date.
It is not likely that the Mortgage Loans will prepay at a constant rate
until maturity, that all of the Mortgage Loans will prepay at the same rate or
that they will have the characteristics assumed. There can be no assurance that
the Mortgage Loans will prepay at any of the rates shown in the table or at any
other particular rate. The timing of changes in the rate of prepayments may
affect significantly the yield realized by a holders of the Class 1-A-2 and
Class 2-A-2 Certificates and there can be no assurance that your pre-tax yield
on your Class 1-A-2 and Class 2-A-2 Certificates will correspond to any of the
pre-tax yields shown in this prospectus supplement. You must make your own
decision as to the appropriate prepayment assumptions to be used in deciding
whether to purchase a Class 1-A-2 or Class 2-A-2 Certificate.
SENSITIVITY OF THE CLASS 1-A-2 CERTIFICATES TO PREPAYMENTS
(PRE-TAX YIELDS TO MATURITY)
PERCENTAGE OF CPR
--------------------------------------------------------------
0% 15% 30% 45% 60%
---------- ---------- ---------- ---------- ----------
Class 1-A-2 Certificates ......... 6.02% 5.52% 4.82% 3.86% 2.59%
SENSITIVITY OF THE CLASS 2-A-2 CERTIFICATES TO PREPAYMENTS
(PRE-TAX YIELDS TO MATURITY)
PERCENTAGE OF CPR
--------------------------------------------------------------
0% 15% 30% 45% 60%
---------- ---------- ---------- ---------- ----------
Class 2-A-2 Certificates ......... 6.81% 6.33% 5.66% 4.79% 3.66%
The yields set forth in the preceding table were calculated by (i)
determining the monthly discount rates that, when applied to the assumed
streams of cash flows to be paid on the Class 1-A-2 and Class 2-A-2
Certificates, would cause the discounted present values of such assumed streams
of cash flows to equal the assumed purchase price of the Class 1-A-2 and Class
2-A-2 Certificates indicated above and (ii) converting such monthly rates to
corporate bond equivalent rates. This calculation does not take into account
variations that may occur in the interest rates at which you may be able to
reinvest funds received as payments of principal of the Class 1-A-2 or Class
2-A-2 Certificates and consequently does not purport to reflect the return on
any investment in the Class 1-A-2 or Class 2-A-2 Certificates when such
reinvestment rates are considered.
YIELD ON THE CLASS 1-A-R AND CLASS 1-A-LR CERTIFICATES
The after-tax rate of return to the holder of the Class 1-A-R or Class
1-A-LR Certificate will reflect its pre-tax rate of return, reduced by the
taxes required to be paid with respect to such
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Certificate. If you hold the Class 1-A-R or Class 1-A-LR Certificate, you may
have tax liabilities during the early years of the applicable REMIC's term that
substantially exceed any distributions payable thereon during any such period.
In addition, the present value of the tax liabilities with respect to your
Class 1-A-R or Class 1-A-LR Certificate may substantially exceed the present
value of expected distributions on your Class 1-A-R or Class 1-A-LR Certificate
and of any tax benefits that may arise with respect to it. Accordingly, the
after-tax rate of return on the Class 1-A-R or Class 1-A-LR Certificate may be
negative or may be otherwise significantly adversely affected. The timing and
amount of taxable income attributable to the Class 1-A-R or Class 1-A-LR
Certificate will depend on, among other things, the timing and amounts of
prepayments and losses experienced with respect to the Mortgage Loans.
If you own the Class 1-A-R or Class 1-A-LR Certificate, you should consult
your tax advisors regarding the effect of taxes and the receipt of any payments
made in connection with the purchase of the Class 1-A-R or Class 1-A-LR
Certificate on your after-tax rate of return. See "Federal Income Tax
Consequences" in this prospectus supplement and in the prospectus.
YIELD ON THE SUBORDINATE CERTIFICATES
The weighted average life of, and the yield to maturity on, the
Subordinate Certificates, in increasing order of their numerical class
designation, will be progressively more sensitive to the rate and timing of
mortgagor defaults and the severity of ensuing losses on the Mortgage Loans. If
the actual rate and severity of losses on the Mortgage Loans is higher than
those you assumed, the actual yield to maturity of your Subordinate Certificate
may be lower than the yield you expected. The timing of losses on Mortgage
Loans will also affect your actual yield to maturity, even if the rate of
defaults and severity of losses over the life of the Trust are consistent with
your expectations. In general, the earlier a loss occurs, the greater the
effect on an investor's yield to maturity. Realized Losses on the Mortgage
Loans will be allocated to reduce the balance of the applicable class of
Subordinate Certificates (as described in this prospectus supplement under
"Description of the Certificates -- Allocation of Losses"), without the receipt
of cash equal to the reduction. In addition, shortfalls in cash available for
distributions on the Subordinate Certificates will result in a reduction in the
balance of the class of Subordinate Certificates then outstanding with the
highest numerical class designation if and to the extent that the aggregate
balance of all classes of Certificates, following all distributions and the
allocation of Realized Losses on a Distribution Date, exceeds the balance of
the Mortgage Pool as of the due date occurring in the month of such
Distribution Date. As a result of such reductions, less interest will accrue on
that class of Subordinate Certificates than otherwise would be the case. The
yield to maturity of the Subordinate Certificates will also be affected by the
disproportionate allocation of principal prepayments to the Senior Certificates
and Components relating to each Loan Group (other than the PO Components), Net
Interest Shortfalls, other cash shortfalls in the Pool Distribution Amounts and
distribution of funds otherwise available for distribution on the Subordinate
Certificates to the PO Components in reimbursement for applicable PO Deferred
Amounts. See "Description of the Certificates -- Allocation of Losses" in this
prospectus supplement.
If on any Distribution Date, the Fractional Interest for any class of
Subordinate Certificates is less than its original Fractional Interest, all
partial principal prepayments and principal prepayments in full available for
distribution on the Subordinate Certificates will be allocated solely to that
class and all other classes of Subordinate Certificates with lower numerical
class designations, thereby accelerating the amortization thereof relative to
that of the classes junior to that class and reducing the weighted average
lives of the classes of Subordinate Certificates receiving such distributions.
Accelerating the amortization of the classes of Subordinate Certificates with
lower numerical class designations relative to the other classes of Subordinate
Certificates is intended to preserve the availability of the subordination
provided by those other classes.
YIELD CONSIDERATIONS WITH RESPECT TO THE CLASS B-2 AND CLASS B-3 CERTIFICATES
Defaults on mortgage loans may be measured relative to a default standard
or model. The model used in this prospectus supplement, the standard default
assumption ("SDA"), represents an assumed
S-77
rate of default each month relative to the outstanding performing principal
balance of a pool of new mortgage loans. A default assumption of 100% SDA
assumes constant default rates of 0.02% per annum of the outstanding principal
balance of such mortgage loans in the first month of the life of the mortgage
loans and an additional 0.02% per annum in each month thereafter until the 30th
month. Beginning in the 30th month and in each month thereafter through the
60th month of the life of the mortgage loans, 100% SDA assumes a constant
default rate of 0.60% per annum each month. Beginning in the 61st month and in
each month thereafter through the 120th month of the life of the mortgage
loans, 100% SDA assumes that the constant default rate declines each month by
0.0095% per annum, and that the constant default rate remains at 0.03% per
annum in each month after the 120th month. For the following tables, it is
assumed that there is no delay between the default and liquidation of the
mortgage loans. As used in the following tables, "0% SDA" assumes no defaults.
SDA is not a historical description of default experience or a prediction of
the rate of default of any pool of mortgage loans.
The following tables indicate the sensitivity of the pre-tax yield to
maturity on the Class B-2 and Class B-3 Certificates to various rates of
prepayment and varying levels of Realized Losses. The tables set forth below
are based upon, among other things, the Modeling Assumptions (other than the
assumption that no defaults shall have occurred with respect to the Mortgage
Loans) and the additional assumption that liquidations (other than those
scenarios indicated as 0% of SDA (no defaults)) occur monthly on the last day
of the preceding month (other than on a due date) at the percentages of SDA set
forth in the table.
In addition, it was assumed that (i) Realized Losses on liquidations of
25% or 50% of the outstanding principal balance of the Liquidated Mortgage
Loans in each Loan Group, as indicated in the tables below (referred to as a
"LOSS SEVERITY PERCENTAGE"), will occur at the time of liquidation and (ii) the
Class B-2 and Class B-3 Certificates are purchased on the Closing Date at
assumed purchase prices equal to 101.6060% and 99.4254%, in each case, of their
balance plus accrued interest from September 1, 2002 to (but not including) the
Closing Date.
It is highly unlikely that the Mortgage Loans will have the precise
characteristics referred to in this prospectus supplement or that they will
prepay or liquidate at any of the rates specified or that the Realized Losses
will be incurred according to one particular pattern. The assumed percentages
of SDA and CPR and the Loss Severity Percentages shown below are for
illustrative purposes only. Those assumptions may not be correct and the actual
rates of prepayment and liquidation and loss severity experience of the
Mortgage Loans of a Loan Group may not correspond to any of the assumptions
made in this prospectus supplement. For these reasons, and because the timing
of cash flows is critical to determining yield, the pre-tax yield to maturity
of the Class B-2 and Class B-3 Certificates are likely to differ from the
pre-tax yields to maturity shown below.
The pre-tax yields to maturity set forth below were calculated by
determining the monthly discount rates which, when applied to the assumed
streams of cash flows to be paid on the Class B-2 and Class B-3 Certificates,
would cause the discounted present value of those assumed streams of cash flows
to equal the aggregate assumed purchase prices of the Class B-2 and Class B-3
Certificates set forth above. In all cases, monthly rates were then converted
to the semi-annual corporate bond equivalent yields shown below. Implicit in
the use of any discounted present value or internal rate of return calculations
such as these is the assumption that intermediate cash flows are reinvested at
the discount rates at which investors may be able to reinvest funds received by
them as distributions on the Class B-2 and Class B-3 Certificates.
Consequently, these yields do not purport to reflect the total return on any
investment in the Class B-2 and Class B-3 Certificates when reinvestment rates
are considered.
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SENSITIVITY OF PRE-TAX YIELDS TO MATURITY OF THE CLASS B-2
CERTIFICATES TO PREPAYMENTS AND REALIZED LOSSES
LOSS PERCENTAGE OF CPR
PERCENTAGE SEVERITY --------------------------------------------------------------
OF SDA PERCENTAGE 0% 15% 30% 45% 60%
- ------ ----------- ---------- ---------- ---------- ---------- ----------
0% ......... 0% 6.09% 6.03% 5.99% 5.93% 5.80%
50% ......... 25% 6.09% 6.02% 5.98% 5.93% 5.80%
50% ......... 50% 6.12% 6.02% 5.98% 5.94% 5.80%
75% ......... 25% 6.10% 6.02% 5.98% 5.93% 5.80%
75% ......... 50% 6.14% 6.01% 5.98% 5.94% 5.80%
100% ......... 25% 6.12% 6.02% 5.98% 5.93% 5.79%
100% ......... 50% 6.13% 6.01% 5.98% 5.94% 5.80%
150% ......... 25% 6.13% 6.01% 5.98% 5.93% 5.79%
150% ......... 50% 1.87% 6.04% 5.98% 5.94% 5.80%
SENSITIVITY OF PRE-TAX YIELDS TO MATURITY OF THE CLASS B-3
CERTIFICATES TO PREPAYMENTS AND REALIZED LOSSES
LOSS PERCENTAGE OF CPR
PERCENTAGE SEVERITY -------------------------------------------------------------------
OF SDA PERCENTAGE 0% 15% 30% 45% 60%
- ------ ----------- ------------- ------------ ---------- ---------- ----------
0% ......... 0% 6.35% 6.36% 6.36% 6.37% 6.38%
50% ......... 25% 6.35% 6.36% 6.36% 6.37% 6.38%
50% ......... 50% 6.35% 6.36% 6.36% 6.37% 6.38%
75% ......... 25% 6.35% 6.36% 6.36% 6.37% 6.38%
75% ......... 50% 5.89% 6.36% 6.36% 6.37% 6.38%
100% ......... 25% 6.35% 6.36% 6.36% 6.37% 6.38%
100% ......... 50% 0.45% 6.36% 6.36% 6.37% 6.38%
150% ......... 25% 5.95% 6.36% 6.36% 6.37% 6.38%
150% ......... 50% (68.74)% (2.40)% 6.03% 6.37% 6.38%
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The following table sets forth the amount of Realized Losses that would be
incurred with respect to the Mortgage Loans, expressed as a percentage of the
aggregate outstanding principal balance of the Mortgage Loans as of the Cut-off
Date.
AGGREGATE REALIZED LOSSES
LOSS PERCENTAGE OF CPR
PERCENTAGE SEVERITY ---------------------------------------------------------
OF SDA PERCENTAGE 0% 15% 30% 45% 60%
- ------ ----------- --------- --------- --------- --------- ---------
50% ......... 25% 0.31 0.20 0.14 0.10 0.08
50% ......... 50% 0.61 0.41 0.29 0.21 0.15
75% ......... 25% 0.46 0.30 0.22 0.16 0.11
75% ......... 50% 0.92 0.61 0.43 0.31 0.23
100% ......... 25% 0.61 0.41 0.29 0.21 0.15
100% ......... 50% 1.22 0.81 0.58 0.42 0.30
150% ......... 25% 0.91 0.61 0.43 0.31 0.23
150% ......... 50% 1.82 1.21 0.86 0.63 0.45
You should make your investment decisions based on your determinations of
anticipated rates of prepayment and Realized Losses under a variety of
scenarios. If you are purchasing Class B-2 or Class B-3 Certificates you should
fully consider the risk that Realized Losses on the Mortgage Loans could result
in the failure to fully recover your investments.
CREDIT SUPPORT
The rights of each class of Class B Certificates to receive distributions
of principal and interest are subordinated to such rights of the Class A
Certificates and of each class of Class B Certificates with a lower numerical
designation. For example, the Class B-2 Certificates will not receive principal
or interest on a Distribution Date until the Class A Certificates and Class B-1
Certificates have received the amounts to which they are entitled on that
Distribution Date. The subordination described above is intended to increase
the likelihood of receipt by the Class A Certificates and the Class B
Certificates with lower numerical class designations of the amount to which
they are entitled on any Distribution Date and to provide those holders with
protection against Realized Losses on the Mortgage Loans.
The applicable Non-PO Percentage of Realized Losses, on the Mortgage Loan
will be allocated to the class of Class B Certificates then outstanding with
the highest numerical class designation. In addition, the balance of that Class
of Class B Certificates will be reduced by the amount of distributions on the
PO Components in reimbursement for the PO Deferred Amounts.
The Senior Certificates and Components (other than the PO Components)
relating to a Loan Group will receive 100% of the Non-PO Percentage of
principal prepayments received with respect to the Mortgage Loans in the
related Loan Group until the fifth anniversary of the first Distribution Date.
During the following four years, those Senior Certificates and Components will
receive a large, but generally decreasing, share of such principal prepayments.
This disproportionate allocation of prepayments will result in an acceleration
of the amortization of those Senior Certificates and Components and will
enhance the likelihood that holders of those Certificates will receive the
entire amount of principal to which they are entitled. In addition to this
acceleration mechanism, on any Distribution Date on which the Total Senior
Percentage exceeds the initial Total Senior Percentage, the Senior Certificates
and Components (other than the PO Components) relating to a Loan Group will be
entitled to receive 100% of the Non-PO Percentage of principal prepayments
received with respect to the Mortgage Loans in the related Loan Group. See
"Description of the Certificates -- Principal" in this prospectus supplement.
S-80
USE OF PROCEEDS
The Depositor will apply the net proceeds of the sale of the Class 1-A-1,
Class 2-A-1 and Class 3-A-1 Certificates against a portion of the purchase
price of the Mortgage Loans. The other Offered Certificates will be transferred
by the Depositor to the Seller in payment of a portion of the purchase price of
the Mortgage Loans. See "Method of Distribution."
FEDERAL INCOME TAX CONSEQUENCES
Elections will be made to treat the Trust as two separate "real estate
mortgage investment conduits" (the "UPPER-TIER REMIC" and the "LOWER-TIER
REMIC" and each, a "REMIC") for federal income tax purposes under the Internal
Revenue Code of 1986, as amended (the "CODE").
o The Class 1-A-1, Class 2-A-1,Class 3-A-1 and Class B Certificates and
each of the Components will be designated as "regular interests" in
the Upper-Tier REMIC. All the Certificates (other than the Class 1-A-R
and Class 1-A-LR Certificates) are "REGULAR CERTIFICATES" for purposes
of the following discussion.
o The Class 1-A-R and Class 1-A-LR Certificates will be designated as
the sole class of "residual interests" in the Upper-Tier REMIC and
Lower-Tier REMIC, respectively.
See "Federal Income Tax Consequences -- Federal Income Tax Consequences
for REMIC Certificates" in the prospectus.
REGULAR CERTIFICATES
The Regular Certificates generally will be treated as debt instruments
issued by the Upper-Tier REMIC for federal income tax purposes. Income on the
Regular Certificates must be reported under an accrual method of accounting.
Although not free from doubt, each of the Class 1-A-2 and Class 2-A-2
Certificates should be treated in the aggregate as one debt instrument having
the cash flows of the related Components. The Class 1-A-2 and Class 2-A-2
Certificates will, and the other classes of Offered Certificates may, depending
on their respective issue prices, be treated for federal income tax purposes as
having been issued with original issue discount. See "Federal Income Tax
Consequences -- REMICs -- Taxation of Owners of Regular Securities -- Original
Issue Discount" in the prospectus. Certain classes of the Regular Certificates
may be treated for federal income tax purposes as having been issued at a
premium. Whether any holder of such a class of Certificates will be treated as
holding a Certificate with amortizable bond premium will depend on such
certificateholder's purchase price and the distributions remaining to be made
on such Certificate at the time of its acquisition by such certificateholder.
Holders of such classes of Certificates should consult their own tax advisors
regarding the possibility of making an election to amortize such premium. See
"Federal Income Tax Consequences -- REMICs -- Taxation of Owners Regular
Securities -- Amortizable Premium" in the prospectus. For purposes of
determining the amount and the rate of accrual of original issue discount and
market discount, and the amortization of premium, the Depositor intends to
assume that there will be prepayments on the Mortgage Loans at a rate equal to
30% CPR. No representation is made as to the actual rate at which the Mortgage
Loans will be prepaid.
The Regular Certificates will be treated as regular interests in a REMIC
under Section 860G of the Code. Accordingly, to the extent described in the
prospectus:
o the Regular Certificates will be treated as assets described in
Section 7701(a)(19)(C) of the Code;
o the Regular Certificates will be treated as "real estate assets"
within the meaning of Section 856(c)(4)(A) of the Code; and
o interest on the Regular Certificates will be treated as interest on
obligations secured by mortgages on real property within the meaning
of Section 856(c)(3)(B) of the Code.
S-81
See "Federal Income Tax Consequences -- REMICs -- Classification of
REMICs" in the prospectus.
RESIDUAL CERTIFICATES
If you hold the Class 1-A-R or Class 1-A-LR Certificate, you must include
the taxable income or loss of the Upper-Tier REMIC or Lower-Tier REMIC,
respectively, in determining your federal taxable income. Your resulting tax
liability may exceed cash distributions to you during certain periods. In
addition, all or a portion of the taxable income you recognize from the Class
1-A-R or Class 1-A-LR Certificate may be treated as "excess inclusion" income,
which, among other consequences, will result in your inability to use net
operating losses or unrelated deductions to offset such income from the
Upper-Tier REMIC or Lower-Tier REMIC, respectively.
You should consider carefully the tax consequences of any investment in
the Class 1-A-R or Class 1-A-LR Certificate discussed in the prospectus and
should consult your tax advisors with respect to those consequences. See
"Federal Income Tax Consequences" in the prospectus. Specifically, you should
consult your tax advisors regarding whether, at the time of acquisition, the
Class 1-A-R or Class 1-A-LR Certificate will be treated as a "noneconomic"
residual interest and "tax avoidance potential" residual interest. See "Federal
Income Tax Consequences -- REMICs -- Taxation of Owners of Residual Securities
- -- Tax-Related Restrictions on Transfer of Residual Securities -- Noneconomic
Residual Interests," " -- Foreign Investors" and " -- Mark to Market
Regulations" in the prospectus. Additionally, for information regarding
Prohibited Transactions, see "Federal Income Tax Consequences -- REMICs --
Taxes That May Be Imposed on the REMIC Pool -- Prohibited Transactions" in the
prospectus.
BACKUP WITHHOLDING AND REPORTING REQUIREMENTS
Certain holders or other beneficial owners of Offered Certificates may be
subject to backup withholding a phasing down from 30% to 28% over the period
2002 to 2006 with respect to interest paid on the Offered Certificates if those
holders or beneficial owners, upon issuance, fail to supply the Certificate
Administrator or their broker with their taxpayer identification number,
furnish an incorrect taxpayer identification number, fail to report interest,
dividends or other "reportable payments" (as defined in the Code) properly, or,
under certain circumstances, fail to provide the Certificate Administrator or
their broker with a certified statement, under penalty of perjury, that they
are not subject to backup withholding. See "Federal Income Tax Consequences --
REMICs -- Taxation of Certain Foreign Investors -- Backup Withholding" in the
prospectus.
The Certificate Administrator will be required to report annually to the
Internal Revenue Service (the "IRS"), and to each certificateholder of record,
the amount of interest paid (and original issue discount accrued, if any) on
the Regular Certificates and the amount of interest withheld for federal income
taxes, if any, for each calendar year, except as to exempt holders (generally,
holders that are corporations, certain tax-exempt organizations or nonresident
aliens who provide certification as to their status as nonresidents). As long
as the only "certificateholder" of record of the Offered Certificates (other
than the Class 1-A-R and Class 1-A-LR Certificates) is Cede & Co., as nominee
for DTC, beneficial owners of the Offered Certificates and the IRS will receive
tax and other information including the amount of interest paid on such
Certificates from DTC Participants rather than from the Certificate
Administrator. (The Certificate Administrator, however, will respond to
requests for necessary information to enable Participants and certain other
persons to complete their reports.) See "Federal Income Tax Consequences --
REMICs -- Taxation of Certain Foreign Investors -- Reporting Requirements" in
the prospectus.
All investors should consult their tax advisors regarding the federal,
state, local or foreign income tax consequences of the purchase, ownership and
disposition of the Offered Certificates.
STATE TAXES
The Depositor makes no representations regarding the tax consequences of
purchase, ownership or disposition of the Offered Certificates under the tax
laws of any state. Investors considering an investment in the Offered
Certificates should consult their tax advisors regarding such tax consequences.
S-82
ERISA CONSIDERATIONS
A fiduciary or other person acting on behalf of any employee benefit plan
or arrangement, including an individual retirement account (an "IRA"), subject
to the Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
the Code or any federal, state or local law ("SIMILAR LAW") which is similar to
ERISA or the Code (collectively, a "PLAN") should carefully review with its
legal advisors whether the purchase or holding of an Offered Certificate could
give rise to a transaction prohibited or not otherwise permissible under ERISA,
the Code or Similar Law. See "ERISA Considerations" in the prospectus.
On April 3, 1996, the U.S. Department of Labor extended to Wachovia
Securities, Inc. (formerly First Union Securities, Inc.) ("WACHOVIA
SECURITIES"), an indirect, wholly-owned subsidiary of Wachovia Corporation, an
administrative exemption (amended and restated as Prohibited Transaction
Exemption 2002-41, 67 Fed. Reg. 54487) (the "EXEMPTION") from certain of the
prohibited transaction rules of ERISA and the related excise tax provisions of
Section 4975 of the Code with respect to the initial purchase, the holding and
the subsequent resale by certain Plans of certificates in pass-through trusts
that consist of certain receivables, loans and other obligations that meet the
conditions and requirements of the Exemption. The Exemption applies to mortgage
loans such as the Mortgage Loans, but does not cover certain IRAs and certain
employee benefit plans covering only self-employed individuals which are
subject to the prohibited transaction provisions of the Code.
For a general description of the Exemption and the conditions that must be
satisfied for the Exemption to apply, see "ERISA Considerations" in the
prospectus.
Wachovia Securities believes that the Exemption will cover the acquisition
and holding of the Offered Certificates (other than the Class 1-A-R and Class
1-A-LR Certificates) by the Plans to which it applies and that all conditions
of the Exemption other than those within the control of the investors will be
met. In addition, as of the date hereof, there is no single mortgagor that is
the obligor on 5% of the initial balance of the Mortgage Pool.
Prospective Plan investors should consult with their legal advisors
concerning the impact of ERISA, the Code and Similar Law, the applicability of
PTCE 83-1 described under "ERISA Considerations" in the prospectus and the
Exemption, and the potential consequences in their specific circumstances,
prior to making an investment in the Offered Certificates. Moreover, each Plan
fiduciary should determine whether under the governing plan instruments and the
applicable fiduciary standards of investment prudence and diversification, an
investment in the Offered Certificates is appropriate for the Plan, taking into
account the overall investment policy of the Plan and the composition of the
Plan's investment portfolio.
The Class 1-A-R and Class 1-A-LR Certificates may not be purchased by or
transferred to a Plan or a person acting on behalf of or investing assets of a
Plan. See "Description of the Certificates -- Restrictions on Transfer of the
Class 1-A-R and Class 1-A-LR Certificates" in this prospectus supplement.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting
Agreement (the "UNDERWRITING AGREEMENT") among the Depositor, Wachovia Bank and
Wachovia Securities (the "UNDERWRITER") the Depositor has agreed to sell to the
Underwriter, and the Underwriter has agreed to purchase the Class 1-A-1, Class
2-A-1 and Class 3-A-1 Certificates. Proceeds to the Depositor from the sale of
the Class 1-A-1, Class 2-A-1 and Class 3-A-1 Certificates to the Underwriter
are expected to be approximately 102.57% (excluding accrued interest) of the
initial principal amount of such classes, before deducting expenses estimated
to be approximately $600,000 payable by the Depositor. The Class 1-A-2, Class
1-A-R, Class 1-A-LR, Class 2-A-2, Class B-1, Class B-2 and Class B-3
Certificates will be transferred by the Depositor to Wachovia Bank as partial
consideration for the purchase of the Mortgage Loans.
S-83
Distribution of the Class 1-A-1, Class 2-A-1 and Class 3-A-1 Certificates
will be made by the Underwriter from time to time in negotiated transactions or
otherwise at varying prices to be determined at the time of sale. In connection
with the purchase and sale of the Class 1-A-1, Class 2-A-1 and Class 3-A-1
Certificates, the Underwriter may be deemed to have received compensation from
the Depositor in the form of underwriting discounts.
The Depositor has been advised by the Underwriter that it intend to make a
market in the Class 1-A-1, Class 2-A-1 and Class 3-A-1 Certificates but have no
obligation to do so. There can be no assurance that a secondary market for the
Class 1-A-1, Class 2-A-1 and Class 3-A-1 Certificates or any other Offered
Certificates will develop or, if it does develop, that it will continue.
The Depositor has agreed to indemnify the Underwriter against, or make
contributions to the Underwriter with respect to, certain liabilities,
including liabilities under the Securities Act of 1933, as amended.
The Underwriter is an affiliate of the Depositor, the Seller, the
Servicer, the Master Servicer and the Certificate Administrator, and is a
registered broker/dealer. Any obligations of the Underwriter are the sole
responsibility of the Underwriter and do not create any obligation or guarantee
on the part of any affiliate of the Underwriter. This prospectus supplement may
be used by the Underwriter, to the extent required, in connection with market
making transactions in the Offered Certificates. The Underwriter may act as
principal or agent in such transactions.
LEGAL MATTERS
The validity of and certain federal income tax matters with respect to the
Offered Certificates will be passed upon for the Depositor and Underwriter by
Cadwalader, Wickersham & Taft, New York, New York.
CERTIFICATE RATINGS
At their issuance, each class of Offered Certificates is required to
receive from Standard & Poor's, a division of The McGraw-Hill Companies, Inc.
("S&P"), Moody's Investors Service, Inc. ("MOODY'S") and Fitch Ratings ("FITCH"
and, together with S&P and Moody's, the "RATING AGENCIES") at least the rating
set forth in the table on page S-4 of this prospectus supplement.
Ratings on mortgage pass-through certificates address the likelihood of
receipt by certificateholders of payments required under the Pooling Agreement.
S&P's, Moody's and Fitch's ratings take into consideration the credit
quality of the Mortgage Pool, including any credit support, structural and
legal aspects associated with the Offered Certificates, and the extent to which
the payment stream of the Mortgage Pool is adequate to make payments required
under the Offered Certificates. S&P's, Moody's and Fitch's ratings on the
Offered Certificates do not, however, constitute a statement regarding
frequency of prepayments on the Mortgage Loans.
The Depositor has not requested a rating of any class of Offered
Certificates by any rating agency other than S&P, Moody's and Fitch. However,
there can be no assurance as to whether any other rating agency will rate the
Offered Certificates or, if it does, what rating would be assigned by such
other rating agency. The rating assigned by any such other rating agency to a
class of Offered Certificates may be lower than the ratings assigned by S&P,
Moody's and Fitch.
The rating of the Offered Certificates should be evaluated independently
from similar ratings on other types of securities. A security rating is not a
recommendation to buy, sell or hold securities and may be subject to revision
or withdrawal at any time by the assigning rating agency.
S-84
INDEX OF SIGNIFICANT PROSPECTUS SUPPLEMENT DEFINITIONS
Adjusted Pool Amount ....................... S-63
Adjusted Pool Amount (PO Portion) .......... S-64
Administrative Fee Rate .................... S-45
Administrative Fees ........................ S-44
Advance .................................... S-45
Aggregate Subordinate Percentage ........... S-61
Balloon Mortgage Loan ...................... S-19
Balloon Payment ............................ S-19
Bankruptcy Losses .......................... S-63
beneficial owner ........................... S-48
Book-Entry Certificates .................... S-48
Certificate Account ........................ S-44
Certificate Administrator .................. S-47
Certificate Administrator Fee Rate ......... S-45
Certificate Owners ......................... S-48
Certificateholder .......................... S-48
Certificates ............................... S-47
Class 1-A-2C Notional Amount ............... S-55
Class 2-A-2C Notional Amount ............... S-55
Class 3-A-2B Notional Amount ............... S-55
Clearstream ................................ S-50
Clearstream Participants ................... S-50
Code ....................................... S-81
Compensating Interest ...................... S-45
Component .................................. S-47
Component Interest Distribution
Amount ..................................... S-53
Corporate Trust Office ..................... S-47
CPR ........................................ S-70
Custodian .................................. S-43
Debt Service Reduction ..................... S-63
Decrement Tables ........................... S-68
Deficient Valuation ........................ S-63
Definitive Certificates .................... S-48
Deleted Mortgage Loan ...................... S-44
Determination Date ......................... S-45
Discount Mortgage Loans .................... S-56
Distribution Date .......................... S-52
DTC ........................................ S-48
Eligible Substitute Mortgage Loan .......... S-44
ERISA ...................................... S-83
Euroclear .................................. S-50
Euroclear Operator ......................... S-50
Euroclear Participants ..................... S-50
European Depositaries ...................... S-48
Exemption .................................. S-83
Financial Intermediary ..................... S-48
Fitch ...................................... S-84
Fractional Interest ........................ S-60
Global Securities .......................... A-1
Group 1 Discount Mortgage Loan ............. S-56
Group 1 Mortgage Loans ..................... S-19
Group 1 Premium Mortgage Loan .............. S-56
Group 2 Discount Mortgage Loan ............. S-56
Group 2 Mortgage Loans ..................... S-19
Group 2 Premium Mortgage Loan .............. S-56
Group 3 Discount Mortgage Loan ............. S-56
Group 3 Mortgage Loans ..................... S-19
Group 3 Premium Mortgage Loan .............. S-56
Group Subordinate Amount ................... S-55
Indirect Participants ...................... S-48
Interest Accrual Period .................... S-54
Interest Distribution Amount ............... S-53
IO Components .............................. S-55
IRA ........................................ S-83
IRS ........................................ S-82
Liquidated Mortgage Loan ................... S-63
Liquidation Proceeds ....................... S-52
Loan Group ................................. S-19
Loan Group 1 ............................... S-19
Loan Group 2 ............................... S-19
Loan Group 3 ............................... S-19
Loan-to-Value Ratio ........................ S-19
Loss Severity Percentage ................... S-78
Lower-Tier REMIC ........................... S-81
Master Servicer ............................ S-40
Master Servicing Fee ....................... S-45
Master Servicing Fee Rate .................. S-45
MERS ....................................... S-43
Modeling Assumptions ....................... S-68
Moody's .................................... S-84
Mortgage File .............................. S-43
Mortgage Loan Purchase Agreement ........... S-19
Mortgage Loans ............................. S-19
Mortgage Pool .............................. S-19
Net Interest Shortfall ..................... S-54
Net Mortgage Interest Rate ................. S-56
New Regulations ............................ A-4
Non-PO Percentage .......................... S-56
Non-PO Principal Amount .................... S-56
Non-Supported Interest Shortfall ........... S-54
Offered Certificates ....................... S-47
Original Subordinate Principal Balance ..... S-59
Participants ............................... S-48
Percentage Interest ........................ S-47
Plan ....................................... S-83
S-85
PO Components ............................ S-54
PO Deferred Amount ....................... S-62
PO Percentage ............................ S-56
PO Principal Amount ...................... S-60
PO Principal Distribution Amount ......... S-59
Pool Distribution Amount ................. S-52
Pool Distribution Amount Allocation ...... S-53
Pool Principal Balance ................... S-58
Pool Principal Balance (Non-PO
Portion) ................................. S-58
Pooling Agreement ........................ S-43
Premium Mortgage Loans ................... S-56
Prepayment Interest Shortfall ............ S-54
Purchase Price ........................... S-44
Rating Agencies .......................... S-84
Realized Loss ............................ S-63
Record Date .............................. S-52
Regular Certificates ..................... S-81
Related Group ............................ S-61
Relevant Depositary ...................... S-48
Relief Act ............................... S-54
Relief Act Reduction ..................... S-54
REMIC .................................... S-81
REO Property ............................. S-45
Rules .................................... S-49
Scheduled Principal Payments ............. S-57
SDA ...................................... S-77
Seller ................................... S-19
Senior Certificates: ..................... S-6
Senior Credit Support Depletion Date ..... S-58
Senior Percentage ........................ S-58
Senior Prepayment Percentage ............. S-58
Senior Principal Distribution Amount ..... S-58
Servicer ................................. S-40
Servicer Custodial Account ............... S-44
Servicing Fee ............................ S-44
Servicing Fee Rate ....................... S-45
Similar Law .............................. S-83
S&P ...................................... S-84
Stated Principal Balance ................. S-58
Subordinate Percentage ................... S-58
Subordinate Prepayment Percentage ........ S-59
Subordinate Principal Distribution
Amount ................................... S-61
Substitution Adjustment Amount ........... S-44
Terms and Conditions ..................... S-50
Total Senior Percentage .................. S-59
Trust .................................... S-19
Trustee .................................. S-47
Undercollateralized Amount ............... S-61
Undercollateralized Group ................ S-61
Underwriter .............................. S-83
Underwriting Agreement ................... S-83
Unscheduled Principal Payments ........... S-57
Upper-Tier REMIC ......................... S-81
U.S. Person .............................. S-65
Wachovia Bank ............................ S-40
Wachovia Securities ...................... S-83
S-86
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION
PROCEDURES
Except in certain limited circumstances, the Offered Certificates (other
than the Class 1-A-R and Class 1-A-LR Certificates) will be offered globally
(the "GLOBAL SECURITIES") and will be available only in book-entry form.
Investors in the Global Securities may hold such Global Securities through any
of DTC, Clearstream or Euroclear. The Global Securities will be tradable as
home market instruments in both the European and U.S. domestic markets. Initial
settlement and all secondary trades will settle in same-day funds.
Secondary market trading between investors holding Global Securities
through Clearstream and Euroclear will be conducted in the ordinary way in
accordance with their normal rules and operating procedures and in accordance
with conventional eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors holding Global Securities
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations.
Secondary cross-market trading between Clearstream or Euroclear and DTC
Participants holding Certificates will be effected on a
delivery-against-payment basis through the respective Depositaries of
Clearstream and Euroclear (in such capacity) and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be subject
to U.S. withholding taxes unless such holders meet certain requirements and
deliver appropriate U.S. tax documents to the securities clearing organizations
or their participants.
INITIAL SETTLEMENT
All Global Securities will be held in book-entry form by DTC in the name
of Cede & Co., as nominee of DTC. Investors' interests in the Global Securities
will be represented through financial institutions acting on their behalf as
direct and indirect Participants in DTC. As a result, Clearstream and Euroclear
will hold positions on behalf of their participants through their respective
Depositaries, which in turn will hold such positions in accounts as DTC
Participants.
Investors electing to hold their Global Securities through DTC will follow
the settlement practices applicable to conventional eurobonds, except that
there will be no temporary global security and no "lock-up" or restricted
period. Investor securities custody accounts will be credited with their
holdings against payment in same-day funds on the settlement date.
Investors electing to hold their Global Securities through Clearstream or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no `lock-up' or restricted period. Global Securities will be credited to
the securities custody accounts on the settlement date against payment in
same-day funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
Trading between DTC Participants. Secondary market trading between DTC
Participants will be settled using the procedures applicable to prior mortgage
loan asset backed certificates issues in same-day funds.
Trading between Clearstream and/or Euroclear Participants. Secondary
market trading between Clearstream Participants or Euroclear Participants will
be settled using the procedures applicable to conventional eurobonds in
same-day funds.
A-1
Trading between DTC seller and Clearstream or Euroclear purchaser. When
Global Securities are to be transferred from the account of a DTC Participant
to the account of a Clearstream Participant or a Euroclear Participant, the
purchaser will send instructions to Clearstream or Euroclear through a
Clearstream Participant or Euroclear Participant at least one business day
prior to settlement. Clearstream or Euroclear will instruct the respective
Depositary, as the case may be, to receive the Global Securities against
payment. Payment will include interest accrued on the Global Securities from
and including the last coupon payment date to and excluding the settlement
date, on the basis of either a 360-day year comprised of 30-day months or the
actual number of days in such accrual period and a year assumed to consist of
360 days, as applicable. For transactions settling on the 31st of the month,
payment will include interest accrued to and excluding the first day of the
following month. Payment will then be made by the respective Depositary of the
DTC Participant's account against delivery of the Global Securities. After
settlement has been completed, the Global Securities will be credited to the
respective clearing system and by the clearing system, in accordance with its
usual procedures, to the Clearstream Participant's or Euroclear Participant's
account. The securities credit will appear the next day (European time) and the
cash debt will be back-valued to, and the interest on the Global Securities
will accrue from, the value date (which would be the preceding day when
settlement occurred in New York). If settlement is not completed on the
intended value date (i.e., the trade fails), the Clearstream or Euroclear cash
debt will be valued instead as of the actual settlement date.
Clearstream Participants and Euroclear Participants will need to make
available to the respective clearing systems the funds necessary to process
same-day funds settlement. The most direct means of doing so is to preposition
funds for settlement, either from cash on hand or existing lines of credit, as
they would for any settlement occurring within Clearstream or Euroclear. Under
this approach, they may take on credit exposure to Clearstream or Euroclear
until the Global Securities are credited to their accounts one day later.
As an alternative, if Clearstream or Euroclear has extended a line of
credit to them, Clearstream Participants or Euroclear Participants can elect
not to preposition funds and allow that credit line to be drawn upon the
finance settlement. Under this procedure, Clearstream Participants or Euroclear
Participants purchasing Global Securities would incur overdraft charges for one
day, assuming they cleared the overdraft when the Global Securities were
credited to their accounts. However, interest on the Global Securities would
accrue from the value date. Therefore, in many cases the investment income on
the Global Securities earned during that one-day period may substantially
reduce or offset the amount of such overdraft charges, although this result
will depend on each Clearstream Participant's or Euroclear Participant's
particular cost of funds.
Since the settlement is taking place during New York business hours, DTC
Participants can employ their usual procedures for sending Global Securities to
the respective European Depositary for the benefit of Clearstream Participants
or Euroclear Participants. The sale proceeds will be available to the DTC
seller on the settlement date. Thus, to the DTC Participants a cross-market
transaction will settle no differently than a trade between two DTC
Participants.
Trading between Clearstream or Euroclear Seller and DTC Purchaser. Due to
time zone differences in their favor, Clearstream Participants and Euroclear
Participants may employ their customary procedures for transactions in which
Global Securities are to be transferred by the respective clearing system,
through the respective Depositary, to a DTC Participant. The seller will send
instructions to Clearstream or Euroclear through a Clearstream Participant or
Euroclear Participant at least one business day prior to settlement. In these
cases Clearstream or Euroclear will instruct the respective Depositary, as
appropriate, to deliver the Global Securities to the DTC Participant's account
against payment. Payment will include interest accrued on the Global Securities
from and including the last coupon payment to and excluding the settlement date
on the basis of either a 360-day year comprised of 30-day months or the actual
number of days in such accrual period and a year assumed to consist of 360
days, as applicable. For transactions settling on the 31st of the month,
payment will include interest accrued to and excluding the first day of the
following month. The payment will then be reflected in the account of the
Clearstream Participant or Euroclear
A-2
Participant the following day, and receipt of the cash proceeds in the
Clearstream Participant's or Euroclear Participant's account would be
back-valued to the value date (which would be the preceding day, when
settlement occurred in New York). Should the Clearstream Participant or
Euroclear Participant have a line of credit with its respective clearing system
and elect to be in debt in anticipation of receipt of the sale proceeds in its
account, the back-valuation will extinguish any overdraft incurred over that
one-day period. If settlement is not completed on the intended value date
(i.e., the trade fails), receipt of the cash proceeds in the Clearstream
Participant's or Euroclear Participant's account would instead be valued as of
the actual settlement date.
Finally, day traders that use Clearstream or Euroclear and that purchase
Global Securities from DTC Participants for delivery to Clearstream
Participants or Euroclear Participants should note that these trades would
automatically fail on the sale side unless affirmative action were taken. At
least three techniques should be readily available to eliminate this potential
problem:
(a) borrowing through Clearstream or Euroclear for one day (until
the purchase side of the day trade is reflected in their Clearstream or
Euroclear accounts) in accordance with the clearing system's customary
procedures;
(b) borrowing the Global Securities in the U.S. from a DTC
Participant no later than one day prior to settlement, which would give the
Global Securities sufficient time to be reflected in their Clearstream or
Euroclear account in order to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the
trade so that the value date for the purchase from the DTC Participant is
at least one day prior to the value date for the sale to the Clearstream
Participant or Euroclear Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Securities holding securities through
Clearstream or Euroclear (or through DTC if the holder has an address outside
the U.S.) will be subject to the 30% U.S. withholding tax that generally
applies to payments of interest (including original issue discount) on
registered debt issued by U.S. Persons, unless (i) each clearing system, bank
or other financial institution that holds customers' securities in the ordinary
course of its trade or business in the chain of intermediaries between such
beneficial owner and the U.S. entity required to withhold tax complies with
applicable certification requirements and (ii) such beneficial owner takes one
of the following steps to obtain an exemption or reduced tax rate:
Exemption for non-U.S. Persons (Form W-8BEN). Beneficial owners of Global
Securities that are non-U.S. Persons can obtain a complete exemption from the
withholding tax by filing a signed Form W-8BEN (Certificate of Foreign Status
of Beneficial Owner for United States Tax Withholding). If the information
shown on Form W-8BEN changes, a new Form W-8BEN must be filed within 30 days of
such change.
Exemption for non-U.S. Persons with effectively connected income (Form
W-8ECI). A non-U.S. Person, including a non-U.S. corporation or bank with a
U.S. branch, for which the interest income is 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 of Tax on Income Effectively Connected
with the Conduct of a Trade or Business in the United States).
Exemption or reduced rate for non-U.S. Persons resident in treaty
countries (Form W-8BEN). Non-U.S. Persons that are Certificate Owners residing
in a country that has a tax treaty with the United States can obtain an
exemption or reduced tax rate (depending on the treaty terms) by filing Form
W-8BEN.
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a complete
exemption from the withholding tax by filing Form W-9 (Payer's Request for
Taxpayer Identification Number and Certification).
A-3
U.S. Federal Income Tax Reporting Procedure. The Certificate Owner of a
Global Security or, in the case of a Form W-8ECI filer, his agent, files by
submitting the appropriate form to the person through whom it holds (the
clearing agency, in the case of persons holding directly on the books of the
clearing agency). Form W-8BEN and Form W-8ECI are effective until the third
succeeding calendar year from the date the form is signed.
Final withholding regulations (the "NEW REGULATIONS") effective January 1,
2001 affect the documentation required from non-U.S. Persons. The New
Regulations replace a number of prior tax certification forms (including IRS
Form W-8, 1001 and 4224) with a new series of IRS Form W-8 and generally
standardize the period of time for which withholding agents can rely on such
forms (although certain of the new forms may remain valid indefinitely if the
beneficial owner provides a United States taxpayer identification number and
the information on the form does not change).
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-4
PROSPECTUS
WACHOVIA ASSET SECURITIZATION, INC.
DEPOSITOR
MORTGAGE PASS-THROUGH CERTIFICATES
MORTGAGE-BACKED NOTES
(ISSUABLE IN SERIES)
YOU SHOULD CAREFULLY CONSIDER THE RISK FACTORS BEGINNING ON PAGE 10 OF THIS
PROSPECTUS.
The securities of any series will not be insured or guaranteed by any
governmental agency or instrumentality other than as expressly described in the
prospectus supplement for that series.
The securities of each series will represent interests in, or will represent
debt obligations of, the related trust only and will not represent interests in
or obligations of any other entity.
This prospectus may be used to offer and sell any series of securities only if
accompanied by the prospectus supplement for that series.
The securities of each series are not deposits or other obligations of a bank
and are not insured by the FDIC.
EACH TRUST--
o will issue a series of asset-backed certificates or asset-backed notes that
will consist of one or more classes; and
o may own--
o a pool or pools of single family and/or multifamily mortgage loans,
which may include sub-prime mortgage loans, and are secured by either
first or junior liens on one- to four-family residential properties or
primarily residential properties consisting of five or more
residential dwelling units and which may include limited retail,
office or other commercial space;
o a pool or pools of home improvement installment sales contracts or
installment loans that are unsecured;
o a pool or pools of manufactured housing installment sales contracts
and installment loan agreements secured by a security interest in a
new or used manufactured home, and if indicated in the accompanying
prospectus supplement, by real property; and entity.
o other assets described in this prospectus and the accompanying
prospectus supplement.
EACH SERIES OF SECURITIES--
o will represent ownership interest in the related trust or will represent
debt obligations of the related trust;
o may be entitled to one or more of the other types of credit support
described in this prospectus; and
o will be paid only from the assets of the related trust.
NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS APPROVED THE SECURITIES
OR DETERMINED THAT THIS PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
SEPTEMBER 25, 2002
TABLE OF CONTENTS
Important Notice About Information
Presented in this Prospectus and the
Accompanying Prospectus Supplement .............. 5
Summary of Prospectus .............................. 6
Risk Factors ....................................... 10
Risks Associated with the Securities ............ 10
Risks Associated with the Assets ................ 12
Violations of Federal Laws or State
Laws May Adversely Affect Ability to
Collect on Loans or Result in Losses ......... 15
Market Values of Manufactured Homes
May Increase the Risk of Loss ................ 16
Risk of Loss May Be Greater on
Unsecured Home Improvement
Loans ........................................ 16
Risks of Loss May Increase Due to
Defective Security Interest and Effects
of Certain Other Legal Aspects of the
Contracts .................................... 16
Description of the Trust Funds ..................... 17
Assets .......................................... 17
Mortgage Loans .................................. 19
General ...................................... 19
Loan-to-Value Ratio .......................... 19
Mortgage Loan Information in
Prospectus Supplements .................... 19
Payment Provisions of the Mortgage
Loans ..................................... 20
Revolving Credit Line Loans .................. 21
Unsecured Home Improvement Loans ................ 21
Unsecured Home Improvement Loan
Information in Prospectus
Supplements ............................... 21
Contracts ....................................... 22
General ...................................... 22
Contract Information in Prospectus
Supplements ............................... 22
Payment Provisions of the Contracts .......... 23
Pre-Funding Account ............................. 23
Accounts ........................................ 24
Credit Support .................................. 24
Cash Flow Agreements ............................ 24
Use of Proceeds .................................... 25
Yield Considerations ............................... 25
General ......................................... 25
Pass-Through Rate and Interest Rate ............. 25
Timing of Payment of Interest ................... 25
Payments of Principal; Prepayments .............. 25
Prepayments--Maturity and Weighted
Average Life ................................. 27
Other Factors Affecting Weighted
Average Life ................................. 28
Type of Asset ................................ 28
Termination .................................. 29
Defaults ..................................... 29
Foreclosures ................................. 29
Refinancing .................................. 30
Due-on-Sale Clauses .......................... 30
The Depositor ...................................... 30
Description of the Securities ...................... 31
General ......................................... 31
Distributions ................................... 31
Available Distribution Amount ................... 32
Distributions of Interest on the
Securities ................................... 33
Distributions of Principal of the
Securities ................................... 34
Categories of Classes of Securities ............. 34
Components ...................................... 39
Distributions on the Securities of
Prepayment Premiums .......................... 39
Allocation of Losses and Shortfalls ............. 39
Advances in Respect of Delinquencies ............ 39
Reports to Securityholders ...................... 40
Termination; Optional Purchase of
Mortgage Loans ............................... 42
Optional Purchases .............................. 43
Definitive Form ................................. 43
Book-Entry Registration and Form ................ 43
Description of the Agreements ...................... 47
Agreements Applicable to a Series ............... 47
REMIC Securities, FASIT Securities,
Grantor Trust Securities .................. 47
Securities That Are Partnership
Interests for Tax Purposes and
Notes ..................................... 47
Material Terms of the Pooling and
Servicing Agreements and Underlying
Servicing Agreements ......................... 47
General ...................................... 47
Assignment of Assets; Repurchases ............ 48
Representations and Warranties;
Repurchases ............................... 50
Collection Account and Related
Accounts .................................. 51
Realization Upon Defaulted Assets ............ 55
Hazard Insurance Policies .................... 56
Contracts .................................... 57
2
Fidelity Bonds and Errors and
Omissions Insurance ................... 58
Due-on-Sale Provisions ................... 58
Retained Interest; Servicing
Compensation and Payment of
Expenses .............................. 58
Evidence as to Compliance ................ 59
Certain Matters Regarding Servicers,
the Master Servicer and the
Depositor ............................. 59
Special Servicers ........................ 60
Events of Default under the
Agreements ............................ 61
Rights Upon Event of Default under
the Agreements ........................ 61
Amendment ................................ 62
The Trustee .............................. 63
Duties of the Trustee .................... 63
Certain Matters Regarding the
Trustee ............................... 63
Resignation and Removal of the
Trustee ............................... 63
Material Terms of the Indenture ............. 64
General .................................. 64
Events of Default ........................ 64
Discharge of Indenture ................... 66
Indenture Trustee's Annual Report ........ 66
The Indenture Trustee .................... 66
Description of Credit Support .................. 67
General ..................................... 67
Subordinate Securities ...................... 67
Cross-Support Provisions .................... 68
Limited Guarantee ........................... 68
Financial Guaranty Insurance Policy or
Surety Bond .............................. 68
Letter of Credit ............................ 68
Pool Insurance Policies ..................... 68
Special Hazard Insurance Policies ........... 68
Mortgagor Bankruptcy Bond ................... 68
Reserve Funds ............................... 69
Overcollateralization ....................... 69
Certain Legal Aspects of Mortgage Loans......... 70
General ..................................... 70
Types of Mortgage Instruments ............... 70
Interest in Real Property ................... 70
Cooperative Loans ........................... 71
Land Sale Contracts ......................... 72
Foreclosure ................................. 72
General .................................. 72
Judicial Foreclosure ..................... 73
Equitable Limitations on
Enforceability of Certain
Provisions ............................ 73
Non-Judicial Foreclosure/Power of
Sale .................................. 73
Public Sale .............................. 74
Rights of Redemption ..................... 74
Cooperative Loans ........................ 75
Junior Mortgages ............................ 76
Rights of Redemption ........................ 76
Anti-Deficiency Legislation, the
Bankruptcy Code and Other
Limitations on Lenders ................... 77
Enforceability of Certain Provisions ........ 79
Environmental Considerations ................ 80
Due-on-Sale Clauses ......................... 82
Prepayment Charges .......................... 82
Subordinate Financing ....................... 82
Applicability of Usury Laws ................. 83
Alternative Mortgage Instruments ............ 83
Homeowners Protection Act of 1998 ........... 84
Texas Home Equity Loans ..................... 84
Soldiers' and Sailors' Civil Relief Act of
1940 and Similar Laws .................... 84
Forfeitures in Drug, RICO and Money
Laundering Violations .................... 85
Certain Legal Aspects of the Contracts ......... 85
General ..................................... 85
Security Interests in the Manufactured
Homes .................................... 85
Enforcement of Security Interests in
Manufactured Homes ....................... 87
Soldiers' and Sailors' Civil Relief Act of
1940 and Similar Laws .................... 88
Consumer Protection Laws .................... 88
Transfers of Manufactured Homes;
Enforceability of Due-on-Sale Clauses..... 88
Applicability of Usury Laws ................. 88
Federal Income Tax Consequences ................ 89
General ..................................... 89
Taxable Mortgage Pools ................... 90
REMICS ...................................... 90
Classification of REMICs ................. 90
Characterization of Investments in
REMIC Securities ...................... 92
Tiered REMIC Structures .................. 93
Taxation of Owners of Regular
Securities ............................ 93
Election to Treat All Interest Under
the Constant Yield Method ............. 99
3
Treatment of Losses ...................... 99
Sale or Exchange of Regular
Securities ............................ 100
Taxation of Owners of Residual
Securities ............................ 100
Taxes That May Be Imposed on the
REMIC Pool ............................ 108
Taxation of Certain Foreign Investors..... 110
Grantor Trust Funds ......................... 112
Classification of Grantor Trust Funds..... 112
Standard Securities ......................... 112
General .................................. 112
Tax Status ............................... 113
Premium and Discount ..................... 114
Recharacterization of Servicing Fees ..... 114
Stripped Securities ......................... 116
General .................................. 116
Status of Stripped Securities ............ 117
Taxation of Stripped Securities .......... 117
Reporting Requirements and Backup
Withholding ........................... 119
Taxation of Certain Foreign Investors..... 119
Partnership Trust Funds ..................... 119
Classification of Partnership Trust
Funds ................................. 119
Characterization of Investments in
Partnership Securities and Debt
Securities ............................ 119
Taxation of Debt Securityholders ......... 120
Taxation of Owners of Partnership
Securities ............................ 120
Recent Tax Law Changes ...................... 125
State and Other Tax Consequences ............... 126
ERISA Considerations ........................... 126
Legal Investment ............................... 130
Methods of Distribution ........................ 131
Legal Matters .................................. 132
Financial Information .......................... 132
Ratings ........................................ 133
Where You can Find More Information ............ 133
Incorporation of Certain Information by
Reference ................................... 133
Index of Significant Definitions ............... 134
4
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS
PROSPECTUS AND THE ACCOMPANYING PROSPECTUS SUPPLEMENT
Information is provided to you about the securities in two separate
documents that progressively provide more detail: (a) this prospectus, which
provides general information, some of which may not apply to a particular
series of securities, including your series, and (b) the accompanying
prospectus supplement, which will describe the specific terms of your series of
securities, including:
o the principal balances and/or interest rates of each class;
o the timing and priority of interest and principal payments;
o statistical and other information about the mortgage loans;
o information about credit enhancement, if any, for each class;
o the ratings for each class; and
o the method for selling the securities.
IF THE TERMS OF A PARTICULAR SERIES OF SECURITIES VARY BETWEEN THIS
PROSPECTUS AND THE ACCOMPANYING PROSPECTUS SUPPLEMENT, YOU SHOULD RELY ON THE
INFORMATION IN THE ACCOMPANYING PROSPECTUS SUPPLEMENT.
You should rely only on the information provided in this prospectus and
the accompanying prospectus supplement including the information incorporated
by reference. No one has been authorized to provide you with different
information. The securities are not being offered in any state where the offer
is not permitted. The depositor does not claim the accuracy of the information
in this prospectus or the accompanying prospectus supplement as of any date
other than the dates stated on their respective covers.
Cross-references are included in this prospectus and in the accompanying
prospectus supplement to captions in these materials where you can find further
related discussions. The following Table of Contents and the Table of Contents
included in the accompanying prospectus supplement provide the pages on which
these captions are located.
You can find a listing of the pages where capitalized terms used in this
prospectus are defined under the caption "Index of Significant Definitions"
beginning on page 134 in this prospectus.
The depositor's principal executive office is located at 8739 Research
Drive, NC0121-Suite D, Charlotte, North Carolina 28288-0121 and the depositor's
telephone number is (704) 596-7616.
5
SUMMARY OF PROSPECTUS
This summary highlights selected information from this document and does
not contain all of the information that you need to consider in making an
investment decision. Please read this entire prospectus and the accompanying
prospectus supplement carefully to understand all of the terms of a series of
certificates.
This summary provides an overview of certain calculations, cash flows and
other information to aid your understanding of the terms of the certificates
and is qualified by the full description of these calculations, cash flows and
other information in the prospectus and the prospectus supplement.
RELEVANT PARTIES FOR EACH SERIES OF SECURITIES
TITLE OF Mortgage pass-through TRUSTEE / The entity named as trustee or
SECURITIES certificates and mortgage- INDENTURE indenture trustee in the related
backed notes issuable in series. TRUSTEE prospectus supplement.
DEPOSITOR Wachovia Asset RELEVANT DATES
Securitization, Inc., an
wholly-owned indirect CUT-OFF The date specified in the related
subsidiary of Wachovia DATE prospectus supplement.
Corporation. The depositor is
an affiliate of Wachovia
Securities, Inc. CLOSING The date when the certificates
DATE and/or notes of any series are
ISSUER With respect to each series of initially issued as specified in
certificates and/or notes, the the related prospectus
trust fund to be formed supplement.
pursuant to either a pooling and
servicing agreement or a deposit
trust agreement. DISTRIBUTION The monthly, quarterly or other
DATE periodic date specified in the
SERVICER The entity or entities named as related prospectus supplement
servicer in the related on which distributions will be
prospectus supplement. A made to holders of the
servicer may be an affiliate of certificates and/or notes.
the depositor.
STATISTICAL The calendar day, if applicable,
MASTER The entity, if any, named as CALCULATION specified in the related
SERVICER master servicer in the related DATE prospectus supplement.
prospectus supplement that will
perform certain administration,
calculation and reporting
functions with respect to the
trust fund and will supervise the
servicers. The master servicer
may be an affiliate of the
depositor.
---------------------
DESCRIPTION OF SECURITIES
Each series of certificates will be issued pursuant to a pooling and
servicing agreement and will include one or more classes representing an
ownership interest in a segregated pool of mortgage loans, unsecured home
improvement loans and/or manufactured housing installment sales contracts
6
and other assets of the trust fund. If a series of securities includes notes,
such notes will represent debt obligations of the related trust fund formed
pursuant to a deposit trust agreement and will be secured by the assets of the
trust fund pursuant to an indenture. A class of securities will be entitled, to
the extent of funds available, to one of the following:
o principal and interest distributions;
o principal distributions, with no interest distributions;
o interest distributions, with no principal distributions; or
o such other distributions as are described in the applicable prospectus
supplement.
See "Description of the Securities" in this prospectus.
INTEREST DISTRIBUTIONS
With respect to each series of securities, interest on each class of
securities (other than a class of securities entitled to receive only
principal) will accrue during each period specified in the prospectus
supplement and will be distributed to the holders of the related classes of
securities on each distribution date in accordance with the particular terms of
each such class of securities. The terms of each such class of securities will
be described in the related prospectus supplement.
See "Description of the Securities -- Distributions of Interest on the
Securities" in this prospectus.
PRINCIPAL DISTRIBUTIONS
With respect to each series of securities, principal payments (including
prepayments) on the related mortgage loans, unsecured home improvement loans
and/or manufactured housing installment sales contracts will be distributed to
holders of the related securities or otherwise applied as described in the
related prospectus supplement on each distribution date. Distributions in
reduction of principal balance will be allocated among the classes of
securities of a series in the manner specified in the applicable prospectus
supplement.
See "Description of the Securities -- Distribution of Principal on the
Securities" in this prospectus.
DENOMINATIONS
Each class of securities of a series will be issued in the minimum
denominations set forth in the related prospectus supplement.
REGISTRATION OF THE SECURITIES
The securities will be issued either:
o in book-entry form initially held through DTC in the United States, or
Clearstream Banking or the Euroclear System, in Europe; or
o in fully registered, certificated form.
See "Description of the Securities -- General" and "-- Book-Entry
Registration and Definitive Securities" in this prospectus.
ASSETS OF THE TRUST
The trust related to each series will consist primarily of any of the
following assets:
o a segregated pool of single family and/or multifamily mortgage loans,
which may include sub-prime mortgage loans;
7
o home improvement installment sales contracts or installment loans that
are unsecured;
o manufactured housing installment sales contracts and installment loan
agreements; and
o certain other property.
You should refer to the applicable prospectus supplement for the precise
characteristics or expected characteristics of the assets and a description of
the other property, if any, included in a particular trust.
See "Description of the Trust Funds" in this prospectus.
OPTIONAL TERMINATION OF THE TRUST
The related prospectus supplement may provide that the party specified in
the related prospectus supplement may
o repurchase all of the assets in the trust fund and thereby cause early
retirement of the securities under the circumstances and in the manner
specified in the related prospectus supplement and
o repurchase a portion of such assets to retire specified class or
classes of securities under the circumstances and in the manner
specified in the related prospectus supplement.
See "Description of the Securities -- Termination" in this prospectus.
The yield on each class of securities of a series will be affected by,
among other things, the rate of payment of principal (including prepayments) on
the assets in the related trust and the timing of receipt of such payments.
See "Yield Considerations" in this prospectus.
PREFUNDING ACCOUNT
The related prospectus supplement may provide that the depositor deposit a
specified amount in a pre-funding account on the date the securities are
issued. In this case, the deposited funds may only be used to acquire the
additional assets for the trust during a set period after the initial issuance
of the securities. Any amounts remaining in the account at the end of the
period will be distributed as a prepayment of principal to the holders of the
related securities.
See "Description of the Trust Funds -- Prefunding Account" in this
prospectus.
CREDIT ENHANCEMENT
If so specified in the applicable prospectus supplement, the securities of
any series, or any one or more classes of a series, may be entitled to the
benefits of other types of credit enhancement, including but not limited to:
o letter of credit o financial guaranty insurance policy
o special hazard insurance policy o mortgage pool insurance policy
o reserve fund o spread account
o cash collateral account o overcollateralization
Credit support may also be provided by subordination. Any credit support
will be described in detail in the applicable prospectus supplement.
See "Description of Credit Support" in this prospectus.
8
RATINGS OF SECURITIES
The securities of any series will not be offered pursuant to this
prospectus and a prospectus supplement unless each offered security is rated in
one of the four highest rating categories by at least one nationally recognized
statistical rating agency.
o A security rating is not a recommendation to buy, sell or hold the
securities on any series and is subject to revision or withdrawal at
any time by the assigning rating agency.
o Ratings do not address credit risk and do not represent any assessment
of the likelihood or rate of principal prepayments.
See "Risk Factors -- Risks Associated with the Securities -- Ratings
Assigned to the Securities Will Have Limitations" and "Ratings" in this
prospectus.
TAX STATUS OF THE SECURITIES
The securities of each series offered will be either:
o regular interests and residual interests in a trust fund treated as a
REMIC;
o interests in a trust fund treated as a grantor trust;
o interests in a trust fund treated as a partnership;
o debt obligations secured by assets of a trust fund; or
o regular interest or ownership interests in a trust fund treated as a
FASIT.
For additional information see "Federal Income Tax Consequences" in this
prospectus and "Certain Material Federal Income Tax Consequences" in the
prospectus supplement.
ERISA CONSIDERATIONS
If you are a fiduciary of any employee benefit plan or arrangement,
including an individual retirement account, subject to fiduciary responsibility
or prohibited transaction provisions of ERISA, you should carefully review with
your legal advisors whether the purchase or holding of securities could give
rise to a transaction that is prohibited or not otherwise permissible under
ERISA or other comparable rules or regulations.
For additional information see "ERISA Considerations" in this prospectus
and in the prospectus supplement.
LEGAL INVESTMENT
The applicable prospectus supplement will specify whether the class or
classes of securities offered will constitute "mortgage related securities" for
purposes of the Secondary Mortgage Market Enhancement Act of 1984, as amended.
If your investment authority is subject to legal restrictions you should
consult your own legal advisors to determine whether and to what extent such
securities constitute a legal investment for you.
For additional information see "Legal Investment" in this prospectus and
in the prospectus supplement.
MATERIAL RISKS
You are urged to read "Risk Factors" in this prospectus and in the
prospectus supplement for a discussion of the material risks associated with an
investment in the securities.
9
RISK FACTORS
You should consider, among other things, the following factors in
connection with the purchase of securities.
RISKS ASSOCIATED WITH THE SECURITIES
Securities May Not be Liquid. The liquidity of your securities may be
limited. You should consider that:
o a secondary market for the securities of any series may not develop,
or if it does, it may not provide you with liquidity of investment, or
it may not continue for the life of the securities of any series;
o issuance of any of the securities of any series in book-entry form may
reduce the liquidity of such securities in the secondary trading
market because investors may not be willing to purchase securities for
which they cannot obtain physical certificates or notes; and
o unless specified in the applicable prospectus supplement, the
securities will not be listed on any securities exchange.
The Depositor, the Master Servicer, the Servicer, the Trustee and, if
applicable, the Certificate Administrator Will Have Limited Obligations. No
class of securities of any series will be an interest in or obligation of the
depositor, the master servicer, the servicer, the trustee, the certificate
administrator (if applicable) or any of their affiliates. Unless otherwise
provided in the related prospectus supplement, the only obligations with
respect to any of the securities or the related assets will be:
o the servicer's and master servicer's servicing obligations under the
applicable agreement; and
o the obligation of the party making representations and warranties
regarding the assets of a trust, the seller of the assets of a trust,
either directly or indirectly, to the depositor or other entity
specified in the related prospectus supplement to purchase, or
substitute a substantially similar asset for any asset as to which
there is defective documentation or a breach of certain
representations and warranties made with respect to such asset.
Unless otherwise provided in the prospectus supplement, the securities and
the underlying assets will not be guaranteed or insured by any governmental
agency or instrumentality, or by the depositor, the master servicer, the
servicer, the trustee or any of their affiliates.
Credit Enhancement is Limited in Amount and Coverage. With respect to each
series of securities, credit enhancement may be provided in limited amounts to
cover certain types of losses on the underlying assets. Credit enhancement will
be provided in one or more of the forms referred to in this prospectus,
including, but not limited to: subordination of other classes of securities of
the same series; a letter of credit; a financial guaranty insurance policy; a
mortgage pool insurance policy; a special hazard insurance policy; a reserve
fund; a spread account; a cash collateral account; or other type of credit
enhancement. See "Description of Credit Support" in this prospectus.
Regardless of the form of credit enhancement provided:
o the amount of coverage will be limited in amount and in most cases
will be subject to periodic reduction in accordance with a schedule or
formula;
o may provide only very limited coverage as to certain types of losses,
and may provide no coverage as to certain types of losses; and
o all or a portion of the credit enhancement for any series of
securities may be permitted to be reduced, terminated or substituted
for, if each applicable rating agency indicates that the then-current
ratings will not be adversely affected.
Rate of Prepayment on Assets May Adversely Affect Average Lives and Yields
on the Securities. The yield on the securities of each series will depend in
part on the rate of principal payment on the
10
assets (including prepayments, liquidations due to defaults and asset
repurchases). Such yield may be adversely affected, depending upon whether a
particular security is purchased at a premium or a discount, by a higher or
lower than anticipated rate of prepayments on the related assets. In
particular:
o the yield on principal-only or interest-only securities will be
extremely sensitive to the rate of prepayments on the related assets;
and
o the yield on certain classes of securities may be relatively more
sensitive to the rate of prepayments of specified assets than other
classes of securities.
The rate of prepayments on assets is influenced by a number of factors,
including:
o the prevailing mortgage market interest rates;
o local and national economic conditions;
o homeowner mobility; and
o the ability of the borrower to obtain financing.
In addition, your yield may be adversely affected by interest shortfalls
which may result from the timing of the receipt of prepayments or liquidations
to the extent that such interest shortfalls are not covered by aggregate
servicing fees or other mechanisms specified in the applicable prospectus
supplement. Your yield also will be adversely affected if losses on the assets
in the related trust are allocated to your securities and may be adversely
affected to the extent of unadvanced delinquencies on the assets in the related
trust. Classes of securities identified in the applicable prospectus supplement
as subordinated certificates or notes are more likely to be affected by
delinquencies and losses than other classes of securities.
See "Yield Considerations" in this prospectus.
Ratings Assigned to the Securities Will Have Limitations. The ratings
assigned to your securities will not:
o assess the likelihood that principal prepayments (including those
caused by defaults) on the related assets will be made, the degree to
which the rate of such prepayments might differ from that originally
anticipated or the likelihood of early optional termination or
redemption of the series of securities; and
o address the possibility that prepayments 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.
In addition, the ratings of any series of securities by any applicable
rating agency may be lowered following the initial issuance of the securities.
The lowering of a rating on a series or class of securities may adversely
affect the market value of such securities and the liquidity of such
securities. The depositor or any of its affiliates will not have any obligation
to maintain any rating of any series of securities.
Book-Entry Securities May Experience Certain Problems. Since transactions
in the classes of securities of a Series issued in book-entry form can be
effected only through DTC, Clearstream Banking, the Euroclear System,
participating organizations, indirect participants and certain banks:
o you may experience delays in your receipts of payments of interest and
principal; and
o your ability to pledge such securities to persons or entities that do
not participate in the DTC, Clearstream
Banking or the Euroclear System may be limited due to the lack of a
physical certificate.
See "Description of the Securities -- Book-Entry Registration and
Definitive Securities" in this prospectus.
11
Risk of Loss May Be Greater on Subordinated Securities. The rights of
holders of subordinated securities will be subordinate:
o to the rights of the servicer and any master servicer (to the extent
of their servicing fees, including any unpaid servicing fees with
respect to one or more prior due periods, and its reimbursement for
certain unreimbursed advances and unreimbursed liquidation expenses);
and
o the holders of senior securities to the extent described in the
related prospectus supplement.
As a result of the foregoing, investors must be prepared to bear the risk
that they may be subject to delays in payment and may not recover their initial
investments in the subordinated securities. See "Description of Credit Support"
in this prospectus.
The yields on the subordinated securities may be extremely sensitive to
the loss experience of the related assets and the timing of any such losses. If
the actual rate and amount of losses experienced by the assets exceed the rate
and amount of such losses assumed by an investor, the yield to maturity on the
subordinated securities may be lower than anticipated.
RISKS ASSOCIATED WITH THE ASSETS
Mortgage Loans Secured by Multifamily Properties May Experience Greater
Rates of Delinquency and Foreclosure. The ability of a borrower to repay a loan
secured by an income-producing property typically is dependent primarily upon
the successful operation of such property rather than upon the existence of
independent income or assets of the borrower; thus, the value of an
income-producing property typically is directly related to the net operating
income derived from such property. If the net operating income of the property
is reduced (for example, if rental or occupancy rates decline or real estate
tax rates or other operating expenses increase), the borrower's ability to
repay the loan may be impaired. In addition, the concentration of default,
foreclosure and loss risk for a pool of mortgage loans secured by multifamily
properties may be greater than for a pool of mortgage loans secured by single
family properties of comparable aggregate unpaid principal balance because the
pool of mortgage loans secured by multifamily properties is likely to consist
of a smaller number of higher balance loans.
General Economic Conditions Affect Mortgage Loan Performance. General
economic conditions have an impact on the ability of borrowers to repay
mortgage loans. Loss of earnings, illness and other similar factors may lead to
an increase in delinquencies and bankruptcy filings by borrowers. In the event
of personal bankruptcy of a borrower under a mortgage loan, it is possible that
the holders of the related securities could experience a loss with respect to
such mortgagor's mortgage loan. In conjunction with a mortgagor's bankruptcy, a
bankruptcy court may suspend or reduce the payments of principal and interest
to be paid with respect to such mortgage loan, thus delaying the amount
received by the holders of the related securities with respect to such mortgage
loan. Moreover, if a bankruptcy court prevents the transfer of the related
mortgaged property to the related trust, any remaining balance on such mortgage
loan may not be recoverable.
Real Estate Market Conditions Affect Mortgage Loan Performance. An
investment in the securities which are secured by or represent interests in
mortgage loans may be affected by, among other things, a decline in real estate
values. There is no assurance that the values of the mortgaged properties will
remain at the levels existing on the dates of origination of the related
mortgage loans.
If the residential real estate market should experience an overall decline
in property values such that the outstanding balances of the mortgage loans
contained in a particular trust and any secondary financing on the mortgaged
properties, become equal to or greater than the value of the mortgaged
properties, delinquencies, foreclosures and losses could be higher than those
now generally experienced in the mortgage lending industry.
Geographic Concentration May Increase Rates of Loss and
Delinquency. Certain geographic regions of the United States from time to time
will experience weaker regional economic conditions
12
and housing markets, and, consequently, will experience higher rates of loss
and delinquency on assets generally. Any concentration of the assets relating
to any series of securities in such a region may present risk considerations in
addition to those generally present for similar asset-backed securities without
such concentration.
See "The Mortgage Pool" in the related prospectus supplement for further
information regarding the geographic concentration of the assets underlying the
securities of any series.
Risk of Loss May Be Greater on Junior Mortgage Loans. Certain of the
mortgage loans underlying the securities of a series may be secured by
mortgages junior or subordinate to one or more other mortgages, and the related
more senior mortgages may not be included in the trust fund. Although little
data is available, the rate of default of second or more junior mortgage loans
may be greater than that of mortgage loans secured by senior liens on
comparable properties. A primary risk to holders of mortgage loans secured by
junior mortgages is the possibility that adequate funds will not be received in
connection with a foreclosure of the related senior mortgage to satisfy fully
both the senior mortgage and the mortgage that is junior or subordinate. In
such case, holders of the securities would bear:
o the risk of delay in distributions while a deficiency judgement
against the borrower is obtained; and
o the risk of loss if the deficiency judgment is not realized upon.
Moreover, deficiency judgments may not be available in certain
jurisdictions. In addition, a junior mortgagee may not foreclose on the
property securing a junior mortgage unless it forecloses subject to the more
senior mortgage.
In servicing junior mortgages, it is generally the servicer's and master
servicer's practice to advance funds to keep the senior mortgage current if the
mortgagor is in default thereunder. The servicer and master servicer intend to
advance such amounts in accordance with their normal servicing procedures, but
only to the extent that it determines such advances will be recoverable from
future payments and collections on that mortgage loan or otherwise. Such
practice may not be followed in servicing loans more junior than second
mortgages or may be modified at any time. The related trust will have no source
of funds to satisfy any senior mortgage or make payments due to any senior
mortgagee. The junior mortgages securing the mortgage loans are subject and
subordinate to any senior mortgage affecting the related mortgaged property,
including limitations and prohibitions which may be contained in such senior
mortgage upon subordinate financing.
Special Risks of Certain Assets. Certain assets that may be included in
the Trust may involve additional uncertainties not present in other types of
assets. Certain of the assets may provide for escalating or variable payments
that may be larger than the initial payment amount; however, the borrowers
under such assets are generally approved on the basis of the initial payment
amount and the borrower's income may not be sufficient to enable them to pay
the increased payment amounts. Therefore, in such cases the likelihood of
default may increase.
Certain of the assets underlying a series of securities may be delinquent
in respect of the payment of principal and interest. In addition, certain of
the mortgagors under the mortgage loans underlying a series of securities may
be subject to personal bankruptcy proceedings. Credit enhancement provided with
respect to a particular series of securities may not cover all losses related
to such mortgage loans. Prospective investors should consider the risk that the
inclusion in a trust of delinquent assets and mortgage loans with respect to
which the mortgagor is the subject of bankruptcy proceedings may cause the rate
of the defaults and prepayments on such assets to increase and, in turn, may
cause losses to exceed the available credit enhancement for such series and
affect the yield on the securities of such series. See "The Mortgage Pool" in
the related prospectus supplement.
Defaulted Mortgage Loans May Experience Delays in Liquidation. Even
assuming the mortgaged properties provide adequate security for the mortgage
loans underlying a series of securities, substantial delays could result in
connection with the liquidation of defaulted mortgage loans. This
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could result in corresponding delays in the receipt of the related proceeds by
the related trust. See "Certain Legal Aspects of the Mortgage Loans --
Foreclosure," "-- Rights of Redemption" and "-- Anti-Deficiency Legislation, the
Bankruptcy Code and Other Limitations on Lenders" in this prospectus.
Liquidation Expenses May be Disproportionate. Liquidation expenses with
respect to defaulted assets do not vary directly with the outstanding principal
balance of the assets at the time of default. Therefore, assuming that the
servicer and master servicer took the same steps in realizing upon a defaulted
asset having a small remaining principal balance as they would in the case of a
defaulted asset having a large remaining principal balance, the amount realized
after expenses of liquidation would be smaller as a percentage of the
outstanding principal balance of the small asset than would be the case with
the defaulted asset having a large remaining principal balance. Because the
average outstanding principal balance of the assets is small relative to the
size of the average outstanding principal balance of the loans in a typical
pool consisting only of conventional purchase-money mortgage loans, net
liquidation proceeds on liquidated assets may also be smaller as a percentage
of the principal balance of the assets than would be the case in a typical pool
consisting only of conventional purchase-money mortgage loans.
Defaults May Be More Likely on Newer Assets. Certain of the assets
underlying a series of securities may be recently originated as of the date of
the inclusion in the related trust fund. Although little data is available,
defaults on assets are generally expected to occur with greater frequency in
their early years.
Balloon Payment Assets May Have a Greater Default Risk at
Maturity. Certain of the underlying a series of securities may provide for a
lump-sum payment of the unamortized principal balance of the mortgage loan at
the maturity of the asset. See "The Mortgage Pool" in the related prospectus
supplement.
Because borrowers under this type of asset are required to make a
relatively large single payment upon maturity, it is possible that the default
risk associated with such assets is greater than that associated with
fully-amortizing mortgage loans. The ability of a mortgagor on this type of
asset to repay the mortgage loan upon maturity frequently depends upon the
mortgagor's ability:
o to refinance the asset, which will be affected by a number of factors,
including, without limitation, the level of mortgage rates available
in the primary mortgage market at the time, the mortgagor's equity in
the related mortgaged property, the financial condition of the
mortgagor, the condition of the mortgaged property, tax law, general
economic conditions and the general willingness of financial
institutions and primary mortgage bankers to extend credit; or
o to sell the related mortgaged property at a price sufficient to permit
the mortgagor to make the lump-sum payment.
Texas Home Equity Loans Have Significant Limitations. Certain of the
mortgage loans may be home equity loans secured by mortgaged properties located
in Texas. The Texas Constitution permits this type of loan, but significant
limitations were imposed on permitted terms, conditions and practices incident
to their creation. For example, these loans must be made without recourse for
personal liability against the homestead owner(s) or their spouse(s) (except in
the case of actual fraud on their part in obtaining the loan) and may be
foreclosed upon only by court order. Further, holders of these types of loans
face unique legal risks and uncertainties that they do not customarily confront
with equity take-out mortgages in other states. For example, if any of the
requirements that are addressed in the amendment to the Texas Constitution
(such as limitations on fees charged to the borrower, disclosures to the
borrower or matters to be provided for in the closing documents) are not met,
the lien may be invalid. There are also similar risks involved in servicing
these types of loans, such as the failure to comply with an obligation to the
borrower within a reasonable time after receiving notification from the
borrower, that can result in the forfeiture of all principal and interest due
on the mortgage loan.
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Increased Risk of Loss if Assets are Delinquent. A portion of the assets
may be delinquent upon the issuance of the related securities. Credit
enhancement provided with respect to a particular series of securities may not
cover all losses related thereto. You should consider the risk that the
inclusion of such assets in the trust fund for a series may cause the rate of
defaults and prepayments on the assets to increase and, in turn, may cause
losses to exceed the available credit enhancement for such series and affect
the yield on the securities of such series.
Cash Flow Agreements are Subject to Counterparty Risk. The assets of a
trust fund may, if specified in the related prospectus supplement, include
agreements such as interest rate exchange agreements, interest rate cap or
floor agreements, currency exchange agreements or other similar agreements,
which will require the provider of such instrument or counterparty to make
payments to the trust fund under the circumstances described in the prospectus
supplement. To the extent that payments on the securities of the related series
depend in part on payments to be received under this type of agreement, the
ability of the trust fund to make payments on the securities will be subject to
the credit risk of the counterparty. The prospectus supplement for a series of
securities will describe any mechanism, such as the payment of any "breakage
fee," which may exist to facilitate the replacement of this type of agreement
upon the default of credit impairment of the related counterparty. However,
there can be no assurance that any such mechanism will result in the ability of
the servicer to obtain a replacement.
Sub-Prime Mortgage Loans May Experience Greater Rates of Delinquency and
Foreclosure. If specified in the related prospectus supplement, all or a
portion of the mortgage loans may consist of sub-prime mortgage loans. A
sub-prime mortgage loan is a mortgage loan that is ineligible for purchase by
Fannie Mae or the Freddie Mac due to borrower credit characteristics, property
characteristics, loan documentation guidelines or other credit characteristics
that do not meet Fannie Mae or Freddie Mac underwriting guidelines. As a
consequence:
o delinquencies and foreclosures may be expected to be more likely with
respect to sub-prime mortgage loans than with respect to mortgage
loans originated in accordance with Fannie Mae or Freddie Mac
underwriting guidelines; and
o changes in the values of the mortgaged properties may have a greater
effect on the loss experience of sub-prime mortgage loans than on
mortgage loans originated in accordance with Fannie Mae or Freddie Mac
underwriting guidelines.
VIOLATIONS OF FEDERAL LAWS OR STATE LAWS MAY ADVERSELY AFFECT ABILITY TO
COLLECT ON LOANS OR RESULT IN LOSSES
There are various federal and state laws, public policies and principles
of equity that protect consumers. Among other things, these laws, policies and
principles:
o regulate interest rate and other charges;
o require certain disclosures;
o require licensing of mortgage loan originators;
o require the lender to provide credit counseling and/or make certain
affirmative determinations regarding the borrower's ability to replay
the mortgage loan;
o prohibit discriminatory lending practices;
o limit or prohibit certain mortgage loan features, such as prepayment
penalties or balloon payments;
o regulate the use of consumer credit information; and
o regulate debt collection practices.
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Violation of certain provisions of these laws, policies and principles:
o may limit a servicer's ability to collect all or part of the principal
of or interest on the mortgage loans;
o may entitle the borrower to a refund of amounts previously paid; and
o could subject a servicer or the trust to damages and administrative
sanctions.
The seller of the assets, either directly or indirectly, to the depositor
will generally be required to repurchase any mortgage loan which, at the time
of origination, did not comply with such federal and state laws or regulations,
however that remedy may not be adequate to fully compensate the related trust
fund.
See "Certain Legal Aspects of the Mortgage Loans" in this prospectus.
In addition, certain of the mortgage loans secured by mortgaged properties
located in Texas may be subject to the provisions of Texas laws which regulate
loans other than purchase money loans. These laws provide for certain
disclosure requirements, caps on allowable fees, required loan closing
procedures and other restrictions. Failure to comply with any requirement may
render the mortgage loan unenforceable and/or the lien on the mortgaged
property invalid. There are also similar risks involved in servicing such
mortgage loans (such as the failure to comply with an obligation to the
borrower within a reasonable time after receiving notification from the
borrower) that can result in the forfeiture of all principal and interest due
on the mortgage loan.
See "Certain Legal Aspects of the Mortgage Loans-Anti -- Deficiency
Legislation, the Bankruptcy Code and Other Limitations on Lenders," "-- Texas
Home Equity Loans" and "-- Homeowners Protection Act of 1998."
MARKET VALUES OF MANUFACTURED HOMES MAY INCREASE THE RISK OF LOSS
Manufactured homes generally depreciate in value. Thus investors should
expect that, as a general matter, the market value of any manufactured home
will be lower than the outstanding principal balance of the related installment
contract. As a result, investors must be prepared to bear the risk of loss
resulting from any delinquency or liquidation loss on the contracts in a trust
fund. See "Description of Credit Support" in this prospectus.
RISK OF LOSS MAY BE GREATER ON UNSECURED HOME IMPROVEMENT LOANS
The obligations of the borrower under any unsecured home improvement loan
included in a trust fund will not be secured by an interest in the related real
estate or any other property. In the event of a default, the trust fund will
have recourse only against the borrower's assets generally, along with all
other general unsecured creditors of the borrower. In a bankruptcy or
insolvency proceeding, the obligations of the borrower under an unsecured home
improvement loan may be discharged in their entirety. As a result, the trust
fund may suffer losses. In addition, a borrower on an unsecured home
improvement loan may not demonstrate the same degree of concern over
performance of the borrower's obligations as if such obligations were secured
by the real estate or other assets owned by such borrower.
RISKS OF LOSS MAY INCREASE DUE TO DEFECTIVE SECURITY INTEREST AND EFFECTS OF
CERTAIN OTHER LEGAL ASPECTS OF THE CONTRACTS
The seller of the assets, either directly or indirectly, to the depositor
will represent that a contract is secured by a security interest in a
manufactured home. Perfection of such security interests and the right to
realize upon the value of the manufactured homes as collateral for the
contracts are subject to a number of federal and state laws, including the
Uniform Commercial Code. The steps necessary to perfect the security interest
in a manufactured home will vary from state to state. Because of the expense
and administrative inconvenience involved, the servicer or the master servicer
will not amend
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any certificates of title to change the lienholder specified therein from the
asset seller to the trustee and will not deliver any certificate of title to
the trustee or note thereon the trustee's interest. Consequently, in some
states, in the absence of such an amendment, the assignment to the trustee of
the security interest in the manufactured home may not be effective or such
security interest may not be perfected and, may not be effective against
creditors of the asset seller or a trustee in bankruptcy of the asset seller.
In addition, numerous federal and state consumer protection laws impose
requirements on lending under installment sales contracts and installment loan
agreements and the failure by the lender or seller of goods to comply with such
requirements could give rise to liabilities of assignees for amounts due under
such agreements and claims by such assignees may be subject to set-off as a
result of such lender's or seller's noncompliance. These laws would apply to
the trustee as assignee of the contracts. The asset seller of the contracts
will warrant that each contract complies with all requirements of law and will
make certain warranties relating to the validity, subsistence, perfection and
priority of the security interest in each manufactured home securing a
contract. A breach of any such warranty that materially adversely affects any
contract would create an obligation of the asset seller to repurchase, or if
permitted by the applicable agreement, substitute for, such contract unless
such breach is cured. If the credit support is exhausted and recovery of
amounts due on the contracts is dependent on repossession and resale of
manufactured homes securing contracts that are in default, certain other
factors may limit the ability to realize upon the manufactured home or may
limit the amount realized by securityholders to less than the amount due. See
"Certain Legal Aspects of the Contracts."
DESCRIPTION OF THE TRUST FUNDS
ASSETS
The primary assets of each Trust Fund (the "ASSETS") will include (i)
single family and/or multifamily mortgage loans, which may include sub-prime
mortgage loans (or certain balances thereof) (collectively, the "MORTGAGE
LOANS"), including without limitation, First Lien Mortgage Loans, Home Equity
Loans, Home Improvement Contracts and Land Sale Contracts, (ii) unsecured home
improvement loans ("UNSECURED HOME IMPROVEMENT LOANS"), (iii) manufactured
housing installment sale contracts or installment loan agreements (the
"CONTRACTS"), or (iv) a combination of Mortgage Loans, Unsecured Home
Improvement Loans and/or Contracts. The Mortgage Loans will not be guaranteed
or insured by the Depositor or any of its affiliates. The Mortgage Loans will
be guaranteed or insured by a governmental agency or instrumentality or other
person only if and to the extent expressly provided in the related prospectus
supplement. Each Asset will be selected by the Depositor for inclusion in a
Trust Fund from among those purchased, either directly or indirectly, from a
prior holder thereof (an "ASSET SELLER"), which may be an affiliate of the
Depositor and which prior holder may or may not be the originator of such
Mortgage Loan, Unsecured Home Improvement Loan or Contract.
The Assets included in the Trust Fund for a Series may be subject to
various types of payment provisions. Such Assets may consist of:
o "LEVEL PAYMENT ASSETS," which may provide for the payment of interest
and full repayment of principal in level monthly payments with a fixed
rate of interest computed on their declining principal balances;
o "ADJUSTABLE RATE ASSETS," which may provide for periodic adjustments
to their rates of interest to equal the sum (which may be rounded) of
a fixed margin and an index;
o "BUY DOWN ASSETS," which are Assets for which funds have been provided
by someone other than the related obligors to reduce the obligors'
monthly payments during the early period after origination of such
Assets;
o "INCREASING PAYMENT ASSETS," as described below;
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o "INTEREST REDUCTION ASSETS," which provide for the one-time reduction
of the interest rate payable thereon;
o "GEM ASSETS," which provide for (a) monthly payments during the first
year after origination that are at least sufficient to pay interest
due thereon, and (b) an increase in such monthly payments in
subsequent years at a predetermined rate resulting in full repayment
over a shorter term than the initial amortization terms of such
Assets;
o "GPM ASSETS," which allow for payments during a portion of their terms
which are or may be less than the amount of interest due on the unpaid
principal balances thereof, and which unpaid interest will be added to
the principal balances of such Assets and will be paid, together with
interest thereon, in later years;
o "STEP-UP RATE ASSETS" which provide for interest rates that increase
over time;
o "BALLOON PAYMENT ASSETS" which are mortgage loans that are not fully
amortizing over their terms and, thus, will require a lump-sum payment
at their stated maturity;
o "INTEREST-ONLY ASSETS" which provide for the payment of interest at
the related interest rate, but no payment of principal, for a certain
period of time following the origination of the asset;
o "ADDITIONAL COLLATERAL ASSETS" which are assets that are either (i)
secured by a security interest in additional collateral (normally
securities) owned by the borrower or (ii) supported by a third party
guarantee (usually a parent of the borrower) which is in turn secured
by a security interest in collateral (usually securities) owned by
such guarantor;
o "CONVERTIBLE ASSETS" Which are Adjustable Rate Assets subject to
provisions pursuant to which, subject to certain limitations, the
related obligors may exercise an option to convert the adjustable
interest rate to a fixed interest rate; and
o "BI-WEEKLY ASSETS," which provide for obligor payments to be made on a
bi-weekly basis.
An "INCREASING PAYMENT ASSET" is an Asset that provides for monthly
payments that are fixed for an initial period to be specified in the related
prospectus supplement and which increase thereafter (at a predetermined rate
expressed as a percentage of the monthly payment during the preceding payment
period, subject to any caps on the amount of any single monthly payment
increase) for a period to be specified in the related prospectus supplement
from the date of origination, after which the monthly payment is fixed at a
level-payment amount so as to fully amortize the Asset over its remaining term
to maturity. The scheduled monthly payment with respect to an Increasing
Payment Asset is the total amount required to be paid each month in accordance
with its terms and equals the sum of (1) the obligor's monthly payments
referred to in the preceding sentence and (2) in the case of certain Increasing
Payment Assets, payments made by the respective Servicers pursuant to buy-down
or subsidy agreements. The obligor's initial monthly payments for each
Increasing Payment Asset are set at the level-payment amount that would apply
to an otherwise identical Level Payment Asset having an interest rate a certain
number of percentage points below the Asset Rate of such Increasing Payment
Asset. The obligor's monthly payments on each Increasing Payment Asset,
together with any payments made thereon by the related Servicers pursuant to
buy-down or subsidy agreements, will in all cases be sufficient to allow
payment of accrued interest on such Increasing Payment Asset at the related
interest rate, without negative amortization. An obligor's monthly payments on
such an Asset may, however, not be sufficient to result in any reduction of the
principal balance of such Asset until after the period when such payments may
be increased.
The Securities will be entitled to payment only from the assets of the
related Trust Fund and will not be entitled to payments in respect of the
assets of any other trust fund established by the Depositor. If specified in
the related prospectus supplement, the assets of a Trust Fund will consist of
certificates representing beneficial ownership interests in, or indebtedness
of, another trust fund that contains the Assets.
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MORTGAGE LOANS
General
Each Mortgage Loan will generally be secured by a lien on (i) a one-to
four-family residential property or a security interest in shares issued by a
cooperative housing corporation (a "SINGLE FAMILY PROPERTY" and the related
Mortgage Loan a "SINGLE FAMILY MORTGAGE LOAN") or (ii) a primarily residential
property which consists of five or more residential dwelling units, and which
may include limited retail, office or other commercial space (a "MULTIFAMILY
PROPERTY" and the related Mortgage Loan a "MULTIFAMILY MORTGAGE LOAN"). Single
Family Properties and Multifamily Properties are sometimes referred to herein
collectively as "Mortgaged Properties." To the extent specified in the related
prospectus supplement, the Mortgage Loans will be secured by first and/or
junior mortgages or deeds of trust or other similar security instruments
creating a first or junior lien on Mortgaged Property. The Mortgaged Properties
may include apartments owned by cooperative housing corporations
("COOPERATIVES"). The Mortgaged Properties may include leasehold interests in
properties, the title to which is held by third party lessors. The term of any
such leasehold shall exceed the term of the related mortgage note by at least
five years or such other time period specified in the related prospectus
supplement. The Mortgage Loans may include (i) fixed or adjustable rate
conventional mortgage loans which are secured by a first lien on one- to
four-family residential property ("FIRST LIEN MORTGAGE LOANS"), (ii) closed-end
and/or revolving home equity loans or certain balances thereof secured by first
liens or junior liens on one- to four- family residential property ("HOME
EQUITY LOANS") and/or (iii) secured home improvement installment sales
contracts and secured installment loan agreements ("HOME IMPROVEMENT
CONTRACTS"). In addition, the Mortgage Loans may include certain Mortgage Loans
evidenced by contracts ("LAND SALE CONTRACTS") for the sale of properties
pursuant to which the mortgagor promises to pay the amount due thereon to the
holder thereof with fee title to the related property held by such holder until
the mortgagor has made all of the payments required pursuant to such Land Sale
Contract, at which time fee title is conveyed to the mortgagor. The Originator
of each Mortgage Loan will have been a person other than the Depositor. The
related prospectus supplement will indicate if any person who originated the
Mortgage Loans (each an "ORIGINATOR") is an affiliate of the Depositor. The
Mortgage Loans will be evidenced by promissory notes (the "MORTGAGE NOTES")
secured by mortgages, deeds of trust or other security instruments (the
"MORTGAGES") creating a lien on the Mortgaged Properties.
Loan-to-Value Ratio
The "LOAN-TO-VALUE RATIO" of a Mortgage Loan at any given time is the
ratio (expressed as a percentage) of the then outstanding principal balance of
the Mortgage Loan to the Value of the related Mortgaged Property. The "VALUE"
of a Mortgaged Property, other than with respect to Refinance Loans, is
generally the lesser of (a) the appraised value determined in an appraisal
obtained by the originator at origination of such loan and (b) the sales price
for such property. "REFINANCE LOANS" are loans made to refinance existing
loans. Unless otherwise set forth in the related prospectus supplement, the
Value of the Mortgaged Property securing a Refinance Loan is the appraised
value thereof determined in an appraisal obtained at the time of origination of
the Refinance Loan. The value of a Mortgaged Property as of the date of initial
issuance of the related Series of Securities may be less than the Value at
origination and will fluctuate from time to time based upon changes in economic
conditions and the real estate market.
Mortgage Loan Information in Prospectus Supplements
Each prospectus supplement will contain information, as of the dates
specified in such prospectus supplement and to the extent then applicable and
specifically known to the Depositor, with respect to the Mortgage Loans,
including:
o the aggregate outstanding principal balance and the largest, smallest
and average outstanding principal balance of the Mortgage Loans as of
the applicable cut-off date (the "CUT-OFF DATE") specified in the
prospectus supplement,
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o the type of property securing the Mortgage Loans,
o the weighted average (by principal balance) of the original and
remaining terms to maturity of the Mortgage Loans,
o the earliest and latest origination date and maturity date of the
Mortgage Loans,
o the range of the Loan-to-Value Ratios at origination of the Mortgage
Loans,
o the Mortgage Rates or range of Mortgage Rates and the weighted average
Mortgage Rate borne by the Mortgage Loans,
o the state or states in which most of the Mortgaged Properties are
located,
o information with respect to the prepayment provisions, if any, of the
Mortgage Loans,
o with respect to Mortgage Loans with adjustable Mortgage Rates ("ARM
LOANS"), the index, the frequency of the adjustment dates, the range
of margins added to the index, and the maximum Mortgage Rate or
monthly payment variation at the time of any adjustment thereof and
over the life of the ARM Loan,
o information regarding the payment characteristics of the Mortgage
Loans, including without limitation balloon payment and other
amortization provisions,
o the number of Mortgage Loans that are delinquent and the number of
days or ranges of the number of days such Mortgage Loans are
delinquent and
o the material underwriting standards used for the Mortgage Loans.
If specific information respecting the Mortgage Loans is not known to the
Depositor at the time Securities are initially offered, more general
information of the nature described above will be provided in the prospectus
supplement, and specific information will be set forth in a report which will
be available to purchasers of the related Securities at or before the initial
issuance thereof and will be filed as part of a Current Report on Form 8-K with
the Securities and Exchange Commission (the "SEC") after such initial issuance.
Notwithstanding the foregoing, the characteristics of the Mortgage Loans
included in a Trust Fund will not vary by more than five percent (by aggregate
principal balance as of the Cut-off Date) from the characteristics thereof that
are described in the related prospectus supplement.
The related prospectus supplement will specify whether the Mortgage Loans
include (i) First Lien Mortgage Loans, (ii) Home Equity Loans, which may be
secured by Mortgages that are junior to other liens on the related Mortgaged
Property and/or (iii) Home Improvement Contracts originated by a home
improvement contractor and secured by a Mortgage on the related Mortgaged
Property that is junior to other liens on the Mortgaged Property. The home
improvements purchased with the Home Improvement Contracts typically include
replacement windows, house siding, roofs, swimming pools, satellite dishes,
kitchen and bathroom remodeling goods, solar heating panels, patios, decks,
room additions and garages. The related prospectus supplement will specify
whether the Home Improvement Contracts are partially insured under Title I of
the National Housing Act of 1934 (the "NATIONAL HOUSING ACT") and, if so, the
limitations on such insurance. In addition, the related prospectus supplement
will specify whether the Mortgage Loans contain certain Mortgage Loans
evidenced by Land Sale Contracts.
Payment Provisions of the Mortgage Loans
All of the Mortgage Loans will provide for payments of principal, interest
or both, on due dates that occur monthly, quarterly or semi-annually or at such
other interval as is specified in the related prospectus supplement or for
payments in another manner described in the related prospectus supplement. Each
Mortgage Loan may provide for no accrual of interest or for accrual of interest
thereon at an interest rate (a "MORTGAGE RATE") that is fixed over its term or
that adjusts from time to time, or that may be converted from an adjustable to
a fixed Mortgage Rate or a different adjustable Mortgage Rate, or from a fixed
to an adjustable Mortgage Rate, from time to time pursuant to an
20
election or as otherwise specified on the related Mortgage Note, in each case
as described in the related prospectus supplement. Each Mortgage Loan may
provide for scheduled payments to maturity or payments that adjust from time to
time to accommodate changes in the Mortgage Rate or to reflect the occurrence
of certain events or that adjust on the basis of other methodologies, and may
provide for negative amortization or accelerated amortization, in each case as
described in the related prospectus supplement. Each Mortgage Loan may be fully
amortizing or require a balloon payment due on its stated maturity date, in
each case as described in the related prospectus supplement. Each Mortgage Loan
may contain prohibitions on prepayment (a "LOCK-OUT PERIOD" and, the date of
expiration thereof, a "LOCK-OUT DATE") or require payment of a premium or a
yield maintenance penalty (a "PREPAYMENT PREMIUM") in connection with a
prepayment, in each case as described in the related prospectus supplement. In
the event that holders of any Class or Classes of Offered Securities will be
entitled to all or a portion of any Prepayment Premiums collected in respect of
Mortgage Loans, the related prospectus supplement will specify the method or
methods by which any such amounts will be allocated. See "-- Assets" above.
Revolving Credit Line Loans
As more fully described in the related prospectus supplement, the Mortgage
Loans may consist, in whole or in part, of revolving Home Equity Loans or
certain balances thereof ("REVOLVING CREDIT LINE LOANS"). Interest on each
Revolving Credit Line Loan, excluding introductory rates offered from time to
time during promotional periods, may be computed and payable monthly on the
average daily outstanding principal balance of such loan. From time to time
prior to the expiration of the related draw period specified in a Revolving
Credit Line Loan, principal amounts on such Revolving Credit Line Loan may be
drawn down (up to a maximum amount as set forth in the related prospectus
supplement) or repaid. If specified in the related prospectus supplement, new
draws by borrowers under the Revolving Credit Line Loans will automatically
become part of the Trust Fund described in such prospectus supplement. As a
result, the aggregate balance of the Revolving Credit Line Loans will fluctuate
from day to day as new draws by borrowers are added to the Trust Fund and
principal payments are applied to such balances and such amounts will usually
differ each day, as more specifically described in the related prospectus
supplement. Under certain circumstances, under a Revolving Credit Line Loan, a
borrower may, during the related draw period, choose an interest only payment
option, during which the borrower is obligated to pay only the amount of
interest which accrues on the loan during the billing cycle, and may also elect
to pay all or a portion of the principal. An interest only payment option may
terminate at the end of the related draw period, after which the borrower must
begin paying at least a minimum monthly portion of the average outstanding
principal balance of the loan.
UNSECURED HOME IMPROVEMENT LOANS
The Unsecured Home Improvement Loans may consist of conventional unsecured
home improvement loans and FHA insured unsecured home improvement loans. Except
as otherwise set forth in the related prospectus supplement, the Unsecured Home
Improvement Loans will be fully amortizing and will bear interest at a fixed or
variable annual percentage rate.
Unsecured Home Improvement Loan Information in Prospectus Supplements
Each prospectus supplement will contain information, as of the dates
specified in such prospectus supplement and to the extent then applicable and
specifically known to the Depositor, with respect to the Unsecured Home
Improvement Loans, including:
o the aggregate outstanding principal balance and the largest, smallest
and average outstanding principal balance of the Unsecured Home
Improvement Loans as of the applicable Cut-Off Date,
o the weighted average (by principal balance) of the original and
remaining terms to maturity of the Unsecured Home Improvement Loans,
21
o the earliest and latest origination date and maturity date of the
Unsecured Home Improvements Loans,
o the interest rates or range of interest rates and the weighted average
interest rates borne by the Unsecured Home Improvement Loans,
o the state or states in which most of the Unsecured Home Improvement
Loans were originated,
o information with respect to the prepayment provisions, if any, of the
Unsecured Home Improvement Loans,
o with respect to the Unsecured Home Improvement Loans with adjustable
interest rates ("ARM UNSECURED HOME IMPROVEMENT LOANS"), the index,
the frequency of the adjustment dates, the range of margins added to
the index, and the maximum interest rate or monthly payment variation
at the time of any adjustment thereof and over the life of the ARM
Unsecured Home Improvement Loan,
o information regarding the payment characteristics of the Unsecured
Home Improvement Loan,
o the number of Unsecured Home Improvement Loans that are delinquent and
the number of days or ranges of the number of days such Unsecured Home
Improvement Loans are delinquent and
o the material underwriting standards used for the Unsecured Home
Improvement Loans.
If specific information respecting the Unsecured Home Improvement Loans is not
known to the Depositor at the time Securities are initially offered, more
general information of the nature described above will be provided in the
prospectus supplement, and specific information will be set forth in a report
which will be available to purchasers of the related Securities at or before
the initial issuance thereof and will be filed as part of a Current Report on
Form 8-K with the SEC after such initial issuance. Notwithstanding the
foregoing, the characteristics of the Unsecured Home Improvement Loans included
in a Trust Fund will not vary by more than five percent (by aggregate principal
balance as of the Cut-off Date) from the characteristics thereof that are
described in the related prospectus supplement.
CONTRACTS
General
To the extent provided in the related prospectus supplement, each Contract
will be secured by a security interest in a new or used manufactured home
(each, a "MANUFACTURED HOME"). Such prospectus supplement will specify the
states or other jurisdictions in which the Manufactured Homes are located as of
the related Cut-off Date. The method of computing the "LOAN-TO-VALUE RATIO" of
a Contract will be described in the related prospectus supplement.
Contract Information in Prospectus Supplements
Each prospectus supplement will contain certain information, as of the
dates specified in such prospectus supplement and to the extent then applicable
and specifically known to the Depositor, with respect to the Contracts,
including:
o the aggregate outstanding principal balance and the largest, smallest
and average outstanding principal balance of the Contracts as of the
applicable Cut-off Date,
o whether the Manufactured Homes were new or used as of the origination
of the related Contracts,
o the weighted average (by principal balance) of the original and
remaining terms to maturity of the Contracts,
22
o the earliest and latest origination date and maturity date of the
Contracts,
o the range of the Loan-to-Value Ratios at origination of the Contracts,
o the Contract Rates or range of Contract Rates and the weighted average
Contract Rate borne by the Contracts,
o the state or states in which most of the Manufactured Homes are
located at origination,
o information with respect to the prepayment provisions, if any, of the
Contracts,
o with respect to Contracts with adjustable Contract Rates ("ARM
CONTRACTS"), the index, the frequency of the adjustment dates, and the
maximum Contract Rate or monthly payment variation at the time of any
adjustment thereof and over the life of the ARM Contract,
o the number of Contracts that are delinquent and the number of days or
ranges of the number of days such Contracts are delinquent,
o information regarding the payment characteristics of the Contracts and
o the material underwriting standards used for the Contracts.
If specific information respecting the Contracts is not known to the Depositor
at the time Securities are initially offered, more general information of the
nature described above will be provided in the prospectus supplement, and
specific information will be set forth in a report which will be available to
purchasers of the related Securities at or before the initial issuance thereof
and will be filed as part of a Current Report on Form 8-K with the SEC after
such initial issuance. Notwithstanding the foregoing, the characteristics of
the Contracts included in a Trust Fund will not vary by more than five percent
(by aggregate principal balance as of the Cut-off Date) from the
characteristics thereof that are described in the related prospectus
supplement.
Payment Provisions of the Contracts
All of the Contracts will provide for payments of principal, interest or
both, on due dates that occur monthly or at such other interval as is specified
in the related prospectus supplement or for payments in another manner
described in the prospectus supplement. Each Contract may provide for no
accrual of interest or for accrual of interest thereon at an annual percentage
rate (a "CONTRACT RATE") that is fixed over its term or that adjusts from time
to time, or as otherwise specified in the related prospectus supplement. Each
Contract may provide for scheduled payments to maturity or payments that adjust
from time to time to accommodate changes in the Contract Rate as otherwise
described in the related prospectus supplement. See "-- Assets" above.
PRE-FUNDING ACCOUNT
To the extent provided in a prospectus supplement, a portion of the
proceeds of the issuance of Securities may be deposited into an account
maintained with the Trustee (a "PRE-FUNDING ACCOUNT"). In such event, the
Depositor will be obligated (subject only to the availability thereof) to sell
at a predetermined price, and the Trust Fund for the related Series of
Securities will be obligated to purchase (subject to the availability thereof),
additional Assets (the "SUBSEQUENT ASSETS") from time to time (as frequently as
daily) within the period (generally not to exceed three months) specified in
the related prospectus supplement (the "PRE-FUNDING PERIOD") after the issuance
of such Series of Securities having an aggregate principal balance
approximately equal to the amount on deposit in the Pre-Funding Account (the
"PRE-FUNDED AMOUNT") for such Series on the date of such issuance. The
Pre-Funded Amount with respect to a Series is not expected to exceed 25% of the
aggregate initial Security Balance of the related Securities. Any Subsequent
Assets will be required to satisfy certain eligibility criteria more fully set
forth in the applicable Agreement, which eligibility criteria will be
consistent with the eligibility criteria of the Assets initially included in
the Trust Fund, subject to such exceptions as are expressly stated in the
prospectus supplement. For example, the Subsequent Assets will be subject to
the same underwriting standards, representations and warranties as the Assets
23
initially included in the Trust Fund. In addition, certain conditions must be
satisfied before the Subsequent Assets are transferred into the Trust Fund such
as the delivery to the Rating Agencies and the Trustee of certain opinions of
counsel (including bankruptcy, corporate and tax opinions).
Any portion of the Pre-Funded Amount remaining in the Pre-Funding Account
at the end of the Pre-Funding Period will be used to prepay one or more Classes
of Securities in the amounts and in the manner specified in the related
prospectus supplement. In addition, if specified in the related prospectus
supplement, the Depositor may be required to deposit cash into an account
maintained by the Trustee (the "CAPITALIZED INTEREST ACCOUNT") for the purpose
of assuring the availability of funds to pay interest with respect to the
Securities during the Pre-Funding Period. Any amount remaining in the
Capitalized Interest Account at the end of the Pre-Funding Period will be
remitted as specified in the related prospectus supplement.
ACCOUNTS
Each Trust Fund will include one or more accounts, established and
maintained on behalf of the Securityholders into which the person or persons
designated in the related prospectus supplement will, to the extent described
herein and in such prospectus supplement deposit all payments and collections
received or advanced with respect to the Assets and other assets in the Trust
Fund. Such an account may be maintained as an interest bearing or a
non-interest bearing account, and funds held therein may be held as cash or
invested in certain short-term, investment grade obligations, in each case as
described in the related prospectus supplement. See "Description of the
Agreements -- Material Terms of the Pooling and Servicing Agreements and
Underlying Servicing Agreements -- Collection Account and Related Accounts."
CREDIT SUPPORT
If so provided in the related prospectus supplement, partial or full
protection against certain defaults and losses on the Assets in the related
Trust Fund may be provided to one or more Classes of Securities in the related
Series in the form of subordination of one or more other Classes of Securities
in such Series or by one or more other types of credit support, such as a
letter of credit, insurance policy, guarantee, reserve fund or another type of
credit support, or a combination thereof (any such coverage with respect to the
Securities of any Series, "CREDIT SUPPORT"). The amount and types of coverage,
the identification of the entity providing the coverage (if applicable) and
related information with respect to each type of Credit Support, if any, will
be described in the prospectus supplement for a Series of Securities. See "Risk
Factors -- Risks Associated with the Securities -- Credit Enhancement is
Limited in Amount and Coverage" and "Description of Credit Support."
CASH FLOW AGREEMENTS
If so provided in the related prospectus supplement, the Trust Fund may
include guaranteed investment contracts pursuant to which moneys held in the
funds and accounts established for the related Series will be invested at a
specified rate. The Trust Fund may also include certain other agreements, such
as interest rate exchange agreements, interest rate cap or floor agreements,
currency exchange agreements or similar agreements provided to reduce the
effects of interest rate or currency exchange rate fluctuations on the Assets
or on one or more Classes of Securities. Currency exchange agreements might be
included in the Trust Fund if some or all of the Mortgage Loans were
denominated in a non-United States currency. The principal terms of any such
guaranteed investment contract or other agreement (any such agreement, a "CASH
FLOW AGREEMENT"), including, without limitation, provisions relating to the
timing, manner and amount of payments thereunder and provisions relating to the
termination thereof, will be described in the prospectus supplement for the
related Series. In addition, the related prospectus supplement will provide
certain information with respect to the obligor under any such Cash Flow
Agreement.
24
USE OF PROCEEDS
The net proceeds to be received from the sale of the Securities will be
applied by the Depositor to the purchase of Assets, or the repayment of the
financing incurred in such purchase, and to pay for certain expenses incurred
in connection with such purchase of Assets and sale of Securities. The
Depositor expects to sell the Securities from time to time, but the timing and
amount of offerings of Securities will depend on a number of factors, including
the volume of Assets acquired by the Depositor, prevailing interest rates,
availability of funds and general market conditions.
YIELD CONSIDERATIONS
GENERAL
The yield on any Offered Security will depend on the price paid by the
holder of the Security (the "SECURITYHOLDER"), the Pass-Through Rate of the
Security, the receipt and timing of receipt of distributions on the Security
and the weighted average life of the Assets in the related Trust Fund (which
may be affected by prepayments, defaults, liquidations or repurchases). See
"Risk Factors -- Risks Associated with the Securities -- Rate of Prepayment on
Mortgage Loans May Adversely Affect Average Lives and Yields on the
Securities."
PASS-THROUGH RATE AND INTEREST RATE
Securities of any Class within a Series may have fixed, variable or
adjustable Pass-Through Rates or interest rates, which may or may not be based
upon the interest rates borne by the Assets in the related Trust Fund. The
prospectus supplement with respect to any Series of Securities will specify the
Pass-Through Rate or interest rate for each Class of such Securities or, in the
case of a variable or adjustable Pass-Through Rate or interest rate, the method
of determining the Pass-Through Rate or interest rate; the effect, if any, of
the prepayment of any Asset on the Pass-Through Rate or interest rate of one or
more Classes of Securities; and whether the distributions of interest on the
Securities of any Class will be dependent, in whole or in part, on the
performance of any obligor under a Cash Flow Agreement.
If so specified in the related prospectus supplement, the effective yield
to maturity to each holder of Securities entitled to payments of interest will
be below that otherwise produced by the applicable Pass-Through Rate or
interest rate and purchase price of such Security because, while interest may
accrue on each Asset during a certain period (each, an "ACCRUAL PERIOD"), the
distribution of such interest will be made on a day which may be several days,
weeks or months following the period of accrual.
TIMING OF PAYMENT OF INTEREST
Each payment of interest on the Securities (or addition to the Security
Balance of a Class of Accrual Securities) on the monthly, quarterly or other
periodic date specified in the related prospectus supplement on which
distributions will be made to holders of Securities (a "DISTRIBUTION DATE")
will include interest accrued during the Accrual Period for such Distribution
Date. As indicated above under "-- Pass-Through Rate and Interest Rate," if the
Accrual Period ends on a date other than the day before a Distribution Date for
the related Series, the yield realized by the holders of such Securities may be
lower than the yield that would result if the Accrual Period ended on such day
before the Distribution Date.
PAYMENTS OF PRINCIPAL; PREPAYMENTS
The yield to maturity on the Securities will be affected by the rate of
principal payments on the Assets, including principal prepayments on Mortgage
Loans and Contracts resulting from both voluntary prepayments by the borrowers
and involuntary liquidations. The rate at which principal prepayments occur on
the Mortgage Loans and Contracts will be affected by a variety of factors,
25
including, without limitation, the terms of the Mortgage Loans and Contracts,
the level of prevailing interest rates, the availability of mortgage credit and
economic, demographic, geographic, tax, legal and other factors. In general,
however, if prevailing interest rates fall significantly below the Mortgage
Rates on the Mortgage Loans comprising or underlying the Assets in a particular
Trust Fund, such Mortgage Loans are likely to be the subject of higher
principal prepayments than if prevailing rates remain at or above the rates
borne by such Mortgage Loans. In this regard, it should be noted that certain
Assets may consist of Mortgage Loans with different Mortgage Rates. The rate of
principal payments on some or all of the Classes of Securities of a Series will
correspond to the rate of principal payments on the Assets in the related Trust
Fund and is likely to be affected by the existence of Lock-out Periods and
Prepayment Premium provisions of the Mortgage Loans underlying or comprising
such Assets, and by the extent to which the servicer of any such Mortgage Loan
is able to enforce such provisions. Mortgage Loans with a Lock-out Period or a
Prepayment Premium provision, to the extent enforceable, generally would be
expected to experience a lower rate of principal prepayments than otherwise
identical Mortgage Loans without such provisions, with shorter Lock-out Periods
or with lower Prepayment Premiums. Because of the depreciating nature of
manufactured housing, which limits the possibilities for refinancing, and
because the terms and principal amounts of manufactured housing contracts are
generally shorter and smaller than the terms and principal amounts of mortgage
loans secured by site-built homes, changes in interest rates have a
correspondingly smaller effect on the amount of the monthly payments on
manufactured housing contracts than on the amount of the monthly payments on
mortgage loans secured by site-built homes. Consequently, changes in interest
rates may play a smaller role in prepayment behavior of manufactured housing
contracts than they do in the prepayment behavior of loans secured by mortgage
on site-built homes. Conversely, local economic conditions and certain of the
other factors mentioned above may play a larger role in the prepayment behavior
of manufactured housing contracts than they do in the prepayment behavior of
loans secured by mortgages on site-built homes.
If the purchaser of a Security offered at a discount calculates its
anticipated yield to maturity based on an assumed rate of distributions of
principal that is faster than that actually experienced on the Assets, the
actual yield to maturity will be lower than that so calculated. Conversely, if
the purchaser of a Security offered at a premium calculates its anticipated
yield to maturity based on an assumed rate of distributions of principal that
is slower than that actually experienced on the Assets, the actual yield to
maturity will be lower than that so calculated. In either case, if so provided
in the prospectus supplement for a Series of Securities, the effect on yield on
one or more Classes of the Securities of such Series of prepayments of the
Assets in the related Trust Fund may be mitigated or exacerbated by any
provisions for sequential or selective distribution of principal to such
Classes.
When a full prepayment is made on a Mortgage Loan or a Contract, the
obligor is charged interest on the principal amount of the Mortgage Loan or
Contract so prepaid for the number of days in the month actually elapsed up to
the date of the prepayment or such other period specified in the related
prospectus supplement. Generally, the effect of prepayments in full will be to
reduce the amount of interest paid in the following month to holders of
Securities entitled to payments of interest because interest on the principal
amount of any Mortgage Loan or Contract so prepaid will be paid only to the
date of prepayment rather than for a full month. A partial prepayment of
principal is applied so as to reduce the outstanding principal balance of the
related Mortgage Loan or Contract as of the Due Date in the month in which such
partial prepayment is received or such other date as is specified in the
related prospectus supplement.
The timing of changes in the rate of principal payments on the Assets may
significantly affect an investor's actual yield to maturity, even if the
average rate of distributions of principal is consistent with an investor's
expectation. In general, the earlier a principal payment is received on the
Mortgage Loans and distributed on a Security, the greater the effect on such
investor's yield to maturity. The effect on an investor's yield of principal
payments occurring at a rate higher (or lower) than the rate anticipated by the
investor during a given period may not be offset by a subsequent like decrease
(or increase) in the rate of principal payments.
26
The Securityholder will bear the risk of being able to reinvest principal
received in respect of a Security at a yield at least equal to the yield on
such Security.
PREPAYMENTS -- MATURITY AND WEIGHTED AVERAGE LIFE
The rates at which principal payments are received on the Assets included
in or comprising a Trust Fund and the rate at which payments are made from any
Credit Support or Cash Flow Agreement for the related Series of Securities may
affect the ultimate maturity and the weighted average life of each Class of
such Series. Prepayments on the Mortgage Loans or Contracts comprising or
underlying the Assets in a particular Trust Fund will generally accelerate the
rate at which principal is paid on some or all of the Classes of the Securities
of the related Series.
If so provided in the prospectus supplement for a Series of Securities,
one or more Classes of Securities may have a final scheduled Distribution Date,
which is the date on or prior to which the stated principal amount (the
"SECURITY BALANCE") thereof is scheduled to be reduced to zero, calculated on
the basis of the assumptions applicable to such Series set forth therein.
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 such
security will be repaid to the investor. The weighted average life of a Class
of Securities of a Series will be influenced by the rate at which principal on
the Assets is paid to such Class, which may be in the form of scheduled
amortization or prepayments (for this purpose, the term "PREPAYMENT" includes
prepayments, in whole or in part, and liquidations due to default).
In addition, the weighted average life of the Securities may be affected
by the varying maturities of the Assets in a Trust Fund. If any Assets in a
particular Trust Fund have actual terms to maturity less than those assumed in
calculating final scheduled Distribution Dates for the Classes of Securities of
the related Series, one or more Classes of such Securities may be fully paid
prior to their respective final scheduled Distribution Dates, even in the
absence of prepayments. Accordingly, the prepayment experience of the Assets
will, to some extent, be a function of the mix of Mortgage Rates or Contract
Rates and maturities of the Mortgage Loans or Contracts comprising or
underlying such Assets. See "Description of the Trust Funds."
Prepayments on loans are also commonly measured relative to a prepayment
standard or model, such as the Constant Prepayment Rate ("CPR") prepayment
model or the Standard Prepayment Assumption ("SPA") prepayment model, each as
described below. CPR represents a constant assumed rate of prepayment each
month relative to the then outstanding principal balance of a pool of loans for
the life of such loans. SPA represents an assumed rate of prepayment each month
relative to the then outstanding principal balance of a pool of loans. A
prepayment assumption of 100% of SPA assumes prepayment rates of 0.2% per annum
of the then outstanding principal balance of such loans in the first month of
the life of the loans and an additional 0.2% per annum in each month thereafter
until the thirtieth month. Beginning in the thirtieth month and in each month
thereafter during the life of the loans, 100% of SPA assumes a constant
prepayment rate of 6% per annum each month.
Neither CPR nor SPA nor any other prepayment model or assumption purports
to be a historical description of prepayment experience or a prediction of the
anticipated rate of prepayment of any pool of loans, including the Mortgage
Loans or Contracts underlying or comprising the Assets.
The prospectus supplement with respect to each Series of Securities may
contain tables, if applicable, setting forth the projected weighted average
life of each Class of Offered Securities of such Series and the percentage of
the initial Security Balance of each such Class that would be outstanding on
specified Distribution Dates based on the assumptions stated in such prospectus
supplement, including assumptions that prepayments on the Mortgage Loans
comprising or underlying the related Assets are made at rates corresponding to
various percentages of CPR, SPA or such other standard specified in such
prospectus supplement. Such tables and assumptions are intended to illustrate
the sensitivity of the weighted average life of the Securities to various
prepayment rates and will not be intended to predict or to provide information
that will enable investors to predict the actual weighted
27
average life of the Securities. It is unlikely that prepayment of any Mortgage
Loans or Contracts comprising or underlying the Assets for any Series will
conform to any particular level of CPR, SPA or any other rate specified in the
related prospectus supplement.
OTHER FACTORS AFFECTING WEIGHTED AVERAGE LIFE
Type of Asset
If so specified in the related prospectus supplement, a number of Mortgage
Loans may have balloon payments due at maturity (which may be a substantial
amount), and because the ability of a mortgagor to make a balloon payment
typically will depend upon its ability either to refinance the loan or to sell
the related Mortgaged Property, there is a risk that a number of Balloon
Payment Assets may default at maturity. The ability to obtain refinancing will
depend on a number of factors prevailing at the time refinancing or sale is
required, including, without limitation, real estate values, the mortgagor's
financial situation, prevailing mortgage loan interest rates, the mortgagor's
equity in the related Mortgaged Property, tax laws and prevailing general
economic conditions. Neither the Depositor, the Servicer, the Master Servicer
(if any), nor any of their affiliates will be obligated to refinance or
repurchase any Mortgage Loan or to sell the Mortgaged Property except to the
extent provided in the related prospectus supplement. In the case of defaults,
recovery of proceeds may be delayed by, among other things, bankruptcy of the
mortgagor or adverse conditions in the market where the property is located. In
order to minimize losses on defaulted Mortgage Loans, the Servicer may, to the
extent and under the circumstances set forth in the related prospectus
supplement, be permitted to modify Mortgage Loans that are in default or as to
which a payment default is reasonably foreseeable. Any defaulted balloon
payment or modification that extends the maturity of a Mortgage Loan will tend
to extend the weighted average life of the Securities and may thereby lengthen
the period of time elapsed from the date of issuance of a Security until it is
retired.
With respect to certain Mortgage Loans, including ARM Loans, the Mortgage
Rate at origination may be below the rate that would result if the index and
margin relating thereto were applied at origination. With respect to certain
Contracts, the Contract Rate may be "stepped up" during its term or may
otherwise vary or be adjusted. Under the applicable underwriting standards, the
mortgagor or obligor under each Mortgage Loan or Contract generally will be
qualified on the basis of the Mortgage Rate or Contract Rate in effect at
origination. The repayment of any such Mortgage Loan or Contract may thus be
dependent on the ability of the mortgagor or obligor to make larger level
monthly payments following the adjustment of the Mortgage Rate or Contract
Rate. In addition, certain Mortgage Loans may be subject to temporary buydown
plans ("BUYDOWN MORTGAGE LOANS") pursuant to which the monthly payments made by
the mortgagor during the early years of the Mortgage Loan will be less than the
scheduled monthly payments thereon (the "BUYDOWN PERIOD"). The periodic
increase in the amount paid by the mortgagor of a Buydown Mortgage Loan during
or at the end of the applicable Buydown Period may create a greater financial
burden for the mortgagor, who might not have otherwise qualified for a
mortgage, and may accordingly increase the risk of default with respect to the
related Mortgage Loan.
The Mortgage Rates on certain ARM Loans subject to negative amortization
generally adjust monthly and their amortization schedules adjust less
frequently. During a period of rising interest rates as well as immediately
after origination (initial Mortgage Rates are generally lower than the sum of
the applicable index at origination and the related margin over such index at
which interest accrues), the amount of interest accruing on the principal
balance of such Mortgage Loans may exceed the amount of the minimum scheduled
monthly payment thereon. As a result, a portion of the accrued interest on
negatively amortizing Mortgage Loans may be added to the principal balance
thereof and will bear interest at the applicable Mortgage Rate. The addition of
any such deferred interest to the principal balance of any related Class or
Classes of Securities will lengthen the weighted average life thereof and may
adversely affect yield to holders thereof, depending upon the price at which
such Securities were purchased. In addition, with respect to certain ARM Loans
subject to negative amortization, during a period of declining interest rates,
it might be expected that each minimum scheduled monthly payment on such a
Mortgage Loan would exceed the amount of scheduled
28
principal and accrued interest on the principal balance thereof, and since such
excess will be applied to reduce the principal balance of the related Class or
Classes of Securities, the weighted average life of such Securities will be
reduced and may adversely affect yield to holders thereof, depending upon the
price at which such Securities were purchased.
As may be described in the related prospectus supplement, the applicable
Agreement may provide that all or a portion of the principal collected on or
with respect to the related Mortgage Loans may be applied by the related
Trustee to the acquisition of additional Mortgage Loans during a specified
period (rather than used to fund payments of principal to Securityholders
during such period) with the result that the related securities possess an
interest-only period, also commonly referred to as a revolving period, which
will be followed by an amortization period. Any such interest-only or revolving
period may, upon the occurrence of certain events to be described in the
related prospectus supplement, terminate prior to the end of the specified
period and result in the earlier than expected amortization of the related
Securities.
In addition, and as may be described in the related prospectus supplement,
the related Agreement may provide that all or a portion of such collected
principal may be retained by the Trustee (and held in certain temporary
investments, including Mortgage Loans) for a specified period prior to being
used to fund payments of principal to Securityholders.
The result of such retention and temporary investment by the Trustee of
such principal would be to slow the amortization rate of the related Securities
relative to the amortization rate of the related Mortgage Loans, or to attempt
to match the amortization rate of the related Securities to an amortization
schedule established at the time such Securities are issued. Any such feature
applicable to any Securities may terminate upon the occurrence of events to be
described in the related prospectus supplement, resulting in the current
funding of principal payments to the related Securityholders and an
acceleration of the amortization of such Securities.
Termination
If so specified in the related prospectus supplement, a Series of
Securities may be subject to optional early termination through the repurchase
of the Assets in the related Trust Fund by the party specified therein, on any
date on which the aggregate principal balance of the Assets or the aggregate
Security Balance of the Securities of such Series declines to a percentage
specified in the related prospectus supplement (not to exceed 10%) of the
aggregate initial principal balance of such Assets or initial Security Balance
of such Securities, as the case may be, under the circumstances and in the
manner set forth therein. In addition, if so provided in the related prospectus
supplement, certain Classes of Securities may be purchased or redeemed in the
manner set forth therein. See "Description of the Securities -- Termination."
Defaults
The rate of defaults on the Assets will also affect the rate, timing and
amount of principal payments on the Assets and thus the yield on the
Securities. In general, defaults on mortgage loans or contracts are expected to
occur with greater frequency in their early years. The rate of default on
Mortgage Loans which are refinance or limited documentation mortgage loans, and
on Mortgage Loans with high Loan-to-Value Ratios, may be higher than for other
types of Mortgage Loans. Furthermore, the rate and timing of prepayments,
defaults and liquidations on the Mortgage Loans and Contracts will be affected
by the general economic condition of the region of the country in which the
related Mortgage Properties or Manufactured Homes are located. The risk of
delinquencies and loss is greater and prepayments are less likely in regions
where a weak or deteriorating economy exists, as may be evidenced by, among
other factors, increasing unemployment or falling property values.
Foreclosures
The number of foreclosures or repossessions and the principal amount of
the Mortgage Loans or Contracts comprising or underlying the Assets that are
foreclosed or repossessed in relation to the
29
number and principal amount of Mortgage Loans or Contracts that are repaid in
accordance with their terms will affect the weighted average life of the
Mortgage Loans or Contracts comprising or underlying the Assets and that of the
related Series of Securities.
Refinancing
At the request of a mortgagor, the Servicer may allow the refinancing of a
Mortgage Loan or Contract in any Trust Fund by accepting prepayments thereon
and permitting a new loan secured by a mortgage on the same property. In the
event of such a refinancing, the new loan would not be included in the related
Trust Fund and, therefore, such refinancing would have the same effect as a
prepayment in full of the related Mortgage Loan or Contract. A Servicer may,
from time to time, implement programs designed to encourage refinancing. Such
programs may include, without limitation, modifications of existing loans,
general or targeted solicitations, the offering of pre-approved applications,
reduced origination fees or closing costs, or other financial incentives. In
addition, Servicers may encourage the refinancing of Mortgage Loans or
Contracts, including defaulted Mortgage Loans or Contracts, that would permit
creditworthy borrowers to assume the outstanding indebtedness of such Mortgage
Loans or Contracts.
Due-on-Sale Clauses
Acceleration of mortgage payments as a result of certain transfers of
underlying Mortgaged Property is another factor affecting prepayment rates that
may not be reflected in the prepayment standards or models used in the relevant
prospectus supplement. A number of the Mortgage Loans comprising or underlying
the Assets may include "due-on-sale clauses" that allow the holder of the
Mortgage Loans to demand payment in full of the remaining principal balance of
the Mortgage Loans upon sale, transfer or conveyance of the related Mortgaged
Property. With respect to any Mortgage Loans, except as set forth in the
related prospectus supplement, the Servicer will generally enforce any
due-on-sale clause to the extent it has knowledge of the conveyance or proposed
conveyance of the underlying Mortgaged Property and it is entitled to do so
under applicable law; provided, however, that the Servicer will not take any
action in relation to the enforcement of any due-on-sale provision which would
adversely affect or jeopardize coverage under any applicable insurance policy.
See "Certain Legal Aspects of Mortgage Loans -- Due-on-Sale Clauses" and
"Description of the Agreements -- Material Terms of the Pooling and Servicing
Agreements and Underlying Servicing Agreements -- Due-on-Sale Provisions." The
Contracts, in general, prohibit the sale or transfer of the related
Manufactured Homes without the consent of the Servicer and permit the
acceleration of the maturity of the Contracts by the Servicer upon any such
sale or transfer that is not consented to. It is expected that the Servicer
will permit most transfers of Manufactured Homes and not accelerate the
maturity of the related Contracts. In certain cases, the transfer may be made
by a delinquent obligor in order to avoid a repossession of the Manufactured
Home. In the case of a transfer of a Manufactured Home after which the Servicer
desires to accelerate the maturity of the related Contract, the Servicer's
ability to do so will depend on the enforceability under state law of the
"due-on-sale clause". See "Certain Legal Aspects of the Contracts -- Transfers
of Manufactured Homes; Enforceability of Due-on-Sale Clauses."
THE DEPOSITOR
Wachovia Asset Securitization, Inc. (the "DEPOSITOR") is an indirect
wholly-owned subsidiary of Wachovia Corporation and was incorporated in the
State of North Carolina on February 27, 1996. The principal executive offices
of the Depositor are located at 8739 Research Drive, NC0121-Suite D, Charlotte,
North Carolina 28288-0121. Its telephone number is (704) 596-7616.
The Depositor formerly was an indirect wholly-owned subsidiary of First
Union Corporation. On September 1, 2001, Wachovia Corporation was merged with
and into First Union Corporation with the later entity surviving. Upon
completion of the merger, the surviving entity changed its name to Wachovia
Corporation. As a result, the Depositor is now an indirect wholly-owned
subsidiary of Wachovia Corporation.
The Depositor does not have, nor is it expected in the future to have, any
significant assets.
30
DESCRIPTION OF THE SECURITIES
GENERAL
The asset-backed certificates (the "CERTIFICATES") of a series (each, a
"SERIES") (including any Class of Certificates not offered hereby) will
represent the entire beneficial ownership interest in the trust fund (the
"TRUST" or the "TRUST FUND") created pursuant to the applicable Agreement. If a
Series of Securities includes asset-backed notes (the "NOTES" and, together
with the Certificates, the "SECURITIES"), such Notes will represent
indebtedness of the related Trust Fund and will be issued and secured pursuant
to an Indenture. Each Series of Securities will consist of one or more classes
(each, a "CLASS") of Securities that may:
o provide for the accrual of interest thereon based on fixed, variable
or adjustable rates;
o be senior (the "SENIOR CERTIFICATES" or the "SENIOR NOTES" and,
collectively, "SENIOR SECURITIES") or subordinate (the "SUBORDINATE
CERTIFICATES" or the "SUBORDINATE NOTES" and, collectively,
"SUBORDINATE SECURITIES") to one or more other Classes of Securities
in respect of certain distributions on the Securities;
o be entitled either to (A) principal distributions, with
disproportionately low, nominal or no interest distributions or (B)
interest distributions, with disproportionately low, nominal or no
principal distributions (collectively, "STRIP SECURITIES");
o provide for distributions of accrued interest thereon commencing only
following the occurrence of certain events, such as the retirement of
one or more other Classes of Securities of such Series (collectively,
"ACCRUAL SECURITIES");
o provide for payments of principal as described in the related
prospectus supplement, from all or only a portion of the Assets in
such Trust Fund, to the extent of available funds, in each case as
described in the related prospectus supplement; and/or
o provide for distributions based on a combination of two or more
components thereof with one or more of the characteristics described
in this paragraph including a Strip Security component.
If so specified in the related prospectus supplement, distributions on one or
more Classes of a Series of Securities may be limited to collections from a
designated portion of the Assets in the related Trust Fund (each such portion
of Assets, an "ASSET GROUP"). Any such Classes may include Classes of
Securities of a Series offered pursuant to this prospectus and a related
prospectus supplement (the "OFFERED SECURITIES").
Each Class of Offered Securities of a Series will be issued in minimum
denominations corresponding to the Security Balances or, in the case of certain
Classes of Strip Securities, notional amounts or percentage interests specified
in the related prospectus supplement. The transfer of any Offered Securities
may be registered and such Securities may be exchanged without the payment of
any service charge payable in connection with such registration of transfer or
exchange, but the Depositor or the Trustee or any agent thereof may require
payment of a sum sufficient to cover any tax or other governmental charge. One
or more Classes of Securities of a Series may be issued in fully registered,
certificated form ("DEFINITIVE SECURITIES") or in book-entry form ("BOOK-ENTRY
SECURITIES"), as provided in the related prospectus supplement. See "Risk
Factors -- Risks Associated with the Securities -- Book-Entry Securities May
Experience Certain Problems" and "Description of the Securities -- Book-Entry
Registration and Definitive Securities." Definitive Securities will be
exchangeable for other Securities of the same Class and Series of a like
aggregate Security Balance, notional amount or percentage interest but of
different authorized denominations. See "Risk Factors -- Risks Associated with
the Securities -- Securities May Not be Liquid."
DISTRIBUTIONS
Distributions on the Securities of each Series will be made by or on
behalf of the Trustee on each Distribution Date as specified in the related
prospectus supplement from the Available Distribution
31
Amount for such Series and such Distribution Date. Distributions (other than
the final distribution) will be made to the persons in whose names the
Securities are registered at the close of business on, unless a different date
is specified in the related prospectus supplement, the last business day of the
month preceding the month in which the Distribution Date occurs (the "RECORD
DATE"), and the amount of each distribution will be determined as of the close
of business on the date specified in the related prospectus supplement (the
"DETERMINATION DATE"). All distributions with respect to each Class of
Securities on each Distribution Date will be allocated pro rata among the
outstanding Securityholders in such Class or by random selection or as
described in the related prospectus supplement. Payments will be made either by
wire transfer in immediately available funds to the account of a Securityholder
at a bank or other entity having appropriate facilities therefor, if such
Securityholder has so notified the Trustee or other person required to make
such payments no later than the date specified in the related prospectus
supplement (and, if so provided in the related prospectus supplement, holds
Securities in the requisite amount specified therein), or by check mailed to
the address of the person entitled thereto as it appears on the security
register; provided, however, that the final distribution in retirement of the
Securities will be made only upon presentation and surrender of the Securities
at the location specified in the notice to Securityholders of such final
distribution.
AVAILABLE DISTRIBUTION AMOUNT
All distributions on the Securities of each Series on each Distribution
Date will be made from the Available Distribution Amount described below, in
accordance with the terms described in the related prospectus supplement.
Generally, the "AVAILABLE DISTRIBUTION AMOUNT" for each Distribution Date
equals the sum of the following amounts:
o the total amount of all cash on deposit in the related Collection
Account as of the corresponding Determination Date, exclusive of:
(a) all scheduled payments of principal and interest collected
but due on a date subsequent to the related Due Period (unless a
different period is specified in the related prospectus supplement, a
"DUE PERIOD" with respect to any Distribution Date will commence on
the second day of the month in which the immediately preceding
Distribution Date occurs, or the day after the Cut-off Date in the
case of the first Due Period, and will end on the first day of the
month of the related Distribution Date),
(b) all prepayments, together with related payments of the
interest thereon and related Prepayment Premiums, all proceeds of any
insurance policies to be maintained in respect of each Asset (to the
extent such proceeds are not applied to the restoration of the Asset
or released in accordance with the normal servicing procedures of a
Servicer, subject to the terms and conditions applicable to the
related Asset) (collectively, "INSURANCE PROCEEDS"), all other amounts
received and retained in connection with the liquidation of Assets in
default in the Trust Fund ("LIQUIDATION PROCEEDS"), and other
unscheduled recoveries received subsequent to the related Due Period,
(c) all amounts in the Collection Account that are due or
reimbursable to the Depositor, the Trustee, an Asset Seller, a
Servicer, the Master Servicer or any other entity as specified in the
related prospectus supplement or that are payable in respect of
certain expenses of the related Trust Fund, and
(d) all amounts received for a repurchase of an Asset from the
Trust Fund for defective documentation or a breach of representation
or warranty received subsequent to the related Due Period;
o if the related prospectus supplement so provides, interest or
investment income on amounts on deposit in the Collection Account,
including any net amounts paid under any Cash Flow Agreements;
32
o all advances made by a Servicer or the Master Servicer (if any) or any
other entity as specified in the related prospectus supplement with
respect to such Distribution Date;
o if and to the extent the related prospectus supplement so provides,
amounts paid by a Servicer or any other entity as specified in the
related prospectus supplement with respect to interest shortfalls
resulting from prepayments during the related Prepayment Period; and
o to the extent not on deposit in the related Collection Account as of
the corresponding Determination Date, any amounts collected under,
from or in respect of any Credit Support with respect to such
Distribution Date.
As described below, the entire Available Distribution Amount will be
distributed among the related Securities (including any Securities not offered
hereby) on each Distribution Date, and accordingly will be released from the
Trust Fund and will not be available for any future distributions.
The related prospectus supplement for a Series of Securities will describe
any variation in the calculation of the Available Distribution Amount for such
Series.
DISTRIBUTIONS OF INTEREST ON THE SECURITIES
Each Class of Securities (other than Classes of Strip Securities that have
no Pass-Through Rate or interest rate) may have a different Pass-Through Rate
or interest rate, which will be a fixed, variable or adjustable rate at which
interest will accrue on such Class or a Component thereof (the "PASS-THROUGH
RATE" in the case of Certificates). The related prospectus supplement will
specify the Pass-Through Rate or interest rate for each Class or Component or,
in the case of a variable or adjustable Pass-Through Rate or interest rate, the
method for determining the Pass-Through Rate or interest rate. Interest on the
Securities will be calculated on the basis of a 360-day year consisting of
twelve 30-day months unless the related prospectus supplement specifies a
different basis.
Distributions of interest in respect of the Securities of any Class will
be made on each Distribution Date (other than any Class of Accrual Securities,
which will be entitled to distributions of accrued interest commencing only on
the Distribution Date, or under the circumstances, specified in the related
prospectus supplement, and any Class of Strip Securities that are not entitled
to any distributions of interest) based on the Accrued Security Interest for
such Class and such Distribution Date, subject to the sufficiency of the
portion of the Available Distribution Amount allocable to such Class on such
Distribution Date. Prior to the time interest is distributable on any Class of
Accrual Securities, the amount of Accrued Security Interest otherwise
distributable on such Class will be added to the Security Balance thereof on
each Distribution Date. With respect to each Class of Securities and each
Distribution Date (other than certain Classes of Strip Securities), "ACCRUED
SECURITY INTEREST" will be equal to interest accrued during the related Accrual
Period on the outstanding Security Balance thereof immediately prior to the
Distribution Date, at the applicable Pass-Through Rate or interest rate,
reduced as described below. Accrued Security Interest on certain Classes of
Strip Securities will be equal to interest accrued during the related Accrual
Period on the outstanding notional amount thereof immediately prior to each
Distribution Date, at the applicable Pass-Through Rate or interest rate,
reduced as described below, or interest accrual in the manner described in the
related prospectus supplement. The method of determining the notional amount
for a certain Class of Strip Securities will be described in the related
prospectus supplement. Reference to notional amount is solely for convenience
in certain calculations and does not represent the right to receive any
distributions of principal. Unless otherwise provided in the related prospectus
supplement, the Accrued Security Interest on a Series of Securities will be
reduced in the event of prepayment interest shortfalls, which are shortfalls in
collections of interest for a full accrual period resulting from prepayments
prior to the due date in such accrual period on the Mortgage Loans or Contracts
comprising or underlying the Assets in the Trust Fund for such Series. The
particular manner in which such shortfalls are to be allocated among some or
all of the Classes of Securities of that Series will be specified in the
related prospectus supplement. The related prospectus supplement will also
describe the extent to which the amount of Accrued Security Interest that is
otherwise distributable on (or, in the case of Accrual Securities, that may
otherwise be added to the Security Balance of) a Class of
33
Offered Securities may be reduced as a result of any other contingencies,
including delinquencies, losses and deferred interest on or in respect of the
Mortgage Loans or Contracts comprising or underlying the Assets in the related
Trust Fund. Unless otherwise provided in the related prospectus supplement, any
reduction in the amount of Accrued Security Interest otherwise distributable on
a Class of Securities by reason of the allocation to such Class of a portion of
any deferred interest on the Mortgage Loans or Contracts comprising or
underlying the Assets in the related Trust Fund will result in a corresponding
increase in the Security Balance of such Class. See "Risk Factors -- Risk
Associated with the Securities -- Rate of Prepayment on Assets May Adversely
Affect Average Lives and Yields on the Securities" and "Yield Considerations."
DISTRIBUTIONS OF PRINCIPAL OF THE SECURITIES
The Securities of each series, other than certain Classes of Strip
Securities, will have a Security Balance which, at any time, will equal the
then maximum amount that the holder will be entitled to receive in respect of
principal out of the future cash flow on the Assets and other assets included
in the related Trust Fund. The outstanding Security Balance of a Security will
be reduced to the extent of distributions of principal thereon from time to
time and, if and to the extent so provided in the related prospectus
supplement, by the amount of losses incurred in respect of the related Assets,
may be increased in respect of deferred interest on the related Mortgage Loans
to the extent provided in the related prospectus supplement and, in the case of
Accrual Securities prior to the Distribution Date on which distributions of
interest are required to commence, will be increased by any related Accrued
Security Interest. If so specified in the related prospectus supplement, the
initial aggregate Security Balance of all Classes of Securities of a Series
will be greater than the outstanding aggregate principal balance of the related
Assets as of the applicable Cut-off Date. The initial aggregate Security
Balance of a series and each Class thereof will be specified in the related
prospectus supplement. Distributions of principal will be made on each
Distribution Date to the Class or Classes of Securities in the amounts and in
accordance with the priorities specified in the related prospectus supplement.
Certain Classes of Strip Securities with no Security Balance are not entitled
to any distributions of principal.
CATEGORIES OF CLASSES OF SECURITIES
The Securities of any Series may be comprised of one or more Classes. Such
Classes, in general, fall into different categories. The following chart
identifies and generally defines certain of the more typical categories. The
prospectus supplement for a Series of Securities may identify the Classes which
comprise such Series by reference to the following categories or another
category specified in the applicable prospectus supplement.
CATEGORIES OF CLASSES DEFINITION
- --------------------- ----------
PRINCIPAL TYPES
ACCRETION DIRECTED CERTIFICATES OR
NOTES ........................... A Class of Certificates or Notes that receives principal
payments from amounts that would otherwise be distributed
as interest on specified Accrual Certificates or Notes. Such
principal payments may be in lieu of or in addition to
principal payments from principal receipts on the Assets for
the related Series.
34
CATEGORIES OF CLASSES DEFINITION
- --------------------- ----------
COMPANION CERTIFICATES OR NOTES
(ALSO SOMETIMES REFERRED TO AS
"SUPPORT CERTIFICATES" OR
"SUPPORT NOTES") ....................... A Class of Certificates or Notes that is entitled to receive
principal payments on any Distribution Date only if
scheduled payments have been made on specified Planned
Amortization Certificates or Notes, Targeted Amortization
Certificates or Notes and/or Scheduled Amortization
Certificates or Notes.
COMPONENT CERTIFICATES OR NOTES ......... A Class of Certificates or Notes consisting of two or more
specified components (each, a "COMPONENT") as described in
the applicable prospectus supplement. The Components of a
Class of Component Certificates or Notes may have different
principal and/or interest payment characteristics but together
constitute a single Class and do not represent severable
interests. Each Component of a Class of Component
Certificates or Notes may be identified as falling into one or
more of the categories in this chart.
LOCKOUT CERTIFICATES OR NOTES ........... A Class of Senior Certificates or Notes that is designed not to
participate in or to participate to a limited extent in (i.e., to
be "locked out" of), for a specified period, the receipt of
(1) principal prepayments on the Assets that are allocated
disproportionately to the Classes of Senior Certificates or
Notes of such Series as a group pursuant to a "shifting
interest" structure and/or (2) scheduled principal payments on
the Assets that are allocated to the Classes of Senior
Certificates or Notes as a group. A Class of Lockout
Certificates or Notes will typically not be entitled to receive,
or will be entitled to receive only a restricted portion of,
distributions or principal prepayments and/or scheduled
principal payments, as applicable, for a period of several
years, during which time all or a portion of such principal
payments that it would otherwise be entitled to receive in the
absence of a "lockout" structure will be distributed in
reduction of the principal balances of other Classes of Senior
Certificates or Notes. Lockout Certificates or Notes are
designed to minimize weighted average life volatility during
the lockout period.
NOTIONAL AMOUNT CERTIFICATES OR
NOTES .................................. A Class of Certificates or Notes having no principal balance
and bearing interest on the related notional amount. The
notional amount is used for purposes of the determination of
interest distributions.
35
CATEGORIES OF CLASSES DEFINITION
- --------------------- ----------
PASS-THROUGH CERTIFICATES OR
NOTES .................................. A Class of Senior Securities that is entitled to receive all or a
specified percentage of the principal payments that are
distributable to the Senior Certificates or applicable group of
Senior Certificates or Notes (other than any Ratio Strip
Certificates or Notes) in the aggregate on a Distribution Date
and that is not designated as a Class of Sequential Pay
Certificates or Notes.
PLANNED AMORTIZATION CERTIFICATES
OR NOTES (ALSO SOMETIMES
REFERRED TO AS A "PAC
CERTIFICATES" OR "PAC NOTES") .......... A Class of Certificates or Notes that is designed to receive
principal payments using a predetermined principal balance
schedule derived by assuming two constant prepayment rates
for the underlying Assets. These two rates are the endpoints
for the "structuring range" for the Class of Planned
Amortization Certificates or Notes. The Planned
Amortization Certificates or Notes in any Series of Securities
may be subdivided into different categories (e.g., Planned
Amortization Certificates or Notes I ("PAC I"), Planned
Amortization Certificates or Notes II ("PAC II") and so
forth) derived using different structuring ranges and/or
payment priorities. A Class of PAC Certificates or Notes is
designed to provide protection against volatility of weighted
average life if prepayments occur at a constant rate within the
structuring range.
RATIO STRIP CERTIFICATES OR NOTES ....... A Class of Certificates or Notes that is entitled to receive a
constant proportion, or "ratio strip," of the principal
payments on the underlying Assets.
SCHEDULED AMORTIZATION
CERTIFICATES OR NOTES (ALSO
SOMETIMES REFERRED TO AS
"SCHEDULED CERTIFICATES" OR
"SCHEDULED NOTES") ..................... A Class of Certificates or Notes that is designed to receive
principal payments using a predetermined principal balance
schedule but is not designated as a Class of Planned
Amortization Certificates or Notes or Targeted Amortization
Certificates or Notes. The schedule is derived by assuming
either two constant prepayment rates or a single constant
prepayment rate for the underlying Assets. In the former
case, the two rates are the endpoints for the "structuring
range" for the Scheduled Amortization Certificates or Notes
and such range generally is narrower than that for a Planned
Amortization Certificates or Notes. Typically, the Companion
Certificates or Notes for the applicable Series of Certificates
or Notes generally will represent a smaller percentage of the
Class of Scheduled Amortization Certificates or Notes than
Companion Certificates or Notes generally would represent in
relation to a Class of Planned Amortization Certificates or
36
CATEGORIES OF CLASSES DEFINITION
- --------------------- ----------
Notes or Targeted Amortization Certificates or Notes. A
Class of Scheduled Amortization Certificates or Notes is
generally less sensitive to weighted average life volatility as a
result of prepayments than a Class of Companion Certificates
or Notes but more sensitive than a Class of Planned
Amortization Certificates or Notes or Targeted Amortization
Certificates or Notes.
SENIOR CERTIFICATES OR NOTES ............ A Class of Certificates or Notes that is entitled to receive
payments of principal and interest on each Distribution Date
prior to the Classes of Subordinated Securities.
SEQUENTIAL PAY CERTIFICATES OR
NOTES .................................. A Class of Certificates or Notes that is entitled to receive
principal payments in a prescribed sequence, that does not
have a predetermined principal balance schedule and that, in
most cases, is entitled to receive payments of principal
continuously from the first Distribution Date on which it
receives principal until it is retired. A Class of Sequential Pay
Certificates or Notes may receive principal payments
concurrently with one or more other Classes of Sequential
Pay Certificates or Notes. A single Class the is entitled to
receive principal payments before or after other Classes in
the same Series of Securities may be identified as a Class of
Sequential Pay Certificates or Notes.
SUBORDINATED CERTIFICATES OR
NOTES .................................. A Class of Certificates or Notes that is entitled to receive
payments of principal and interest on each Distribution Date
only after the Senior Securities and Classes of Subordinated
Securities with higher priority of distributions, if any, have
received their full principal and interest entitlements.
SUPER SENIOR CERTIFICATES OR
NOTES .................................. A Class of Senior Certificates or Notes that will not bear its
share of certain losses after the Classes of Subordinated
Certificates or Notes are no longer outstanding for so long as
one or more other specified Classes of Senior Certificates or
Notes are outstanding.
SUPER SENIOR SUPPORT CERTIFICATES
OR NOTES ............................... A Class of Senior Certificates or Notes that bears certain
losses allocated to one or more Classes of Super Senior
Certificates or Notes after the Classes of Subordinated
Certificates or Notes are no longer outstanding.
TARGETED AMORTIZATION CERTIFICATES
OR NOTES (ALSO SOMETIMES
REFERRED TO AS A "TAC
CERTIFICATES" OR "TAC NOTES") .......... A Class of Certificates or Notes that is designed to receive
principal payments using a predetermined principal balance
schedule derived by assuming a single constant prepayment
37
CATEGORIES OF CLASSES DEFINITION
- --------------------- ----------
rate for the underlying Assets. A Class of TAC Certificates or
TAC Notes is designed to provide some protection against
shortening of weighted average life if prepayments occur at a
rate exceeding the assumed constant prepayment rate used to
derive the principal balances schedule of such Class of
Certificates or Notes.
INTEREST TYPES
ACCRUAL CERTIFICATES OR NOTES ........... A Class of Certificates or Notes that accretes the amount of
accrued interest otherwise distributable on such Class, which
amount will be added as principal to the principal balance of
such Class on each applicable Distribution Date. Such
accretion may continue until some specified event has
occurred or until such Accrual Certificates or Notes are
retired.
FIXED RATE CERTIFICATES OR NOTES ........ A Class of Certificates or Notes with an interest rate that is
fixed throughout the life of the Class.
FLOATING RATE CERTIFICATES OR
NOTES .................................. A Class of Certificates or Notes with an interest rate that
resets periodically based upon a designated index and that
varies directly with changes in such index.
INTEREST ONLY CERTIFICATES OR
NOTES .................................. A Class that is entitled to receive some or all of the interest
payments made on the Assets and little or no principal.
Interest Only Certificates or Notes have either no principal
balance, a nominal principal balance or a notional amount. A
nominal principal balance represents actual principal that will
be paid on the Certificates or Notes. It is referred to as
nominal since it is extremely small compared to other Classes.
A notional amount is the amount used as a reference to
calculate the amount of interest due on a Class of Interest
Only Certificates or Notes that is not entitled to any
distributions in respect of principal.
INVERSE FLOATING RATE CERTIFICATES
OR NOTES ............................... A Class of Certificates or Notes with an interest rate that
resets periodically based upon a designated index and that
varies inversely with changes in such index and with changes
in the interest rate payable on the related Class of Floating
Rate Certificates or Notes.
PREPAYMENT PREMIUM CERTIFICATES
OR NOTES ............................... A Class of Certificates or Notes that is only entitled to
penalties or premiums, if any, due in connection with a full or
partial prepayment of an Asset.
38
CATEGORIES OF CLASSES DEFINITION
- --------------------- ----------
PRINCIPAL ONLY CERTIFICATES OR
NOTES .................................. A Class of Certificates or Notes that does not bear interest
and is entitled to receive only distributions in respect of
principal.
STEP COUPON CERTIFICATES OR
NOTES .................................. A Class of Certificates or Notes with a fixed interest rate that
is reduced to a lower fixed rate after a specific period of time.
The difference between the initial interest rate and the lower
interest rate will be supported by a reserve fund established
on the closing date.
VARIABLE RATE CERTIFICATES OR
NOTES .................................. A Class of Certificates or Notes with an interest rate that
resets periodically and is calculated by reference to the rate
or rates of interest applicable to the Assets.
COMPONENTS
To the extent specified in the related prospectus supplement, distribution
on a Class of Securities may be based on a combination of two or more different
Components as described under "-- General" above. To such extent, the
descriptions set forth under "-- Distributions of Interest on the Securities"
and "-- Distributions of Principal of the Securities" above also relate to
Components of such a Class of Securities. In such case, reference in such
sections to Security Balance and Pass-Through Rate or interest rate refer to
the principal balance, if any, of any such Component and the Pass-Through Rate
or interest rate, if any, on any such Component, respectively.
DISTRIBUTIONS ON THE SECURITIES OF PREPAYMENT PREMIUMS
If so provided in the related prospectus supplement, Prepayment Premiums
that are collected on the Mortgage Loans in the related Trust Fund will be
distributed on each Distribution Date to the Class or Classes of Securities
entitled thereto in accordance with the provisions described in such prospectus
supplement.
ALLOCATION OF LOSSES AND SHORTFALLS
If so provided in the prospectus supplement for a Series of Securities
consisting of one or more Classes of Subordinate Securities, on any
Distribution Date in respect of which losses or shortfalls in collections on
the Assets have been incurred, the amount of such losses or shortfalls will be
borne first by a Class of Subordinate Securities in the priority and manner and
subject to the limitations specified in such prospectus supplement. See
"Description of Credit Support" for a description of the types of protection
that may be included in a Trust Fund against losses and shortfalls on Assets
comprising such Trust Fund.
ADVANCES IN RESPECT OF DELINQUENCIES
With respect to any Series of Securities evidencing an interest in a Trust
Fund, if so provided in the related prospectus supplement, the Servicer or
another entity described therein will be required as part of its servicing
responsibilities to advance on or before each Distribution Date its own funds
or funds held in the Collection Account that are not included in the Available
Distribution Amount for such Distribution Date, in an amount equal to the
aggregate of payments of principal (other than any balloon payments) and
interest (net of related servicing fees and Retained Interest) that were due on
the Assets in such Trust Fund during the related Due Period and were delinquent
on the related Determination Date, subject to the Servicer's (or another
entity's) good faith determination that such
39
advances will be reimbursable from Related Proceeds (as defined below). In the
case of a Series of Securities that includes one or more Classes of Subordinate
Securities and if so provided in the related prospectus supplement, the
Servicer's (or another entity's) advance obligation may be limited only to the
portion of such delinquencies necessary to make the required distributions on
one or more Classes of Senior Securities and/or may be subject to the
Servicer's (or another entity's) good faith determination that such advances
will be reimbursable not only from Related Proceeds but also from collections
on other Assets otherwise distributable on one or more Classes of such
Subordinate Securities. See "Description of Credit Support."
Advances are intended to maintain a regular flow of scheduled interest and
principal payments to holders of the Class or Classes of Securities entitled
thereto, rather than to guarantee or insure against losses. Advances of the
Servicer's (or another entity's) funds will be reimbursable only out of related
recoveries on the Assets, including amounts received under any form of Credit
Support, respecting which such advances were made (as to any Assets, "RELATED
PROCEEDS") and from any other amounts specified in the related prospectus
supplement, including out of any amounts otherwise distributable on one or more
Classes of Subordinate Securities of such Series; provided, however, that any
such advance will be reimbursable from any amounts in the Collection Account
prior to any distributions being made on the Securities to the extent that the
Servicer (or such other entity) shall determine in good faith that such advance
(a "NONRECOVERABLE ADVANCE") is not ultimately recoverable from Related
Proceeds or, if applicable, from collections on other Assets otherwise
distributable on such Subordinate Securities. If advances have been made by the
Servicer from excess funds in the Collection Account, the Servicer is required
to replace such funds in the Collection Account on any future Distribution Date
to the extent that funds in the Collection Account on such Distribution Date
are less than payments required to be made to Securityholders on such date. If
so specified in the related prospectus supplement, the obligations of the
Servicer (or another entity) to make advances may be secured by a cash advance
reserve fund, a surety bond, a letter of credit or another form of limited
guaranty. If applicable, information regarding the characteristics of, and the
identity of any obligor on, any such surety bond, will be set forth in the
related prospectus supplement.
If and to the extent so provided in the related prospectus supplement, the
Servicer (or another entity) will be entitled to receive interest at the rate
specified therein on its outstanding advances and will be entitled to pay
itself such interest periodically from general collections on the Assets prior
to any payment to Securityholders or as otherwise provided in the applicable
Agreement and described in such prospectus supplement.
If specified in the related prospectus supplement, the Master Servicer or
the Trustee will be required to make advances, subject to certain conditions
described in the prospectus supplement, in the event of a Servicer default.
REPORTS TO SECURITYHOLDERS
With each distribution to holders of any Class of Securities of a Series,
the Servicer, the Master Servicer or the Trustee, as provided in the related
prospectus supplement, will forward or cause to be forwarded to each such
holder, to the Depositor and to such other parties as may be specified in the
applicable Agreement, a statement generally setting forth, in each case to the
extent applicable and available:
o the amount of such distribution to holders of Securities of such Class
applied to reduce the Security Balance thereof;
o the amount of such distribution to holders of Securities of such Class
allocable to Accrued Security Interest;
o the amount of such distribution allocable to Prepayment Premiums;
o the amount of related servicing compensation and such other customary
information as is required to enable Securityholders to prepare their
tax returns;
40
o the aggregate amount of advances included in such distribution, and
the aggregate amount of unreimbursed advances at the close of business
on such Distribution Date;
o the aggregate principal balance of the Assets at the close of business
on such Distribution Date;
o the number and aggregate principal balance of Mortgage Loans or
Contracts in respect of which (a) one scheduled payment is delinquent,
(b) two scheduled payments are delinquent, (c) three or more scheduled
payments are delinquent and (d) foreclosure proceedings have been
commenced;
o with respect to any Mortgage Loan or Contract liquidated during the
related Due Period, (a) the portion of such liquidation proceeds
payable or reimbursable to a Servicer (or any other entity) in respect
of such Mortgage Loan and (b) the amount of any loss to
Securityholders;
o with respect to collateral acquired by the Trust Fund through
foreclosure or otherwise (a "REO PROPERTY") relating to a Mortgage
Loan or Contract and included in the Trust Fund as of the end of the
related Due Period, the date of acquisition;
o with respect to each REO Property relating to a Mortgage Loan or
Contract and included in the Trust Fund as of the end of the related
Due Period, (a) the book value, (b) the principal balance of the
related Mortgage Loan or Contract immediately following such
Distribution Date (calculated as if such Mortgage Loan or Contract
were still outstanding taking into account certain limited
modifications to the terms thereof specified in the applicable
Agreement), (c) the aggregate amount of unreimbursed servicing
expenses and unreimbursed advances in respect thereof and (d) if
applicable, the aggregate amount of interest accrued and payable on
related servicing expenses and related advances;
o with respect to any such REO Property sold during the related Due
Period (a) the aggregate amount of sale proceeds, (b) the portion of
such sales proceeds payable or reimbursable to the Master Servicer in
respect of such REO Property or the related Mortgage Loan or Contract
and (c) the amount of any loss to Securityholders in respect of the
related Mortgage Loan;
o the aggregate Security Balance or notional amount, as the case may be,
of each Class of Securities (including any Class of Securities not
offered hereby) at the close of business on such Distribution Date,
separately identifying any reduction in such Security Balance due to
the allocation of any loss and increase in the Security Balance of a
Class of Accrual Securities in the event that Accrued Security
Interest has been added to such balance;
o the aggregate amount of principal prepayments made during the related
Due Period;
o the amount deposited in the reserve fund, if any, on such Distribution
Date;
o the amount remaining in the reserve fund, if any, as of the close of
business on such Distribution Date;
o the aggregate unpaid Accrued Security Interest, if any, on each Class
of Securities at the close of business on such Distribution Date;
o in the case of Securities with a variable Pass-Through Rate or
interest rate, the Pass-Through Rate or interest rate applicable to
such Distribution Date, and, if available, the immediately succeeding
Distribution Date, as calculated in accordance with the method
specified in the related prospectus supplement;
o in the case of Securities with an adjustable Pass-Through Rate or
interest rate, for statements to be distributed in any month in which
an adjustment date occurs, the adjustable Pass-Through Rate or
interest rate applicable to such Distribution Date, if available, and
the immediately succeeding Distribution Date as calculated in
accordance with the method specified in the related prospectus
supplement;
41
o as to any Series which includes Credit Support, the amount of coverage
of each instrument of Credit Support included therein as of the close
of business on such Distribution Date;
o during the Pre-Funding Period, the remaining Pre-Funded Amount and the
portion of the Pre-Funding Amount used to acquire Subsequent Mortgage
Loans since the preceding Distribution Date;
o during the Pre-Funding Period, the amount remaining in the Capitalized
Interest Account; and
o the aggregate amount of payments by the obligors of (a) default
interest, (b) late charges and (c) assumption and modification fees
collected during the related Due Period.
Within a reasonable period of time after the end of each calendar year,
the Servicer, the Master Servicer or the Trustee, as provided in the related
prospectus supplement, shall furnish to each Securityholder of record at any
time during the calendar year such information required by the Code and
applicable regulations thereunder to enable Securityholders to prepare their
tax returns. See "Description of the Securities -- Book-Entry Registration and
Definitive Securities."
TERMINATION; OPTIONAL PURCHASE OF MORTGAGE LOANS
The obligations created by the applicable Agreement for each Series of
Securities will terminate upon the payment to Securityholders of that Series of
all amounts held in the Collection Account or by a Servicer, the Master
Servicer, if any, or the Trustee and required to be paid to them pursuant to
such Agreement following the earlier of (i) the final payment or other
liquidation of the last Asset subject thereto or the disposition of all
property acquired upon foreclosure of any Mortgage Loan or Contract subject
thereto and (ii) the purchase of all of the assets of the Trust Fund by the
party entitled to effect such termination, under the circumstances and in the
manner set forth in the related prospectus supplement. In no event, however,
will the Trust Fund continue beyond the expiration of 21 years from the death
of the last survivor of certain persons named in the Agreement. Written notice
of termination of the applicable Agreement will be given to each
Securityholder, and the final distribution will be made only upon presentation
and surrender of the Securities at the location to be specified in the notice
of termination.
If so specified in the related prospectus supplement, a Series of
Securities may be subject to optional early termination through the repurchase
of the Assets in the related Trust Fund by the party specified therein, under
the circumstances and in the manner set forth therein. In the event that any
such party has caused the related Trust Fund (or any segregated pool of assets
therein) to be treated as a REMIC, any such purchase will be affected only
pursuant to either (a) a "clean up call" as defined in Treasury Regulations
Section 1.860G-2(j) or (b) a "qualified liquidation" as defined in Code Section
860F(a)(4)(A). Any qualified liquidation will effect early retirement of the
Securities of that Series, but the right to purchase may be exercised only
after the aggregate principal balance of the Assets for such Series at the time
of purchase is less than a specified percentage, not exceeding 10%, of the
aggregate principal balance as of the Cut-off Date for the Series, or after the
date set forth in the applicable prospectus supplement. If so provided in the
related prospectus supplement, upon the reduction of the Security Balance of a
specified Class or Classes of Securities by a specified percentage, the party
specified therein will solicit bids for the purchase of all assets of the Trust
Fund, or of a sufficient portion of such assets to retire such Class or Classes
or purchase such Class or Classes at a price set forth in the related
prospectus supplement, in each case, under the circumstances and in the manner
set forth therein. Such price will at least equal the outstanding Security
Balances and any accrued and unpaid interest thereon (including any unpaid
interest shortfalls for prior Distribution Dates). Any sale of the Assets of
the Trust Fund will be without recourse to the Trust Fund or the
Securityholders. Any such purchase or solicitation of bids may be made only
when the aggregate Security Balance of such Class or Classes declines to a
percentage of the Initial Security Balance of such Securities (not to exceed
10%) specified in the related prospectus supplement. In addition, if so
provided in the related prospectus supplement, certain Classes of Securities
may be purchased or redeemed in the manner set forth therein.
42
OPTIONAL PURCHASES
Subject to the provisions of the applicable Agreement, the Depositor, the
Servicer or such other party specified in the related prospectus supplement
may, at such party's option, repurchase (i) any Asset which is in default or as
to which default is reasonably foreseeable if, in the Depositor's, the
Servicer's or such other party's judgment, the related default is not likely to
be cured by the borrower or default is not likely to be averted and (ii) any
Asset as to which the origination of such Asset breached a representation or
warranty made with respect of such Mortgage Loan to the Depositor, the Servicer
or such other party at a price equal to the unpaid principal balance thereof
plus accrued interest thereon and under the conditions set forth in the
applicable prospectus supplement.
DEFINITIVE FORM
If so specified in the related prospectus supplement, Securities of a
Series may be issued in fully registered certificated form (such Securities,
"DEFINITIVE SECURITIES"). Distributions of principal of, and interest on,
Definitive Securities will be made directly to holders of Definitive Securities
in accordance with the procedures set forth in the Agreement. The Definitive
Securities of a Series offered hereby and by means of the applicable prospectus
supplement will be transferable and exchangeable at the office or agency
maintained by the Trustee or such other entity for such purpose set forth in
the applicable prospectus supplement. No service charge will be made for any
transfer or exchange of Definitive Securities, but the Trustee or such other
entity may require payment of a sum sufficient to cover any tax or other
governmental charge in connection with such transfer or exchange.
In the event that an election is made to treat the Trust Fund (or one or
more pools of segregated assets therein) as a REMIC, the Residual Securities
thereof will be issued as Definitive Securities. No legal or beneficial
interest in all or a portion of any Residual Security may be transferred
without the receipt by the transferor and the Trustee of an affidavit described
under "-- Taxation of Owners of Residual Securities -- Tax-Related Restrictions
on Transfer of Residual Securities."
BOOK-ENTRY REGISTRATION AND FORM
If so specified in the related prospectus supplement, one or more Classes
of Securities of a Series will be transferable and exchangeable at the office
of the registrar identified in the related prospectus supplement. Unless
otherwise specified in the related prospectus supplement, no service charge
will be made for any such registration or transfer of such Securities, but the
owner may be required to pay a sum sufficient to cover any tax or other
governmental charge.
If so specified in the related prospectus supplement, Book-Entry
Securities may be initially represented by one or more Securities registered in
the name of DTC and be available only in the form of book-entries. If specified
in the related prospectus supplement, holders of Securities may hold beneficial
interests in Book-Entry Securities through DTC (in the United States) or
Clearstream or Euroclear (in Europe) directly if they are participants of such
systems, or indirectly through organizations which are participants in such
systems.
Clearstream and Euroclear will hold omnibus positions on behalf of their
participants through customers' securities accounts in their respective names
on the books of their respective Depositaries which in turn will hold such
positions in customers' securities accounts in the Depositaries' names on the
books of DTC.
Transfers between Participants will occur in accordance with DTC rules.
Transfers between Clearstream Participants and Euroclear Participants will
occur in accordance with their applicable rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Clearstream or
Euroclear, on the other, will be effected in DTC in accordance with DTC rules
on behalf of the relevant European international clearing system by its
Depositary. However, each such cross-market transaction will require delivery
of instructions to
43
the relevant European international clearing system by the counterparty in such
system in accordance with its rules and procedures and within its established
deadlines. The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to its
Depositary to take action to effect final settlement on its behalf by
delivering or receiving securities through DTC, and making or receiving payment
in accordance with normal procedures for same-day funds settlement applicable
to DTC. Clearstream Participants and Euroclear Participants may not deliver
instructions directly to the Depositaries.
Because of time-zone differences, credits of securities received in
Clearstream or Euroclear as a result of a transaction with a Participant will
be made during subsequent securities settlement processing and dated the
business day following the DTC settlement date. Such credits or any
transactions in such securities settled during such processing will be reported
to the Clearstream Participant or Euroclear Participant on such business day.
Cash received in Clearstream or Euroclear as a result of sales of Securities by
or through a Clearstream Participant or a Euroclear Participant to a
Participant will be received with value on the DTC settlement date but will be
available in the relevant Clearstream or Euroclear cash account only as of the
business day following settlement in DTC.
DTC is a limited purpose trust company organized under the laws of the
State of New York, a "banking organization" within the meaning of the New York
Banking Law, a member of the Federal Reserve System, a "clearing corporation"
within the meaning of the New York Uniform Commercial Code ("UCC") and a
"clearing agency" registered pursuant to Section 17A of the Securities Exchange
Act of 1934, as amended ("EXCHANGE ACT"). DTC was created to hold securities
for its participating members ("PARTICIPANTS") and to facilitate the clearance
and settlement of securities transactions between Participants through
electronic book-entries, thereby eliminating the need for physical movement of
securities. Participants include securities brokers and dealers, banks, trust
companies and clearing corporations which may include underwriters, agents or
dealers with respect to the Securities of any Class or Series. Indirect access
to the DTC system also is available to others such as banks, brokers, dealers
and trust companies that clear through or maintain a custodial relationship
with a Participant, either directly or indirectly ("INDIRECT PARTICIPANTS").
The rules applicable to DTC and Participants are on file with the SEC.
Beneficial owners ("SECURITY OWNERS") that are not Participants or
Indirect Participants but desire to purchase, sell or otherwise transfer
ownership of, or other interests in, Book-Entry Securities may do so only
through Participants and Indirect Participants. Participants who are Security
Owners of Book-Entry Securities will receive a credit for such Securities on
DTC's records. The ownership interest of such holder will in turn be recorded
on respective records of the Participants and Indirect Participants. Such
holders will not receive written confirmation from DTC of their purchase, but
are expected to receive written confirmations providing details of the
transaction, as well as periodic statements of their holdings, from the
Participant or Indirect Participant through which the Securityholders entered
into the transaction. Unless and until Definitive Securities are issued as
described below, it is anticipated that the only "holder" of Book-Entry
Securities of any Series will be Cede & Co. ("CEDE"), as nominee of DTC.
Security Owners will only permitted to exercise the rights of holders
indirectly through Participants and DTC.
Under the rules, regulations and procedures creating and affecting DTC and
its operations, DTC is required to make book-entry transfers among Participants
on whose behalf it acts with respect to the Book-Entry Securities and is
required to receive and transmit distributions of principal of and interest on
the Book-Entry Securities. Participants and Indirect Participants with which
Security Owners have accounts with respect to the Book-Entry Securities
similarly are required to make book-entry transfers and receive and transmit
such payments on behalf of their respective Securityholders.
DTC has advised the Servicer and the Depositors that, unless and until
Definitive Securities are issued, DTC will take any action permitted to be
taken by a holder only at the direction of one or more Participants to whose
DTC accounts the Securities are credited. DTC has advised the Servicer
44
and the Depositors that DTC will take such action with respect to any
Percentage Interests of the Book-Entry Securities of a Series only at the
direction of and on behalf of such Participants with respect to such Percentage
Interests of the Book-Entry Securities. DTC may take actions, at the direction
of the related Participants, with respect to some Book-Entry Securities which
conflict with actions taken with respect to other Book-Entry Securities.
Clearstream, 67 Bd Grande-Duchesse Charlotte, L-1331 Luxembourg
("CLEARSTREAM"), was incorporated in 1970 as a limited company under Luxembourg
law. Clearstream is owned by banks, securities dealers and financial
institutions, and currently has about 100 shareholders, including U.S.
financial institutions or their subsidiaries. No single entity may own more
than five percent of Clearstream's stock.
Clearstream is registered as a bank in Luxembourg, and as such is subject
to regulation by the Institute Monetaire Luxembourgeois, the Luxembourg
Monetary Authority, which supervises Luxembourg banks.
Clearstream holds securities for its customers ("CLEARSTREAM
PARTICIPANTS") and facilitates the clearance and settlement of securities
transactions by electronic book-entry transfers between their accounts.
Clearstream provides various services, including safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. Clearstream also deals with domestic securities markets
in several countries through established depository and custodial
relationships. Clearstream has established an electronic bridge with Euroclear
Bank S.A./N.V. as the Euroclear Operator in Brussels to facilitate settlement
of trades between systems. Clearstream currently accepts over 70,000 securities
issues on its books.
Clearstream's customers are world-wide financial institutions including
underwriters, securities brokers and dealers, banks, trust companies and
clearing corporations. Clearstream's United States customers are limited to
securities brokers and dealers and banks. Currently, Clearstream has
approximately 3,000 customers located in over 60 countries, including all major
European countries, Canada, and the United States. Indirect access to
Clearstream is available to other institutions which clear through or maintain
a custodial relationship with an account holder of Clearstream.
The Euroclear System ("EUROCLEAR") was created in 1968 to hold securities
for its participants ("EUROCLEAR PARTICIPANTS") and to clear and settle
transactions between Euroclear Participants through simultaneous electronic
book-entry delivery against payment, thereby eliminating the need for physical
movement of certificates and any risk from lack of simultaneous transfers of
securities and cash. Transactions may be settled in a variety of currencies,
including United States dollars. Euroclear includes various other services,
including securities lending and borrowing and interfaces with domestic markets
in several countries generally similar to the arrangements for cross-market
transfers with DTC described above. Euroclear is operated by Euroclear Bank
S.A./N.V. (the "EUROCLEAR OPERATOR"), under contract with Euroclear Clearance
Systems S.C., a Belgian cooperative corporation (the "COOPERATIVE"). All
operations are conducted by the Euroclear Operator, and all Euroclear
securities clearance accounts and Euroclear cash accounts are accounts with the
Euroclear Operator, not the Cooperative. The Cooperative establishes policy for
Euroclear on behalf of Euroclear Participants. Euroclear Participants include
banks (including central banks), securities brokers and dealers and other
professional financial intermediaries. Indirect access to Euroclear is also
available to other firms that clear through or maintain a custodial
relationship with a Euroclear Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it
is regulated and examined by the Board of Governors of the Federal Reserve
System and the New York State Banking Department, as well as the Belgian
Banking Commission.
Securities clearance accounts and cash accounts with the Euroclear
Operator are governed by the Terms and Conditions Governing Use of Euroclear
and the related Operating Procedures of the Euroclear System and applicable
Belgian law (collectively, the "TERMS AND CONDITIONS"). The Terms
45
and Conditions govern transfers of securities and cash within the Euroclear
System, withdrawals of securities and cash from the Euroclear System and
receipts of payments with respect to securities in the Euroclear System. All
securities in the Euroclear System are held on a fungible basis without
attribution of specific Securities to specific securities clearance accounts.
The Euroclear Operator acts under the Terms and Conditions only on behalf of
Euroclear Participants, and has no record of or relationship with persons
holding through Euroclear Participants.
Payments and distributions with respect to Book-Entry Securities held
through Clearstream or Euroclear will be credited to the cash accounts of
Clearstream Participants or Euroclear Participants in accordance with the
relevant system's rules and procedures, to the extent received by Citibank,
N.A. or JPMorgan Chase Bank, the relevant depositary of Clearstream and
Euroclear (the "DEPOSITARIES" ), respectively. Such payments and distributions
will be subject to tax withholding in accordance with relevant United States
tax laws and regulations. See "Federal Income Tax Consequences". Clearstream or
the Euroclear Operator, as the case may be, will take any other action
permitted to be taken by a Certificateholder on behalf of a Clearstream
Participant or Euroclear Participant only in accordance with its relevant rules
and procedures and subject to its Depositary's ability to effect such actions
on its behalf through DTC.
Although DTC, Clearstream and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of Securities among participants of
DTC, Clearstream and Euroclear, they are under no obligation to perform or
continue to perform such procedures and such procedures may be discontinued at
any time.
Book-Entry Securities of a Series will be converted to Definitive
Securities and reissued to beneficial owners or their nominees, rather than to
DTC or its nominee, only under the circumstances provided in the related
Pooling and Servicing Agreement, which generally will include, except if
otherwise provided therein, if (i) DTC or the Servicer advises the Trustee in
writing that DTC is no longer willing or able to discharge properly its
responsibilities as nominee and depository with respect to the Book-Entry
Securities of such Series and the Servicer is unable to locate a qualified
successor, (ii) the Servicer, at its sole option, elects to terminate the
book-entry system through DTC or (iii) after the occurrence of a Servicer
Termination Event, a majority of the aggregate Percentage Interest of any Class
of Securities of such Series advises DTC in writing that the continuation of a
book-entry system through DTC (or a successor thereto) to the exclusion of any
physical Securities being issued to Security Owners is no longer in the best
interests of Security Owners of such Class of Securities. Upon issuance of
Definitive Securities of a Series to Security Owners, such Book-Entry
Securities will be transferable directly (and not exclusively on a book-entry
basis) and registered holders will deal directly with the Trustee with respect
to transfers, notices and distributions.
46
DESCRIPTION OF THE AGREEMENTS
AGREEMENTS APPLICABLE TO A SERIES
REMIC Securities, FASIT Securities, Grantor Trust Securities
Securities representing interests in a Trust Fund, or a portion thereof,
that the Trustee will elect to have treated as REMIC Securities, FASIT
Securities or Grantor Trust Securities will be issued, and the related Trust
Fund will be created, pursuant to a pooling and servicing agreement (a "POOLING
AND SERVICING AGREEMENT") among the Depositor, the Trustee and the sole
Servicer or Master Servicer, as applicable. The Assets of such Trust Fund will
be transferred to the Trust Fund and thereafter serviced in accordance with the
terms of the Pooling and Servicing Agreement. In the event there are multiple
Servicers of the Assets of such Trust Fund, each Servicer will perform its
servicing functions pursuant to a servicing agreement (each, an "UNDERLYING
SERVICING AGREEMENT").
Securities That Are Partnership Interests for Tax Purposes and Notes
Partnership Securities that are partnership interests for tax purposes
will be issued, and the related Trust Fund will be created, pursuant to a
Pooling and Servicing Agreement.
A Series of Notes issued by a Trust Fund will be issued pursuant to an
indenture (the "INDENTURE") between the related Trust Fund and the Indenture
Trustee named in the related prospectus supplement. The Trust Fund will be
established pursuant to a deposit trust agreement (each, a "DEPOSIT TRUST
AGREEMENT") between the Depositor and an owner trustee specified in the
prospectus supplement relating to such Series of Notes. The Assets securing
payment on the Notes will be serviced in accordance with a servicing agreement
(each, an "INDENTURE SERVICING AGREEMENT") between the related Trust Fund as
issuer of the Notes, the Servicer and the Indenture Trustee. The Pooling and
Servicing Agreements, the Indenture Servicing Agreements, the Underlying
Servicing Agreements and the Indenture are referred to each as an "AGREEMENT."
MATERIAL TERMS OF THE POOLING AND SERVICING AGREEMENTS AND UNDERLYING SERVICING
AGREEMENTS
General
The following summaries describe the material provisions that may appear
in each Pooling and Servicing Agreement and Underlying Servicing Agreement. The
prospectus supplement for a Series of Securities will describe any provision of
the applicable Agreement relating to such Series that materially differs from
the description thereof 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 applicable Agreement for each
Trust Fund and the description of such provisions in the related prospectus
supplement. The provisions of each Agreement will vary depending upon the
nature of the Securities to be issued thereunder and the nature of the related
Trust Fund. As used herein with respect to any Series, the term "SECURITY"
refers to all of the Securities of that Series, whether or not offered hereby
and by the related prospectus supplement, unless the context otherwise
requires. A form of a Pooling and Servicing Agreement has been filed as an
exhibit to the Registration Statement of which this prospectus is a part. The
Depositor will provide a copy of the Pooling and Servicing Agreement (without
exhibits) relating to any Series of Securities without charge upon written
request of a Securityholder of such Series addressed to Wachovia Asset
Securitization, Inc., 8739 Research Drive, NC0121-Suite D, Charlotte, North
Carolina 28288-0121, Attention: Vice President.
The servicers (the "SERVICERS"), any master servicer (the "MASTER
SERVICER") and the trustee (the "TRUSTEE") or indenture trustee (the "INDENTURE
TRUSTEE"), as applicable, with respect to any Series of Securities will be
named in the related prospectus supplement. In the event there are multiple
47
Servicers for the Assets in a Trust Fund, a Master Servicer will perform
certain administration, calculation and reporting functions with respect to
such Trust Fund and, if specified in the related prospectus supplement, will
supervise the related Servicers pursuant to a Pooling and Servicing Agreement.
With respect to Series involving a Master Servicer, references in this
prospectus to the Servicer will apply to the Master Servicer where
non-servicing obligations are described. If so specified in the related
prospectus supplement, a manager or administrator may be appointed pursuant to
the Pooling and Servicing Agreement for any Trust Fund to administer such Trust
Fund or certain administrative functions which would otherwise be performed by
the Servicer or the Master Servicer may be performed by the Trustee.
Assignment of Assets; Repurchases
At the time of issuance of any Series of Securities, the Depositor will
assign (or cause to be assigned) to the designated Trustee the Assets to be
included in the related Trust Fund, together with all principal and interest to
be received on or with respect to such Assets after the Cut-off Date, other
than principal and interest due on or before the Cut-off Date and other than
any Retained Interest. The Trustee will, concurrently with such assignment,
deliver the Securities to the Depositor in exchange for the Assets and the
other assets comprising the Trust Fund for such Series. Each Asset will be
identified in a schedule appearing as an exhibit to the applicable Agreement.
Such schedule will include detailed information to the extent available and
relevant (i) in respect of each Mortgage Loan included in the related Trust
Fund, including without limitation, the city and state of the related Mortgaged
Property and type of such property, the Mortgage Rate and, if applicable, the
applicable index, margin, adjustment date and any rate cap information, the
original and remaining term to maturity, the original and outstanding principal
balance and balloon payment, if any, the Loan-to-Value Ratio as of the date
indicated and payment and prepayment provisions, if applicable; and (ii) in
respect of each Contract included in the related Trust Fund, including without
limitation the outstanding principal amount and the Contract Rate.
With respect to each Mortgage Loan, except as otherwise specified in the
related prospectus supplement, the Depositor will deliver or cause to be
delivered to the Trustee (or to the custodian hereinafter referred to) certain
loan documents, which will generally include the original Mortgage Note
endorsed, without recourse, in blank or to the order of the Trustee, the
original Mortgage (or a certified copy thereof) with evidence of recording
indicated thereon and an assignment of the Mortgage to the Trustee in
recordable form. Notwithstanding the foregoing, a Trust Fund may include
Mortgage Loans where the original Mortgage Note is not delivered to the Trustee
if the Depositor delivers to the Trustee or the custodian a copy or a duplicate
original of the Mortgage Note, together with an affidavit certifying that the
original thereof has been lost or destroyed. With respect to such Mortgage
Loans, the Trustee (or its nominee) may not be able to enforce the Mortgage
Note against the related borrower. The Asset Seller or other entity specified
in the related prospectus supplement will be required to agree to repurchase,
or substitute for, each such Mortgage Loan that is subsequently in default if
the enforcement thereof or of the related Mortgage is materially adversely
affected by the absence of the original Mortgage Note. The applicable Agreement
will generally require the Depositor or another party specified in the related
prospectus supplement to promptly cause each such assignment of Mortgage to be
recorded in the appropriate public office for real property records, unless (i)
with respect to a particular state, the Trustee has received an opinion of
counsel acceptable to it that such recording is not required to make the
assignment effective against the parties to the Mortgage or subsequent
purchasers or encumbrancers of the Mortgaged Property or (ii) recordation in a
state is not required by the Rating Agencies rating the Series in order to
obtain the initial ratings on the Securities described in the related
prospectus supplement.
Notwithstanding the preceding paragraph, with respect to any Mortgage Loan
which has been recorded in the name of Mortgage Electronic Registration
Systems, Inc. ("MERS") or its designee, no mortgage assignment in favor of the
Trustee will be required to be prepared or delivered. Instead, the Master
Servicer and the applicable Servicer will be required to take all actions as
are necessary to cause the applicable Trust Fund to be shown as the owner of
the related Mortgage Loan on the records of MERS for purposes of the system of
recording transfers of beneficial ownership of mortgages maintained by MERS.
48
The Trustee (or a custodian) will review such Mortgage Loan documents
within a specified period of days after receipt thereof, and the Trustee (or a
custodian) will hold such documents in trust for the benefit of the
Securityholders. If any such document is found to be missing or defective in
any material respect, the Trustee (or such custodian) shall immediately notify
the Servicer and the Depositor, and the Servicer shall immediately notify the
relevant Asset Seller or other entity specified in the related prospectus
supplement. If the Asset Seller cannot cure the omission or defect within a
specified number of days after receipt of such notice, then unless otherwise
specified in the related prospectus supplement, the Asset Seller or other
entity specified in the related prospectus supplement will be obligated, within
a specified number of days of receipt of such notice, to repurchase the related
Mortgage Loan from the Trustee at a price equal to the sum of the unpaid
principal balance thereof, plus unpaid accrued interest at the interest rate
for such Asset from the date as to which interest was last paid to the due date
in the Due Period in which the relevant purchase is to occur, plus certain
servicing expenses that are payable to the Servicer or such other price as
specified in the related prospectus supplement (the "PURCHASE PRICE") or
substitute for such Mortgage Loan. There can be no assurance that an Asset
Seller or other named entity will fulfill this repurchase or substitution
obligation, and neither the Servicer nor the Depositor will be obligated to
repurchase or substitute for such Mortgage Loan if the Asset Seller or other
named entity defaults on its obligation. This repurchase or substitution
obligation constitutes the sole remedy available to the Securityholders or the
Trustee for omission of, or a material defect in, a constituent document. To
the extent specified in the related prospectus supplement, in lieu of curing
any omission or defect in the Asset or repurchasing or substituting for such
Asset, the Asset Seller or other named entity may agree to cover any losses
suffered by the Trust Fund as a result of such breach or defect.
Notwithstanding the preceding two paragraphs, the documents with respect
to First Lien Mortgage Loans, Home Equity Loans, Home Improvement Contracts and
Unsecured Home Improvement Loans will be delivered to the Trustee (or a
custodian) only to the extent specified in the related prospectus supplement.
Generally such documents will be retained by the Servicer, which may also be
the Asset Seller. In addition, assignments of the related Mortgages to the
Trustee will be recorded only to the extent specified in the related prospectus
supplement.
With respect to each Contract, the Servicer (which may also be the Asset
Seller) generally will maintain custody of the original Contract and copies of
documents and instruments related to each Contract and the security interest in
the Manufactured Home securing each Contract. In order to give notice of the
right, title and interest of the Trustee in the Contracts, the Depositor will
cause UCC-1 financing statements to be authorized by the related Asset Seller
identifying the Depositor as secured party and by the Depositor identifying the
Trustee as the secured party and, in each case, identifying all Contracts as
collateral. The Contracts will be stamped or otherwise marked to reflect their
assignment from the Company to the Trust Fund only to the extent specified in
the related prospectus supplement. 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 interest of the Trustee in the
Contracts could be defeated. See "Certain Legal Aspects of the Contracts."
While the Contract documents will not be reviewed by the Trustee or the
Servicer, if the Servicer finds that any such document is missing or defective
in any material respect, the Servicer will be required to immediately notify
the Depositor and the relevant Asset Seller or other entity specified in the
related prospectus supplement. If the Asset Seller or such other entity cannot
cure the omission or defect within a specified number of days after receipt of
such notice, then the Asset Seller or such other entity will be obligated,
within a specified number of days of receipt of such notice, to repurchase the
related Contract from the Trustee at the Purchase Price or substitute for such
Contract. There can be no assurance that an Asset Seller or such other entity
will fulfill this repurchase or substitution obligation, and neither the
Servicer nor the Depositor will be obligated to repurchase or substitute for
such Contract if the Asset Seller or such other entity defaults on its
obligation. This repurchase or substitution obligation constitutes the sole
remedy available to the Securityholders or the Trustee for omission of, or a
material defect in, a constituent document. To the
49
extent specified in the related prospectus supplement, in lieu of curing any
omission or defect in the Asset or repurchasing or substituting for such Asset,
the Asset Seller may agree to cover any losses suffered by the Trust Fund as a
result of such breach or defect.
Representations and Warranties; Repurchases
To the extent provided in the related prospectus supplement the Depositor
will, with respect to each Asset, make or assign certain representations and
warranties, as of a specified date (the person making such representations and
warranties including the Depositor, the "WARRANTING PARTY") covering, by way of
example, the following types of matters:
o the accuracy of the information set forth for such Asset on the
schedule of Assets appearing as an exhibit to the applicable
Agreement;
o in the case of a Mortgage Loan, the existence of title insurance
insuring the lien priority of the Mortgage Loan and, in the case of a
Contract, that the Contract creates a valid first security interest in
or lien on the related Manufactured Home;
o the authority of the Warranting Party to sell the Asset;
o the payment status of the Asset;
o in the case of a Mortgage Loan, the existence of customary provisions
in the related Mortgage Note and Mortgage to permit realization
against the Mortgaged Property of the benefit of the security of the
Mortgage; and
o the existence of hazard and extended perils insurance coverage on the
Mortgaged Property or Manufactured Home.
Any Warranting Party shall be an Asset Seller or an affiliate thereof or
such other person acceptable to the Depositor and shall be identified in the
related prospectus supplement.
Representations and warranties made in respect of an Asset may have been
made as of a date prior to the applicable Cut-off Date. A substantial period of
time may have elapsed between such date and the date of initial issuance of the
related Series of Securities evidencing an interest in such Asset. In the event
of a breach of any such representation or warranty, the Warranting Party will
be obligated to reimburse the Trust Fund for losses caused by any such breach
or either cure such breach or repurchase or replace the affected Asset as
described below. Since the representations and warranties may not address
events that may occur following the date as of which they were made, the
Warranting Party will have a reimbursement, cure, repurchase or substitution
obligation in connection with a breach of such a representation and warranty
only if the relevant event that causes such breach occurs prior to such date.
Such party would have no such obligations if the relevant event that causes
such breach occurs after such date.
Each Agreement will provide that the Servicer and/or Trustee or such other
entity identified in the related prospectus supplement will be required to
notify promptly the relevant Warranting Party of any breach of any
representation or warranty made by it in respect of an Asset that materially
and adversely affects the value of such Asset or the interests therein of the
Securityholders. If such Warranting Party cannot cure such breach within a
specified period following the date on which such party was notified of such
breach, then such Warranting Party will be obligated to repurchase such Asset
from the Trustee within a specified period from the date on which the
Warranting Party was notified of such breach, at the Purchase Price therefor.
If so provided in the prospectus supplement for a Series, a Warranting Party,
rather than repurchase an Asset as to which a breach has occurred, will have
the option, within a specified period after initial issuance of such Series of
Securities, to cause the removal of such Asset from the Trust Fund and
substitute in its place one or more other Assets, as applicable, in accordance
with the standards described in the related prospectus supplement. If so
provided in the prospectus supplement for a Series, a Warranting Party, rather
than repurchase or substitute an Asset as to which a breach has occurred, will
have the option to reimburse the Trust Fund or the Securityholders for any
losses caused by such breach. This reimbursement, repurchase or substitution
obligation will constitute the sole remedy available to Securityholders or the
Trustee for a breach of representation by a Warranting Party.
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Neither the Depositor (except to the extent that it is the Warranting
Party) nor the Servicer will be obligated to purchase or substitute for an
Asset if a Warranting Party defaults on its obligation to do so, and no
assurance can be given that Warranting Parties will carry out such obligations
with respect to the Assets.
A Servicer will make certain representations and warranties regarding its
authority to enter into, and its ability to perform its obligations under, the
applicable Agreement. A breach of any such representation of the Servicer which
materially and adversely affects the interests of the Securityholders and which
continues unremedied for the number of days specified in the applicable
Agreement after the giving of written notice of such breach to the Servicer by
the Trustee or the Depositor, or to the Servicer, the Depositor and the Trustee
by the holders of Securities evidencing not less than 25% of the Voting Rights
or such other percentage specified in the related prospectus supplement, will
constitute an Event of Default under such Agreement. See "-- Events of Default
under the Agreements" and "-- Rights Upon Event of Default under the
Agreements."
Collection Account and Related Accounts
General. The Servicer and/or the Trustee will, as to each Trust Fund,
establish and maintain or cause to be established and maintained one or more
separate accounts for the collection of payments on the related Assets
(collectively, the "COLLECTION ACCOUNT"), which must be either (i) an account
or accounts the deposits in which are insured by the Bank Insurance Fund or the
Savings Association Insurance Fund of the Federal Deposit Insurance Corporation
("FDIC") (to the limits established by the FDIC) and the uninsured deposits in
which are otherwise secured such that the Securityholders have a claim with
respect to the funds in the Collection Account or a perfected first priority
security interest against any collateral securing such funds that is superior
to the claims of any other depositors or general creditors of the institution
with which the Collection Account is maintained or (ii) otherwise maintained
with a bank or trust company, and in a manner, satisfactory to the Rating
Agency or Agencies rating any Class of Securities of such Series. The
collateral eligible to secure amounts in the Collection Account is limited to
United States government securities and other investment grade obligations
specified in the applicable Agreement ("PERMITTED INVESTMENTS"). A Collection
Account may be maintained as an interest bearing or a non-interest bearing
account and the funds held therein may be invested pending each succeeding
Distribution Date in certain short-term Permitted Investments. Unless otherwise
specified in the applicable prospectus supplement, any interest or other income
earned on funds in the Collection Account will be paid to the Servicer or its
designee as additional servicing compensation. The Collection Account may be
maintained with an institution that is an affiliate of the Servicer, if
applicable, provided that such institution meets the standards imposed by the
Rating Agency or Agencies. If permitted by the Rating Agency or Agencies, a
Collection Account may contain funds relating to more than one Series of
mortgage pass-through certificates and may contain other funds respecting
payments on mortgage loans belonging to the Servicer or serviced or master
serviced by it on behalf of others.
Deposits. A Servicer or the Trustee will deposit or cause to be deposited
in the Collection Account for one or more Trust Funds on a daily basis, or such
other period provided in the applicable Agreement, the following payments and
collections received, or advances made, by the Servicer or the Trustee or on
its behalf subsequent to the Cut-off Date (other than payments due on or before
the Cut-off Date, and exclusive of any amounts representing a Retained
Interest):
o all payments on account of principal, including principal prepayments,
on the Assets;
o all payments on account of interest on the Assets, including any
default interest collected, in each case net of any portion thereof
retained by a Servicer as its servicing compensation and net of any
Retained Interest;
o Liquidation Proceeds and Insurance Proceeds, together with the net
proceeds on a monthly basis with respect to any Assets acquired for
the benefit of Securityholders;
o any amounts paid under any instrument or drawn from any fund that
constitutes Credit Support for the related Series of Securities as
described under "Description of Credit Support";
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o any advances made as described under "Description of the Securities --
Advances in Respect of Delinquencies";
o any amounts paid under any Cash Flow Agreement, as described under
"Description of the Trust Funds -- Cash Flow Agreements";
o all proceeds of any Asset or, with respect to a Mortgage Loan,
property acquired in respect thereof purchased by the Depositor, any
Asset Seller or any other specified person as described under "--
Assignment of Assets; Repurchases" and "-- Representations and
Warranties; Repurchases," all proceeds of any defaulted Mortgage Loan
purchased as described under "-- Realization Upon Defaulted Assets,"
and all proceeds of any Asset purchased as described under
"Description of the Securities -- Termination";
o any amounts paid by a Servicer to cover certain interest shortfalls
arising out of the prepayment of Assets in the Trust Fund as described
under "Description of the Agreements -- Retained Interest; Servicing
Compensation and Payment of Expenses";
o to the extent that any such item does not constitute additional
servicing compensation to a Servicer, any payments on account of
modification or assumption fees, late payment charges or Prepayment
Premiums on the Assets;
o all payments required to be deposited in the Collection Account with
respect to any deductible clause in any blanket insurance policy
described under "-- Hazard Insurance Policies";
o any amount required to be deposited by a Servicer or the Trustee in
connection with losses realized on investments for the benefit of the
Servicer or the Trustee, as the case may be, of funds held in the
Collection Account; and
o any other amounts required to be deposited in the Collection Account
as provided in the applicable Agreement and described in the related
prospectus supplement.
Withdrawals. A Servicer or the Trustee may, from time to time, make
withdrawals from the Collection Account for each Trust Fund for any of the
following purposes:
o to make distributions to the Securityholders on each Distribution
Date;
o to reimburse a Servicer for unreimbursed amounts advanced as described
under "Description of the Securities -- Advances in Respect of
Delinquencies," such reimbursement to be made out of amounts received
which were identified and applied by the Servicer as late collections
of interest (net of related servicing fees and Retained Interest) on
and principal of the particular Assets with respect to which the
advances were made or out of amounts drawn under any form of Credit
Support with respect to such Assets;
o to reimburse a Servicer for unpaid servicing fees earned and certain
unreimbursed servicing expenses incurred with respect to Assets and
properties acquired in respect thereof, such reimbursement to be made
out of amounts that represent Liquidation Proceeds and Insurance
Proceeds collected on the particular Assets and properties, and net
income collected on the particular properties, with respect to which
such fees were earned or such expenses were incurred or out of amounts
drawn under any form of Credit Support with respect to such Assets and
properties;
o to reimburse a Servicer for any advances described above and any
servicing expenses described above which, in the Servicer's good faith
judgment, will not be recoverable from the amounts described in such
clauses, such reimbursement to be made from amounts collected on other
Assets or, if and to the extent so provided by the applicable
Agreement and described in the related prospectus supplement, just
from that portion of amounts collected on other Assets that is
otherwise distributable on one or more Classes of Subordinate
Securities, if any, remain outstanding, and otherwise any outstanding
Class of Securities, of the related Series;
52
o if and to the extent described in the related prospectus supplement,
to pay a Servicer interest accrued on the advances described above and
the servicing expenses described above while such advances and
servicing expenses remain outstanding and unreimbursed;
o to reimburse a Servicer, the Depositor, or any of their respective
directors, officers, employees and agents, as the case may be, for
certain expenses, costs and liabilities incurred thereby, as and to
the extent described under "-- Certain Matters Regarding Servicers,
the Master Servicer and the Depositor";
o if and to the extent described in the related prospectus supplement,
to pay (or to transfer to a separate account for purposes of escrowing
for the payment of) the Trustee's fees;
o to reimburse the Trustee or any of its directors, officers, employees
and agents, as the case may be, for certain expenses, costs and
liabilities incurred thereby, as and to the extent described under "--
Certain Matters Regarding the Trustee";
o to pay a Servicer, as additional servicing compensation, interest and
investment income earned in respect of amounts held in the Collection
Account;
o to pay the person entitled thereto any amounts deposited in the
Collection Account that were identified and applied by the Servicer as
recoveries of Retained Interest;
o to pay for costs reasonably incurred in connection with the proper
management and maintenance of any Mortgaged Property acquired for the
benefit of Securityholders by foreclosure or by deed in lieu of
foreclosure or otherwise, such payments to be made out of income
received on such property;
o if one or more elections have been made to treat the Trust Fund or
designated portions thereof as a REMIC or a FASIT, to pay any federal,
state or local taxes imposed on the Trust Fund or its assets or
transactions, as and to the extent described under "Federal Income Tax
Consequences -- REMICs -- Taxes That May Be Imposed on the REMIC Pool"
or in the applicable prospectus supplement, respectively;
o to pay for the cost of an independent appraiser or other expert in
real estate matters retained to determine a fair sale price for a
defaulted Mortgage Loan or a property acquired in respect thereof in
connection with the liquidation of such Mortgage Loan or property;
o to pay for the cost of various opinions of counsel obtained pursuant
to the applicable Agreement for the benefit of Securityholders;
o to pay for the costs of recording the applicable Agreement if such
recordation materially and beneficially affects the interests of
Securityholders, provided that such payment shall not constitute a
waiver with respect to the obligation of the Warranting Party to
remedy any breach of representation or warranty under the applicable
Agreement;
o to pay the person entitled thereto any amounts deposited in the
Collection Account in error, including amounts received on any Asset
after its removal from the Trust Fund whether by reason of purchase or
substitution as contemplated by "--Assignment of Assets; Repurchase"
and "--Representations and Warranties; Repurchases" or otherwise;
o to make any other withdrawals permitted by the applicable Agreement;
and
o to clear and terminate the Collection Account at the termination of
the Trust Fund.
Other Collection Accounts. Notwithstanding the foregoing, if so specified
in the related prospectus supplement, the applicable Agreement for any Series
of Securities may provide for the establishment and maintenance of a separate
collection account into which the Servicer will deposit on a daily basis the
amounts described under "-- Deposits" above for one or more Series of
Securities. Any amounts on deposit in any such collection account will be
withdrawn therefrom and deposited into the appropriate Collection Account by a
time specified in the related prospectus supplement. To the extent specified in
the related prospectus supplement, any amounts which could be withdrawn
53
from the Collection Account as described under "-- Withdrawals" above, may also
be withdrawn from any such collection account. The prospectus supplement will
set forth any restrictions with respect to any such collection account,
including investment restrictions and any restrictions with respect to
financial institutions with which any such collection account may be
maintained.
Collection and Other Servicing Procedures. The Servicer is required to
make reasonable efforts to collect all scheduled payments under the Assets and
will follow or cause to be followed such collection procedures as it would
follow with respect to assets that are comparable to the Assets and held for
its own account, provided such procedures are consistent with (i) the terms of
the applicable Agreement and any related hazard insurance policy or instrument
of Credit Support, if any, included in the related Trust Fund described herein
or under "Description of Credit Support," (ii) applicable law and (iii) the
general servicing standard specified in the related prospectus supplement or,
if no such standard is so specified, its normal servicing practices (in either
case, the "SERVICING STANDARD"). In connection therewith, the Servicer will be
permitted in its discretion to waive any late payment charge or penalty
interest in respect of a late payment on an Asset.
Each Servicer will also be required to perform other customary functions
of a servicer of comparable assets, including maintaining hazard insurance
policies as described herein and in any related prospectus supplement, and
filing and settling claims thereunder; maintaining, to the extent required by
the applicable Agreement, escrow or impoundment accounts of obligors for
payment of taxes, insurance and other items required to be paid by any obligor
pursuant to the terms of the Assets; processing assumptions or substitutions in
those cases where the Servicer has determined not to enforce any applicable
due-on-sale clause; attempting to cure delinquencies; supervising foreclosures
or repossessions; inspecting and managing Mortgaged Properties or Manufactured
Homes under certain circumstances; and maintaining accounting records relating
to the Assets. The Servicer or such other entity specified in the related
prospectus supplement will be responsible for filing and settling claims in
respect of particular Assets under any applicable instrument of Credit Support.
See "Description of Credit Support."
The Servicer may agree to modify, waive or amend any term of any Asset in
a manner consistent with the Servicing Standard so long as the modification,
waiver or amendment will not (i) affect the amount or timing of any scheduled
payments of principal or interest on the Asset or (ii) in its judgment,
materially impair the security for the Asset or reduce the likelihood of timely
payment of amounts due thereon. The Servicer also may agree to any
modification, waiver or amendment that would so affect or impair the payments
on, or the security for, an Asset if, unless otherwise provided in the related
prospectus supplement, (i) in its judgment, a material default on the Asset has
occurred or a payment default is reasonably foreseeable and (ii) in its
judgment, such modification, waiver or amendment is reasonably likely to
produce a greater recovery with respect to the Asset on a present value basis
than would liquidation. The Servicer is required to notify the Trustee in the
event of any modification, waiver or amendment of any Asset.
In the case of Multifamily Mortgage Loans, a mortgagor's failure to make
required Mortgage Loan payments may mean that operating income is insufficient
to service the Mortgage Loan debt, or may reflect the diversion of that income
from the servicing of the Mortgage Loan debt. In addition, a mortgagor under a
Multifamily Mortgage Loan that is unable to make Mortgage Loan payments may
also be unable to make timely payment of all required taxes and otherwise to
maintain and insure the related Mortgaged Property. In general, the Servicer
will be required to monitor any Multifamily Loan that is in default, evaluate
whether the causes of the default can be corrected over a reasonable period
without significant impairment of the value of the related Mortgaged Property,
initiate corrective action in cooperation with the mortgagor if cure is likely,
inspect the related Multifamily Property and take such other actions as are
consistent with the applicable Agreement. A significant period of time may
elapse before the Servicer is able to assess the success of any such corrective
action or the need for additional initiatives. The time within which the
Servicer can make the initial determination of appropriate action, evaluate the
success of corrective action, develop additional initiatives, institute
foreclosure proceedings and actually foreclose may vary considerably depending
on the particular Multifamily Mortgage Loan, the Multifamily Property, the
mortgagor, the presence of an acceptable party to assume the Multifamily
Mortgage Loan and the laws of the jurisdiction in which the Multifamily
Property is located.
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Realization Upon Defaulted Assets
Generally, the Servicer is required to monitor any Assets which is in
default, initiate corrective action in cooperation with the mortgagor or
obligor if cure is likely, inspect the Asset and take such other actions as are
consistent with the Servicing Standard. A significant period of time may elapse
before the Servicer is able to assess the success of such corrective action or
the need for additional initiatives.
Any Agreement relating to a Trust Fund that includes Mortgage Loans or
Contracts may grant to the Servicer and/or the holder or holders of certain
Classes of Securities a right of first refusal to purchase from the Trust Fund
at a predetermined purchase price any such Mortgage Loan or Contract as to
which a specified number of scheduled payments thereunder are delinquent. Any
such right granted to the holder of an Offered Security will be described in
the related prospectus supplement. The related prospectus supplement will also
describe any such right granted to any person if the predetermined purchase
price is less than the Purchase Price described under "--Representations and
Warranties; Repurchases."
If so specified in the related prospectus supplement, the Servicer may
offer to sell any defaulted Mortgage Loan or Contract described in the
preceding paragraph and not otherwise purchased by any person having a right of
first refusal with respect thereto, if and when the Servicer determines,
consistent with the Servicing Standard, that such a sale would produce a
greater recovery on a present value basis than would liquidation through
foreclosure, repossession or similar proceedings. The applicable Agreement will
provide that any such offering be made in a commercially reasonable manner for
a specified period and that the Servicer accept the highest cash bid received
from any person (including itself, an affiliate of the Servicer or any
Securityholder) that constitutes a fair price for such defaulted Mortgage Loan
or Contract. In the absence of any bid determined in accordance with the
applicable Agreement to be fair, the Servicer shall proceed with respect to
such defaulted Mortgage Loan or Contract as described below. Any bid in an
amount at least equal to the Purchase Price described under "-- Representations
and Warranties; Repurchases" will in all cases be deemed fair.
The Servicer, on behalf of the Trustee, may at any time institute
foreclosure proceedings, exercise any power of sale contained in any mortgage,
obtain a deed in lieu of foreclosure, or otherwise acquire title to a Mortgaged
Property securing a Mortgage Loan by operation of law or otherwise and may at
any time repossess and realize upon any Manufactured Home, if such action is
consistent with the Servicing Standard and a default on such Mortgage Loan or
Contract has occurred or, in the Servicer's judgment, is imminent.
If title to any Mortgaged Property is acquired by a Trust Fund as to which
a REMIC election has been made, the Servicer, on behalf of the Trust Fund, will
be required to sell the Mortgaged Property by the close of the third calendar
year after the year of acquisition, unless (i) the Internal Revenue Service
(the "IRS") grants an extension of time to sell such property or (ii) the
Trustee receives an opinion of independent counsel to the effect that the
holding of the property by the Trust Fund subsequent to two years after its
acquisition will not result in the imposition of a tax on the Trust Fund or
cause the Trust Fund to fail to qualify as a REMIC under the Code at any time
that any Securities are outstanding. Subject to the foregoing, the Servicer
will be required to (i) solicit bids for any Mortgaged Property so acquired in
such a manner as will be reasonably likely to realize a fair price for such
property and (ii) accept the first (and, if multiple bids are contemporaneously
received, the highest) cash bid received from any person that constitutes a
fair price. The applicability of these limitations if a FASIT election is made
with respect to all or a part of the Trust Fund will be described in the
applicable prospectus supplement.
The limitations imposed by the applicable Agreement and the REMIC
provisions or the FASIT provisions of the Code (if a REMIC election or a FASIT
election, respectively, has been made with respect to the related Trust Fund)
on the ownership and management of any Mortgaged Property acquired on behalf of
the Trust Fund may result in the recovery of an amount less than the amount
that would otherwise be recovered. See "Certain Legal Aspects of Mortgage Loans
- -- Foreclosure."
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If recovery on a defaulted Asset under any related instrument of Credit
Support is not available, the Servicer nevertheless will be obligated to follow
or cause to be followed such normal practices and procedures as it deems
necessary or advisable to realize upon the defaulted Asset. If the proceeds of
any liquidation of the property securing the defaulted Asset are less than the
outstanding principal balance of the defaulted Asset plus interest accrued
thereon at the applicable interest rate, plus the aggregate amount of expenses
incurred by the Servicer in connection with such proceedings and which are
reimbursable under the applicable Agreement, the Trust Fund will realize a loss
in the amount of such difference. The Servicer will be entitled to withdraw or
cause to be withdrawn from the Collection Account out of the Liquidation
Proceeds recovered on any defaulted Asset, prior to the distribution of such
Liquidation Proceeds to Securityholders, amounts representing its normal
servicing compensation on the Security, unreimbursed servicing expenses
incurred with respect to the Asset and any unreimbursed advances of delinquent
payments made with respect to the Asset.
If any property securing a defaulted Asset is damaged, the Servicer is not
required to expend its own funds to restore the damaged property unless it
determines (i) that such restoration will increase the proceeds to
Securityholders on liquidation of the Asset after reimbursement of the Servicer
for its expenses and (ii) that such expenses will be recoverable by it from
related Insurance Proceeds or Liquidation Proceeds.
As servicer of the Assets, a Servicer, on behalf of itself, the Trustee
and the Securityholders, will present claims to the obligor under each
instrument of Credit Support, and will take such reasonable steps as are
necessary to receive payment or to permit recovery thereunder with respect to
defaulted Assets.
If a Servicer or its designee recovers payments under any instrument of
Credit Support with respect to any defaulted Assets, the Servicer will be
entitled to withdraw or cause to be withdrawn from the Collection Account out
of such proceeds, prior to distribution thereof to Securityholders, amounts
representing its normal servicing compensation on such Asset, unreimbursed
servicing expenses incurred with respect to the Asset and any unreimbursed
advances of delinquent payments made with respect to the Asset. See "-- Hazard
Insurance Policies" and "Description of Credit Support."
Hazard Insurance Policies
Mortgage Loans. Generally, each Agreement for a Trust Fund comprised of
Mortgage Loans will require the Servicer to cause the mortgagor on each
Mortgage Loan to maintain a hazard insurance policy providing for such coverage
as is required under the related Mortgage or, if any Mortgage permits the
holder thereof to dictate to the mortgagor the insurance coverage to be
maintained on the related Mortgaged Property, then such coverage as is
consistent with the Servicing Standard. Such coverage will be in general in an
amount equal to the lesser of the principal balance owing on such Mortgage Loan
(but not less than the amount necessary to avoid the application of any
co-insurance clause contained in the hazard insurance policy) and the amount
necessary to fully compensate for any damage or loss to the improvements on the
Mortgaged Property on a replacement cost basis or such other amount specified
in the related prospectus supplement. The ability of the Servicer to assure
that hazard insurance proceeds are appropriately applied may be dependent upon
its being named as an additional insured under any hazard insurance policy and
under any other insurance policy referred to below, or upon the extent to which
information in this regard is furnished by mortgagors. All amounts collected by
the Servicer under any such policy (except for amounts to be applied to the
restoration or repair of the Mortgaged Property or released to the mortgagor in
accordance with the Servicer's normal servicing procedures, subject to the
terms and conditions of the related Mortgage and Mortgage Note) will be
deposited in the Collection Account. The applicable Agreement may provide that
the Servicer may satisfy its obligation to cause each mortgagor to maintain
such a hazard insurance policy by the Servicer's maintaining a blanket policy
insuring against hazard losses on the Mortgage Loans. If such blanket policy
contains a deductible clause, the Servicer will be required to deposit in the
Collection Account all sums that would have been deposited therein but for such
clause.
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In general, the standard form of fire and extended coverage policy covers
physical damage to or destruction of the improvements of the property by fire,
lightning, explosion, smoke, windstorm and hail, and riot, strike and civil
commotion, subject to the conditions and exclusions specified in each policy.
Although the policies relating to the Mortgage Loans will be underwritten by
different insurers under different state laws in accordance with different
applicable state forms, and therefore will not contain identical terms and
conditions, the basic terms thereof are dictated by respective state laws, and
most such policies typically do not cover any physical damage resulting from
war, revolution, governmental actions, floods and other water-related causes,
earth movement (including earthquakes, landslides and mudflows), wet or dry
rot, vermin, domestic animals and certain other kinds of uninsured risks.
The hazard insurance policies covering the Mortgaged Properties securing
the Mortgage Loans will typically contain a coinsurance clause that in effect
requires the insured at all times to carry insurance of a specified percentage
(generally 80% to 90%) of the full replacement value of the improvements on the
property in order to recover the full amount of any partial loss. If the
insured's coverage falls below this specified percentage, such clause generally
provides that the insurer's liability in the event of partial loss does not
exceed the lesser of (i) the replacement cost of the improvements less physical
depreciation and (ii) such proportion of the loss as the amount of insurance
carried bears to the specified percentage of the full replacement cost of such
improvements.
Each Agreement for a Trust Fund comprised of Mortgage Loans will require
the Servicer to cause the mortgagor on each Mortgage Loan to maintain all such
other insurance coverage with respect to the related Mortgaged Property as is
consistent with the terms of the related Mortgage and the Servicing Standard,
which insurance may typically include flood insurance (if the related Mortgaged
Property was located at the time of origination in a federally designated flood
area).
Any cost incurred by the Servicer in maintaining any such insurance policy
will be added to the amount owing under the Mortgage Loan where the terms of
the Mortgage Loan so permit; provided, however, that the addition of such cost
will not be taken into account for purposes of calculating the distribution to
be made to Securityholders. Such costs may be recovered by the Servicer from
the Collection Account, with interest thereon, as provided by the applicable
Agreement.
Under the terms of the Mortgage Loans, mortgagors will generally be
required to present claims to insurers under hazard insurance policies
maintained on the related Mortgaged Properties. The Servicer, on behalf of the
Trustee and Securityholders, is obligated to present or cause to be presented
claims under any blanket insurance policy insuring against hazard losses on
Mortgaged Properties securing the Mortgage Loans. However, the ability of the
Servicer to present or cause to be presented such claims is dependent upon the
extent to which information in this regard is furnished to the Servicer by
mortgagors.
Contracts
Generally, the terms of the applicable Agreement for a Trust Fund
comprised of Contracts will require the Servicer to cause to be maintained with
respect to each Contract one or more hazard insurance policies which provide,
at a minimum, the same coverage as a standard form fire and extended coverage
insurance policy that is customary for manufactured housing, issued by a
company authorized to issue such policies in the state in which the
Manufactured Home is located, and in an amount which is not less than the
maximum insurable value of such Manufactured Home or the principal balance due
from the obligor on the related Contract, whichever is less; provided, however,
that the amount of coverage provided by each such hazard insurance policy shall
be sufficient to avoid the application of any co-insurance clause contained
therein. When a Manufactured Home's location was, at the time of origination of
the related Contract, within a federally designated special flood hazard area,
the Servicer shall cause such flood insurance to be maintained, which coverage
shall be at least equal to the minimum amount specified in the preceding
sentence or such lesser amount as may be available under the federal flood
insurance program. Each hazard insurance policy caused to be maintained by the
Servicer shall contain a standard loss payee clause in favor of the Servicer
and its
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successors and assigns. If any obligor is in default in the payment of premiums
on its hazard insurance policy or policies, the Servicer shall pay such
premiums out of its own funds, and may add separately such premium to the
obligor's obligation as provided by the Contract, but may not add such premium
to the remaining principal balance of the Contract.
The Servicer may maintain, in lieu of causing individual hazard insurance
policies to be maintained with respect to each Manufactured Home, and shall
maintain, to the extent that the related Contract does not require the obligor
to maintain a hazard insurance policy with respect to the related Manufactured
Home, one or more blanket insurance policies covering losses on the obligor's
interest in the Contracts resulting from the absence or insufficiency of
individual hazard insurance policies. The Servicer shall pay the premium for
such blanket policy on the basis described therein and shall pay any deductible
amount with respect to claims under such policy relating to the Contracts.
Fidelity Bonds and Errors and Omissions Insurance
Each Agreement will require that the Servicer obtain and maintain in
effect a fidelity bond or similar form of insurance coverage (which may provide
blanket coverage) or any combination thereof insuring against loss occasioned
by fraud, theft or other intentional misconduct of the officers, employees and
agents of the Servicer. The applicable Agreement will allow the Servicer to
self-insure against loss occasioned by the errors and omissions of the
officers, employees and agents of the Servicer so long as certain criteria set
forth in such Agreement are met.
Due-on-Sale Provisions
The Mortgage Loans may contain clauses requiring the consent of the
mortgagee to any sale or other transfer of the related Mortgaged Property, or
due-on-sale clauses entitling the mortgagee to accelerate payment of the
Mortgage Loan upon any sale, transfer or conveyance of the related Mortgaged
Property. The Servicer will generally enforce any due-on-sale clause to the
extent it has knowledge of the conveyance or proposed conveyance of the
underlying Mortgaged Property and it is entitled to do so under applicable law;
provided, however, that the Servicer will not take any action in relation to
the enforcement of any due-on-sale provision which would adversely affect or
jeopardize coverage under any applicable insurance policy. Any fee collected by
or on behalf of the Servicer for entering into an assumption agreement will be
retained by or on behalf of the Servicer as additional servicing compensation.
See "Certain Legal Aspects of Mortgage Loans -- Due-on-Sale Clauses." The
Contracts may also contain such clauses. The Servicer will generally permit
such transfer so long as the transferee satisfies the Servicer's then
applicable underwriting standards. The purpose of such transfers is often to
avoid a default by the transferring obligor. See "Certain Legal Aspects of the
Contracts -- Transfers of Manufactured Homes; Enforceability of "Due-on-Sale"
Clauses."
Retained Interest; Servicing Compensation and Payment of Expenses
The prospectus supplement for a Series of Securities will specify whether
there will be any Retained Interest in the Assets, and, if so, the initial
owner thereof. If so, the Retained Interest will be established on a
loan-by-loan basis and will be specified on an exhibit to the applicable
Agreement. A "RETAINED INTEREST" in an Asset represents a specified portion of
the interest payable thereon. The Retained Interest will be deducted from
mortgagor payments as received and will not be part of the related Trust Fund.
The Servicer's primary servicing compensation with respect to a Series of
Securities will come from the periodic payment to it of a portion of the
interest payment on each Asset or such other amount specified in the related
prospectus supplement. Since any Retained Interest and a Servicer's primary
compensation are percentages of the principal balance of each Asset, such
amounts will decrease in accordance with the amortization of the Assets. The
prospectus supplement with respect to a Series of Securities evidencing
interests in a Trust Fund that includes Mortgage Loans or Contracts may provide
that, as additional compensation, the Servicer may retain all or a portion of
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assumption fees, modification fees, late payment charges or Prepayment Premiums
collected from mortgagors and any interest or other income which may be earned
on funds held in the Collection Account or any account established by a
Servicer pursuant to the applicable Agreement.
The Servicer may, to the extent provided in the related prospectus
supplement, pay from its servicing compensation certain expenses incurred in
connection with its servicing and managing of the Assets, including, without
limitation, payment of the fees and disbursements of the Trustee and
independent accountants, payment of expenses incurred in connection with
distributions and reports to Securityholders, and payment of any other expenses
described in the related prospectus supplement. Certain other expenses,
including certain expenses relating to defaults and liquidations on the Assets
and, to the extent so provided in the related prospectus supplement, interest
thereon at the rate specified therein may be borne by the Trust Fund.
If and to the extent provided in the related prospectus supplement, the
Servicer may be required to apply a portion of the servicing compensation
otherwise payable to it in respect of any Due Period to certain interest
shortfalls resulting from the voluntary prepayment of any Assets in the related
Trust Fund during such period prior to their respective due dates therein.
Evidence as to Compliance
Each Agreement relating to Assets which include Mortgage Loans or
Contracts will provide that on or before a specified date in each year, a firm
of independent public accountants will furnish a statement to the Trustee to
the effect that, on the basis of the examination by such firm conducted
substantially in compliance with either the Uniform Single Attestation Program
for Mortgage Bankers, the Audit Program for Mortgages serviced for Freddie Mac
or such other program used by the Servicer, the servicing by or on behalf of
the Servicer of mortgage loans under agreements substantially similar to each
other (including the applicable Agreement) was conducted in compliance with the
terms of such agreements or such program except for any significant exceptions
or errors in records that, in the opinion of the firm, either the Audit Program
for Mortgages serviced for Freddie Mac, or paragraph 4 of the Uniform Single
Attestation Program for Mortgage Bankers, or such other program, requires it to
report.
Each such Agreement will also provide for delivery to the Trustee, on or
before a specified date in each year, of an annual statement signed by two
officers of the Servicer to the effect that the Servicer has fulfilled its
obligations under the applicable Agreement throughout the preceding calendar
year or other specified twelve-month period.
Copies of such annual accountants' statement and such statements of
officers will be obtainable by Securityholders without charge upon written
request to the Servicer or other entity specified in the related prospectus
supplement at the address set forth in the related prospectus supplement.
Certain Matters Regarding Servicers, the Master Servicer and the Depositor
The Servicers and Master Servicer, if any, under each Agreement will be
named in the related prospectus supplement. The entities serving as Servicer or
Master Servicer may be affiliates of the Depositor and may have other normal
business relationships with the Depositor or the Depositor's affiliates.
Reference herein to the Servicer shall be deemed to be to the Master Servicer,
if applicable.
The applicable Agreement will provide that the Servicer may resign from
its obligations and duties thereunder only upon a determination that its duties
under such Agreement are no longer permissible under applicable law or are in
material conflict by reason of applicable law with any other activities carried
on by it, the other activities of the Servicer so causing such a conflict being
of a type and nature carried on by the Servicer at the date of such Agreement.
No such resignation will become effective until the Trustee or a successor
servicer has assumed the Servicer's obligations and duties under the applicable
Agreement.
Each Agreement will further provide that neither any Servicer, the
Depositor nor any director, officer, employee, or agent of a Servicer or the
Depositor will be under any liability to the related
59
Trust Fund or Securityholders for any action taken, or for refraining from the
taking of any action, in good faith pursuant to the applicable Agreement;
provided, however, that neither a Servicer, the Depositor nor any such person
will be protected against any breach of a representation, warranty or covenant
made in such Agreement, or against any liability specifically imposed thereby,
or against any liability which would otherwise be imposed by reason of willful
misfeasance, bad faith or gross negligence in the performance of obligations or
duties thereunder or by reason of reckless disregard of obligations and duties
thereunder. Each Agreement will further provide that any Servicer, the
Depositor and any director, officer, employee or agent of a Servicer or the
Depositor will be entitled to indemnification by the related Trust Fund and
will be held harmless against any loss, liability or expense incurred in
connection with any legal action relating to the applicable Agreement or the
Securities; provided, however, that such indemnification will not extend to any
loss, liability or expense
o specifically imposed by such Agreement or otherwise incidental to the
performance of obligations and duties thereunder, including, in the
case of a Servicer, the prosecution of an enforcement action in
respect of any specific Mortgage Loan or Mortgage Loans or Contract or
Contracts (except as any such loss, liability or expense shall be
otherwise reimbursable pursuant to such Agreement);
o incurred in connection with any breach of a representation, warranty
or covenant made in such Agreement;
o incurred by reason of misfeasance, bad faith or gross negligence in
the performance of obligations or duties thereunder, or by reason of
reckless disregard of such obligations or duties;
o incurred in connection with any violation of any state or federal
securities law; or
o imposed by any taxing authority if such loss, liability or expense is
not specifically reimbursable pursuant to the terms of the applicable
Agreement.
In addition, each Agreement will provide that neither any Servicer nor the
Depositor will be under any obligation to appear in, prosecute or defend any
legal action which is not incidental to its respective responsibilities under
the applicable Agreement and which in its opinion may involve it in any expense
or liability. Any such Servicer or the Depositor may, however, in its
discretion undertake any such action which it may deem necessary or desirable
with respect to the applicable Agreement and the rights and duties of the
parties thereto and the interests of the Securityholders thereunder. In such
event, the legal expenses and costs of such action and any liability resulting
therefrom will be expenses, costs and liabilities of the Securityholders, and
the Servicer or the Depositor, as the case may be, will be entitled to be
reimbursed therefor and to charge the Collection Account.
Any person into which the Servicer or the Depositor may be merged or
consolidated, or any person resulting from any merger or consolidation to which
the Servicer or the Depositor is a party, or any person succeeding to the
business of the Servicer or the Depositor, will be the successor of the
Servicer or the Depositor, as the case may be, under the applicable Agreement.
Special Servicers
If and to the extent specified in the related prospectus supplement, a
special servicer (a "SPECIAL SERVICER") may be a party to the applicable
Agreement or may be appointed by the Servicer or another specified party to
perform certain specified duties in respect of servicing the related Mortgage
Loans that would otherwise be performed by the Servicer, such as the workout
and/or foreclosure of defaulted Mortgage Loans. The rights and obligations of
any Special Servicer will be specified in the related Agreement The Servicer
will be liable for the performance of a Special Servicer only if, and to the
extent, set forth in such Agreement.
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Events of Default under the Agreements
Events of default under the applicable Agreement will generally include:
o any failure by the Servicer to distribute or cause to be distributed
to Securityholders, or to remit to the Trustee for distribution to
Securityholders, any required payment that continues after a grace
period, if any;
o any failure by the Servicer duly to observe or perform in any material
respect any of its other covenants or obligations under the applicable
Agreement which continues unremedied for 30 days after written notice
of such failure has been given to the Servicer by the Trustee or the
Depositor, or to the Servicer, the Depositor and the Trustee by
Securityholders evidencing not less than 25% of the Voting Rights;
o any breach of a representation or warranty made by the Servicer under
the applicable Agreement which materially and adversely affects the
interests of Securityholders and which continues unremedied for 30
days after written notice of such breach has been given to the
Servicer by the Trustee or the Depositor, or to the Servicer, the
Depositor and the Trustee by the holders of Securities evidencing not
less than 25% of the Voting Rights; and
o certain events of insolvency, readjustment of debt, marshaling of
assets and liabilities or similar proceedings and certain actions by
or on behalf of the Servicer indicating its insolvency or inability to
pay its obligations.
Material variations to the foregoing events of default (other than to shorten
cure periods or eliminate notice requirements) will be specified in the related
prospectus supplement. The Trustee will, not later than the later of 60 days or
such other period specified in the related prospectus supplement after the
occurrence of any event which constitutes or, with notice or lapse of time or
both, would constitute an event of default and five days after certain officers
of the Trustee become aware of the occurrence of such an event, transmit by
mail to the Depositor and all Securityholders of the applicable Series notice
of such occurrence, unless such default shall have been cured or waived.
The manner of determining the "Voting Rights" of a Security or Class or
Classes of Securities will be specified in the related prospectus supplement.
Rights Upon Event of Default under the Agreements
So long as an event of default under an Agreement remains unremedied, the
Depositor or the Trustee may, and at the direction of holders of Securities
evidencing not less than 51% (or such other percentage specified in the related
prospectus supplement) of the Voting Rights, the Trustee shall terminate all of
the rights and obligations of the Servicer under the applicable Agreement and
in and to the Mortgage Loans (other than as a Securityholder or as the owner of
any Retained Interest), whereupon the Trustee will succeed to all of the
responsibilities, duties and liabilities of the Servicer under the applicable
Agreement (except that if the Trustee is prohibited by law from obligating
itself to make advances regarding delinquent Assets, or if the related
prospectus supplement so specifies, then the Trustee will not be obligated to
make such advances) and will be entitled to similar compensation arrangements.
In the event that the Trustee is unwilling or unable so to act, it may or, at
the written request of the holders of Securities entitled to at least 51% (or
such other percentage specified in the related prospectus supplement) of the
Voting Rights, it shall appoint, or petition a court of competent jurisdiction
for the appointment of, a loan servicing institution acceptable to the Rating
Agency with a net worth at the time of such appointment of at least $15,000,000
(or such other amount specified in the related prospectus supplement) to act as
successor to the Servicer under the applicable Agreement. Pending such
appointment, the Trustee is obligated to act in such capacity. The Trustee and
any such successor may agree upon the servicing compensation to be paid, which
in no event may be greater than the compensation payable to the Servicer under
the applicable Agreement.
The holders of Securities representing at least 66 2/3% (or such other
percentage specified in the related prospectus supplement) of the Voting Rights
allocated to the respective Classes of Securities
61
affected by any event of default will be entitled to waive such event of
default; provided, however, that an Event of Default involving a failure to
distribute a required payment to Securityholders described in the first bullet
point above under "-- Events of Default under the Agreements" may be waived
only by all of the Securityholders. Upon any such waiver of an event of
default, such event of default shall cease to exist and shall be deemed to have
been remedied for every purpose under the applicable Agreement.
No Securityholders will have the right under any Agreement to institute
any proceeding with respect thereto unless such holder previously has given to
the Trustee written notice of default and unless the holders of Securities
evidencing not less than 25% (or such other percentage specified in the related
prospectus supplement) of the Voting Rights have made written request upon the
Trustee to institute such proceeding in its own name as Trustee thereunder and
have offered to the Trustee reasonable indemnity, and the Trustee for 60 days
(or such other number of days specified in the related prospectus supplement)
has neglected or refused to institute any such proceeding. The Trustee,
however, is under no obligation to exercise any of the trusts or powers vested
in it by any Agreement or to make any investigation of matters arising
thereunder or to institute, conduct or defend any litigation thereunder or in
relation thereto at the request, order or direction of any of the
Securityholders covered by such Agreement, unless such Securityholders have
offered to the Trustee reasonable security or indemnity against the costs,
expenses and liabilities which may be incurred therein or thereby.
Amendment
Each Agreement may be amended by the parties thereto, without the consent
of any Securityholders covered by the applicable Agreement,
o to cure any ambiguity or mistake,
o to correct, modify or supplement any provision therein which may be
inconsistent with any other provision therein or with the related
prospectus supplement,
o to make any other provisions with respect to matters or questions
arising under the applicable Agreement which are not materially
inconsistent with the provisions thereof, provided that, such
amendment pursuant to this clause will not adversely affect in any
material respect the interests of any Securityholders covered by the
applicable Agreement as evidenced either by an opinion of counsel to
such effect or the delivery to the Trustee of written notification
from each Rating Agency that provides, at the request of the
Depositor, a rating for the Offered Securities of the related Series
to the effect that such amendment or supplement will not cause such
Rating Agency to lower or withdraw the then current rating assigned to
such Securities; or
o to comply with any requirements imposed by the Code.
Each Agreement may also be amended by the Depositor, the Servicer, if any, and
the Trustee, with the consent of the Securityholders affected thereby
evidencing not less than 51% (or such other percentage specified in the related
prospectus supplement) of the Voting Rights, for any purpose; provided,
however, no such amendment may (i) reduce in any manner the amount of, or delay
the timing of, payments received or advanced on Assets which are required to be
distributed on any Security without the consent of the Securityholder or (ii)
reduce the consent percentages described in this paragraph without the consent
of all the Securityholders covered by such Agreement then outstanding. However,
with respect to any Series of Securities as to which a REMIC election or a
FASIT election is to be made, the Trustee will not consent to any amendment of
the applicable Agreement unless it shall first have received an opinion of
counsel to the effect that such amendment will not result in the imposition of
a tax on the related Trust Fund or cause the related Trust Fund to fail to
qualify as a REMIC or a FASIT, as the case may be, at any time that the related
Securities are outstanding.
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The Trustee
The Trustee under each Agreement will be named in the related prospectus
supplement. The commercial bank, national banking association, banking
corporation or trust company serving as Trustee may have a banking relationship
with the Depositor and its affiliates, with any Servicer and its affiliates and
with any Master Servicer and its affiliates. If so specified in the related
prospectus supplement with respect to certain Series of Securities, a
certificate administrator will perform certain duties and functions normally
performed by the Trustee. Any certificate administrator will be a party to the
applicable Agreement and will be named in the applicable prospectus supplement.
Any certificate administrator will have obligations and rights similar to the
Trustee as described in this prospectus. The commercial bank, national banking
association, banking corporation or trust company serving as certificate
administrator may have a banking relationship with the Depositor and its
affiliates, with any Servicer and its affiliates and with any Master Servicer
and its affiliates.
Duties of the Trustee
The Trustee will make no representations as to the validity or sufficiency
of any Agreement, the Securities or any Asset or related document and is not
accountable for the use or application by or on behalf of any Servicer of any
funds paid to the Master Servicer or its designee in respect of the Securities
or the Assets, or deposited into or withdrawn from the Collection Account or
any other account by or on behalf of the Servicer. If no Event of Default has
occurred and is continuing, the Trustee is required to perform only those
duties specifically required under the applicable Agreement, as applicable.
However, upon receipt of the various certificates, reports or other instruments
required to be furnished to it, the Trustee is required to examine such
documents and to determine whether they conform to the requirements of the
applicable Agreement.
Certain Matters Regarding the Trustee
The Trustee and any director, officer, employee or agent of the Trustee
shall be entitled to indemnification out of the Collection Account for any
loss, liability or expense (including costs and expenses of litigation, and of
investigation, counsel fees, damages, judgments and amounts paid in settlement)
incurred in connection with the Trustee's
o enforcing its rights and remedies and protecting the interests, of the
Securityholders during the continuance of an Event of Default,
o defending or prosecuting any legal action in respect of the applicable
Agreement or Series of Securities,
o being the mortgagee of record with respect to the Mortgage Loans in a
Trust Fund and the owner of record with respect to any Mortgaged
Property acquired in respect thereof for the benefit of
Securityholders, or
o acting or refraining from acting in good faith at the direction of the
holders of the related Series of Securities entitled to not less than
25% (or such other percentage as is specified in the applicable
Agreement with respect to any particular matter) of the Voting Rights
for such Series.
Any such indemnification of the Trustee discussed above will not extend to any
loss, liability or expense that constitutes a specific liability of the Trustee
pursuant to the applicable Agreement, or to any loss, liability or expense
incurred by reason of willful misfeasance, bad faith or negligence on the part
of the Trustee in the performance of its obligations and duties thereunder, or
by reason of its reckless disregard of such obligations or duties, or as may
arise from a breach of any representation, warranty or covenant of the Trustee
made therein.
Resignation and Removal of the Trustee
The Trustee may at any time resign from its obligations and duties under
an Agreement by giving written notice thereof to the Depositor, the Servicer,
if any, and all Securityholders. Upon receiving
63
such notice of resignation, the Depositor is required promptly to appoint a
successor trustee acceptable to the Servicer, if any. If no successor trustee
shall have been so appointed and have accepted appointment within 30 days after
the giving of such notice of resignation, the resigning Trustee may petition
any court of competent jurisdiction for the appointment of a successor trustee.
If at any time the Trustee shall cease to be eligible to continue as such
under the applicable Agreement, or if at any time the Trustee shall become
incapable of acting, or shall be adjudged bankrupt or insolvent, or a receiver
of the Trustee or of its property shall be appointed, or any public officer
shall take charge or control of the Trustee or of its property or affairs for
the purpose of rehabilitation, conservation or liquidation, or if a change in
the financial condition of the Trustee has adversely affected or will adversely
affect the rating on any Class of the Securities, then the Depositor may remove
the Trustee and appoint a successor trustee acceptable to the Master Servicer,
if any. Securityholders of any Series entitled to at least 51% (or such other
percentage specified in the related prospectus supplement) of the Voting Rights
for such Series may at any time remove the Trustee without cause and appoint a
successor trustee.
Any resignation or removal of the Trustee and appointment of a successor
trustee shall not become effective until acceptance of appointment by the
successor trustee.
MATERIAL TERMS OF THE INDENTURE
General
The following summary describes the material provisions that may appear in
each Indenture. The prospectus supplement for a Series of Notes will describe
any provision of the Indenture relating to such Series that materially differs
from the description thereof 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 Indenture for a Series of Notes.
A form of an Indenture has been filed as an exhibit to the Registration
Statement of which this prospectus is a part. The Depositor will provide a copy
of the Indenture (without exhibits) relating to any Series of Notes without
charge upon written request of a Securityholder of such Series addressed to
Wachovia Asset Securitization, Inc., 8739 Research Drive, NC0121-Suite D,
Charlotte, North Carolina 28288-0121, Attention: Vice President.
Events of Default
Events of default under the Indenture for each Series of Notes will
generally include:
o a default for thirty (30) days (or such other number of days specified
in such prospectus supplement) or more in the payment of any principal
of or interest on any Note of such Series;
o failure to perform any other covenant of the Depositor or the Trust
Fund in the Indenture which continues for a period of sixty (60) days
(or such other number of days specified in such prospectus supplement)
after notice thereof 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 thereto or in connection therewith with respect to or
affecting such Series having been incorrect in a material respect as
of the time made, and such breach is not cured within sixty (60) days
(or such other number of days specified in such prospectus supplement)
after notice thereof is given in accordance with the procedures
described in the related prospectus supplement;
o certain events of bankruptcy, insolvency, receivership or liquidation
of the Depositor or the Trust Fund; or
o any other event of default provided with respect to Notes of that
Series.
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If an event of default with respect to the Notes of any Series at the time
outstanding occurs and is continuing, either the Indenture Trustee or the
Securityholders of a majority of the then aggregate outstanding amount of the
Notes of such Series may declare the principal amount (or, if the Notes of that
Series are Accrual Securities, such portion of the principal amount as may be
specified in the terms of that Series, as provided in the related prospectus
supplement) of all the Notes of such Series to be due and payable immediately.
Such declaration may, under certain circumstances, be rescinded and annulled by
the Securityholders of a majority in aggregate outstanding amount of the Notes
of such Series.
If, following an event of default with respect to any Series of Notes, the
Notes of such Series have been declared to be due and payable, the Indenture
Trustee may, in its discretion, notwithstanding such acceleration, elect to
maintain possession of the collateral securing the Notes of such Series and to
continue to apply distributions on such collateral as if there had been no
declaration of acceleration if such collateral continues to provide sufficient
funds for the payment of principal of and interest on the Notes of such Series
as they would have become due if there had not been such 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 or interest on any Note of such
Series for thirty (30) days or more, unless (a) the Securityholders of 100% (or
such other percentage specified in the related prospectus supplement) of the
then aggregate outstanding amount of the Notes of such Series consent to such
sale, (b) the proceeds of such sale or liquidation are sufficient to pay in
full the principal of and accrued interest, due and unpaid, on the outstanding
Notes of such Series at the date of such sale or (c) the Indenture Trustee
determines that such collateral would not be sufficient on an ongoing basis to
make all payments on such Notes as such payments would have become due if such
Notes had not been declared due and payable, and the Indenture Trustee obtains
the consent of the Securityholders of 662/3% (or such other percentage
specified in the related prospectus supplement) of the then aggregate
outstanding amount of the Notes of such 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 such other number of days specified in the related prospectus supplement)
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 such liquidation for unpaid fees and expenses. As a result,
upon the occurrence of such an event of default, the amount available for
distribution to the Securityholders would be less than would otherwise be the
case. However, the Indenture Trustee may not institute a proceeding for the
enforcement of its lien except in connection with a proceeding for the
enforcement of the lien of the Indenture for the benefit of the Securityholders
after the occurrence of such an event of default.
To the extent provided in the related prospectus supplement, in the event
the principal of the Notes of a Series is declared due and payable, as
described above, the Securityholders of any such Notes issued at a discount
from par may be entitled to receive no more than an amount equal to the unpaid
principal amount thereof less the amount of such discount which is unamortized.
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 shall be under no
obligation to exercise any of the rights or powers under the Indenture at the
request or direction of any of the Securityholders of such Series, unless such
holders offered to the Indenture Trustee security or indemnity satisfactory to
it against the costs, expenses and liabilities which might be incurred by it in
complying with such request or direction. Subject to such provisions for
indemnification and certain limitations contained in the Indenture, the
Securityholders of a majority of the then aggregate outstanding amount of the
Notes of such 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 the Notes of such Series, and the Securityholders of a majority of
the then aggregate outstanding amount of the Notes of such Series may, in
certain cases, waive any default with respect thereto,
65
except a default in the payment of principal or interest or a default in
respect of a covenant or provision of the Indenture that cannot be modified
without the waiver or consent of all the Securityholders of the outstanding
Notes of such Series affected thereby.
Discharge of 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 such
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 such Series.
In addition to such discharge with certain limitations, the Indenture will
provide that, if so specified with respect to the Notes of any Series, the
related Trust Fund will be discharged from any and all obligations in respect
of the Notes of such Series (except for certain obligations relating to
temporary Notes and exchange of Notes, to register the transfer of or exchange
Notes of such Series, to replace stolen, lost or mutilated Notes of such
Series, to maintain paying agencies and to hold monies for payment in trust)
upon the deposit with the Indenture Trustee, in trust, of money and/or direct
obligations of or obligations guaranteed by the United States of America which
through the payment of interest and principal in respect thereof in accordance
with their terms will provide money in an amount sufficient to pay the
principal of and each installment of interest on the Notes of such Series on
the maturity date for such Notes and any installment of interest on such Notes
in accordance with the terms of the Indenture and the Notes of such Series. In
the event of any such defeasance and discharge of Notes of such Series, holders
of Notes of such Series would be able to look only to such money and/or direct
obligations for payment of principal and interest, if any, on their Notes until
maturity.
Indenture Trustee's Annual Report
The Indenture Trustee for each Series of Notes will be required to mail
each year to all related Securityholders a brief report relating to its
eligibility and qualification to continue as Indenture Trustee under the
related Indenture, any amounts advanced by it under the Indenture, the amount,
interest rate and maturity date of certain indebtedness owing by such Trust to
the applicable Indenture Trustee in its individual capacity, the property and
funds physically held by such Indenture Trustee as such and any action taken by
it that materially affects such Notes and that has not been previously
reported.
The Indenture Trustee
The Indenture Trustee for a Series of Notes will be specified in the
related prospectus supplement. The Indenture Trustee for any Series may resign
at any time, in which event the Depositor will be obligated to appoint a
successor trustee for such Series. The Depositor may also remove any such
Indenture Trustee if such Indenture Trustee ceases to be eligible to continue
as such under the related Indenture or if such Indenture Trustee becomes
insolvent. In such circumstances the Depositor will be obligated to appoint a
successor trustee for the applicable Series of Notes. Any resignation or
removal of the Indenture Trustee and appointment of a successor trustee for any
Series of Notes does not become effective until acceptance of the appointment
by the successor trustee for such Series.
The bank or trust company serving as Indenture Trustee may have a banking
relationship with the Depositor or any of its affiliates, a Servicer or any of
its affiliates or the Master Servicer or any of its affiliates.
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DESCRIPTION OF CREDIT SUPPORT
GENERAL
For any Series of Securities, Credit Support may be provided with respect
to one or more Classes thereof or the related Assets. Credit Support may be in
the form of the subordination of one or more Classes of Securities, letters of
credit, insurance policies, guarantees, the establishment of one or more
reserve funds or another method of Credit Support described in the related
prospectus supplement, or any combination of the foregoing. If so provided in
the related prospectus supplement, any form of Credit Support may be structured
so as to be drawn upon by more than one Series to the extent described therein.
The coverage provided by any Credit Support will be described in the
related prospectus supplement. Generally, such coverage will not provide
protection against all risks of loss and will not guarantee repayment of the
entire Security Balance of the Securities and interest thereon. If losses or
shortfalls occur that exceed the amount covered by Credit Support or that are
not covered by Credit Support, Securityholders will bear their allocable share
of deficiencies. Moreover, if a form of Credit Support covers more than one
Series of Securities (each, a "COVERED TRUST"), Securityholders evidencing
interests in any of such Covered Trusts will be subject to the risk that such
Credit Support will be exhausted by the claims of other Covered Trusts prior to
such Covered Trust receiving any of its intended share of such coverage.
If Credit Support is provided with respect to one or more Classes of
Securities of a Series, or the related Assets, the related prospectus
supplement will include a description of:
o the nature and amount of coverage under such Credit Support,
o any conditions to payment thereunder not otherwise described herein,
o the conditions, if any, under which the amount of coverage under such
Credit Support may be reduced and under which such Credit Support may
be terminated or replaced and
o the material provisions relating to such Credit Support.
Additionally, the related prospectus supplement will set forth certain
information with respect to the obligor under any instrument of Credit Support,
including:
o a brief description of its principal business activities,
o its principal place of business, place of incorporation and the
jurisdiction under which it is chartered or licensed to do business,
o if applicable, the identity of regulatory agencies that exercise
primary jurisdiction over the conduct of its business and
o its total assets, and its stockholders' or policyholders' surplus, if
applicable, as of the date specified in the prospectus supplement.
See "Risk Factors -- Risks Associated with the Securities -- Credit Enhancement
is Limited in Amount and Coverage."
SUBORDINATE SECURITIES
If so specified in the related prospectus supplement, one or more Classes
of Securities of a Series may be Subordinate Securities. To the extent
specified in the related prospectus supplement, the rights of the holders of
Subordinate Securities to receive distributions of principal and interest from
the Collection Account on any Distribution Date will be subordinated to such
rights of the holders of Senior Securities. If so provided in the related
prospectus supplement, the subordination of a Class may apply only in the event
of (or may be limited to) certain types of losses or shortfalls. The related
prospectus supplement will set forth information concerning the amount of
subordination of a Class or Classes of Subordinate Securities in a Series, the
circumstances in which such subordination will be applicable and the manner, if
any, in which the amount of subordination will be effected.
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CROSS-SUPPORT PROVISIONS
If the Assets for a Series are divided into separate groups, each
supporting a separate Class or Classes of Securities of a Series, Credit
Support may be provided by cross-support provisions requiring that
distributions be made on Senior Securities evidencing interests in one group of
Mortgage Loans prior to distributions on Subordinate Securities evidencing
interests in a different group of Mortgage Loans within the Trust Fund. The
prospectus supplement for a Series that includes a cross-support provision will
describe the manner and conditions for applying such provisions.
LIMITED GUARANTEE
If so specified in the related prospectus supplement with respect to a
Series of Securities, credit enhancement may be provided in the form of a
limited guarantee issued by a guarantor named therein.
FINANCIAL GUARANTY INSURANCE POLICY OR SURETY BOND
If so specified in the related prospectus supplement with respect to a
Series of Securities, credit enhancement may be provided in the form of a
financial guaranty insurance policy or a surety bond issued by an insurer named
therein.
LETTER OF CREDIT
Alternative credit support with respect to a Series of Securities may be
provided by the issuance of a letter of credit by the bank or financial
institution specified in the related prospectus supplement. The coverage,
amount and frequency of any reduction in coverage provided by a letter of
credit issued with respect to a Series of Securities will be set forth in the
prospectus supplement relating to such Series.
POOL INSURANCE POLICIES
If so specified in the related prospectus supplement relating to a Series
of Securities, a pool insurance policy for the Mortgage Loans in the related
Trust Fund will be obtained. The pool insurance policy will cover any loss,
subject to the limitations described in the related prospectus supplement, by
reason of default to the extent a related Mortgage Loan is not covered by any
primary mortgage insurance policy. The amount and principal terms of any such
coverage will be set forth in the prospectus supplement.
SPECIAL HAZARD INSURANCE POLICIES
If so specified in the related prospectus supplement, a special hazard
insurance policy may also be obtained for the related Trust Fund in the amount
set forth in such prospectus supplement. The special hazard insurance policy
will, subject to the limitations described in the related prospectus
supplement, protect against loss by reason of damage to Mortgaged Properties
caused by certain hazards not insured against under the standard form of hazard
insurance policy for the respective states, in which the Mortgaged Properties
are located. The amount and principal terms of any such coverage will be set
forth in the prospectus supplement.
MORTGAGOR BANKRUPTCY BOND
If so specified in the related prospectus supplement, losses resulting
from a bankruptcy proceeding relating to a mortgagor affecting the Mortgage
Loans in a Trust Fund with respect to a Series of Securities will be covered
under a mortgagor bankruptcy bond, or any other instrument that will not result
in a downgrading of the rating of the Securities of a Series by the Rating
Agency or Rating Agencies that rate such Series. Any mortgagor bankruptcy bond
or such other instrument will provide for coverage in an amount meeting the
criteria of the Rating Agency or Rating Agencies
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rating the Securities of the related Series, which amount will be set forth in
the related prospectus supplement. The amount and principal terms of any such
coverage will be set forth in the prospectus supplement.
RESERVE FUNDS
If so provided in the prospectus supplement for a Series of Securities,
deficiencies in amounts otherwise payable on such Securities or certain Classes
thereof will be covered by one or more reserve funds in which cash, a letter of
credit, Permitted Investments, a demand note or a combination thereof will be
deposited, in the amounts so specified in such prospectus supplement. The
reserve funds for a Series may also be funded over time by depositing therein a
specified amount of the distributions received on the related Assets as
specified in the related prospectus supplement.
Amounts on deposit in any reserve fund for a Series, together with the
reinvestment income thereon, if any, will be applied for the purposes, in the
manner, and to the extent specified in the related prospectus supplement. A
reserve fund may be provided to increase the likelihood of timely distributions
of principal of and interest on the Securities. If so specified in the related
prospectus supplement, reserve funds may be established to provide limited
protection against only certain types of losses and shortfalls. Following each
Distribution Date amounts in a reserve fund in excess of any amount required to
be maintained therein may be released from the reserve fund under the
conditions and to the extent specified in the related prospectus supplement and
will not be available for further application to the Securities.
Moneys deposited in any reserve funds will be invested in Permitted
Investments, to the extent specified in the related prospectus supplement. To
the extent specified in the related prospectus supplement, any reinvestment
income or other gain from such investments will be credited to the related
reserve fund for such Series, and any loss resulting from such investments will
be charged to such reserve fund. However, such income may be payable to any
related Servicer or another service provider as additional compensation. To the
extent specified in the related prospectus supplement, the reserve fund, if
any, for a Series will not be a part of the Trust Fund.
Additional information concerning any reserve fund will be set forth in
the related prospectus supplement, including the initial balance of such
reserve fund, the balance required to be maintained in the reserve fund, the
manner in which such required balance will decrease over time, the manner of
funding such reserve fund, the purposes for which funds in the reserve fund may
be applied to make distributions to Securityholders and use of investment
earnings from the reserve fund, if any.
OVERCOLLATERALIZATION
If specified in the related prospectus supplement, subordination
provisions of a Trust Fund may be used to accelerate to a limited extent the
amortization of one or more Classes of Securities relative to the amortization
of the related Assets. The accelerated amortization is achieved by the
application of certain excess interest to the payment of principal of one or
more Classes of Securities. This acceleration feature creates, with respect to
the Assets or groups thereof, overcollateralization which results from the
excess of the aggregate principal balance of the related Assets, or a group
thereof, over the principal balance of the related Class or Classes of
Securities. Such acceleration may continue for the life of the related
Security, or may be limited. In the case of limited acceleration, once the
required level of overcollateralization is reached, and subject to certain
provisions specified in the related prospectus supplement, such limited
acceleration feature may cease, unless necessary to maintain the required level
of overcollateralization.
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CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS
The following discussion contains summaries, which are general in nature,
of certain legal aspects of loans secured by single-family or multi-family
residential properties. Because such legal aspects are governed primarily by
applicable state law (which laws may differ substantially), the summaries do
not purport to be complete nor to reflect the laws of any particular state, nor
to encompass the laws of all states in which the security for the Mortgage
Loans is situated. The summaries are qualified in their entirety by reference
to the applicable federal and state laws governing the Mortgage Loans. See
"Description of the Trust Funds -- Assets."
GENERAL
All of the Mortgage Loans are loans evidenced by a note or bond and
secured by instruments granting a security interest in real property which may
be mortgages, deeds of trust, security deeds or deeds to secure debt, depending
upon the prevailing practice and law in the state in which the Mortgaged
Property is located. Mortgages, deeds of trust and deeds to secure debt are
herein collectively referred to as "mortgages." Any of the foregoing types of
mortgages will create a lien upon, or grant a title interest in, the subject
property, the priority of which will depend on the terms of the particular
security instrument, as well as separate, recorded, contractual arrangements
with others holding interests in the mortgaged property, the knowledge of the
parties to such instrument as well as the order of recordation of the
instrument in the appropriate public recording office. However, recording does
not generally establish priority over governmental claims for real estate taxes
and assessments and other charges imposed under governmental police powers.
TYPES OF MORTGAGE INSTRUMENTS
A mortgage either creates a lien against or constitutes a conveyance of
real property between two parties -- a mortgagor (the borrower and usually the
owner of the subject property) and a mortgagee (the lender). In contrast, a
deed of trust is a three-party instrument, among a trustor (the equivalent of a
mortgagor), a trustee to whom the mortgaged property is conveyed, and a
beneficiary (the lender) for whose benefit the conveyance is made. As used in
this prospectus, unless the context otherwise requires, "mortgagor" includes
the trustor under a deed of trust and a grantor under a security deed or a deed
to secure debt. Under a deed of trust, the mortgagor grants the property,
irrevocably until the debt is paid, in trust, generally with a power of sale as
security for the indebtedness evidenced by the related note. A deed to secure
debt typically has two parties. By executing a deed to secure debt, the grantor
conveys title to, as opposed to merely creating a lien upon, the subject
property to the grantee until such time as the underlying debt is repaid,
generally with a power of sale as security for the indebtedness evidenced by
the related mortgage note. In case the mortgagor under a mortgage is a land
trust, there would be an additional party because legal title to the property
is held by a land trustee under a land trust agreement for the benefit of the
mortgagor. At origination of a mortgage loan involving a land trust, the
mortgagor executes a separate undertaking to make payments on the mortgage
note. The mortgagee's authority under a mortgage, the trustee's authority under
a deed of trust and the grantee's authority under a deed to secure debt are
governed by the express provisions of the mortgage, the law of the state in
which the real property is located, certain federal laws (including, without
limitation, the Relief Act) and, in some cases, in deed of trust transactions,
the directions of the beneficiary.
The Mortgages that encumber Multifamily Properties may contain an
assignment of rents and leases, pursuant to which the mortgagor assigns to the
lender the mortgagor's right, title and interest as landlord under each lease
and the income derived therefrom, while retaining a revocable license to
collect the rents for so long as there is no default. If the mortgagor
defaults, the license terminates and the lender is entitled to collect the
rents. Local law may require that the lender take possession of the property
and/or obtain a court-appointed receiver before becoming entitled to collect
the rents.
INTEREST IN REAL PROPERTY
The real property covered by a mortgage, deed of trust, security deed or
deed to secure debt is most often the fee estate in land and improvements.
However, such an instrument may encumber
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other interests in real property such as a tenant's interest in a lease of land
or improvements, or both, and the leasehold estate created by such lease. An
instrument covering an interest in real property other than the fee estate
requires special provisions in the instrument creating such interest or in the
mortgage, deed of trust, security deed or deed to secure debt, to protect the
mortgagee against termination of such interest before the mortgage, deed of
trust, security deed or deed to secure debt is paid. The Depositor, the Asset
Seller or other entity specified in the related prospectus supplement will make
certain representations and warranties in the applicable Agreement or certain
representations and warranties will be assigned to the Trustee with respect to
any Mortgage Loans that are secured by an interest in a leasehold estate. Such
representation and warranties, if applicable, will be set forth in the
prospectus supplement.
COOPERATIVE LOANS
If specified in the prospectus supplement relating to a Series of Offered
Securities, the Mortgage Loans may also consist of cooperative apartment loans
("COOPERATIVE LOANS") secured by security interests in shares issued by a
cooperative housing corporation (a "COOPERATIVE") and in the related
proprietary leases or occupancy agreements granting exclusive rights to occupy
specific dwelling units in the cooperatives' buildings. The security agreement
will create a lien upon, or grant a title interest in, the property which it
covers, the priority of which will depend on the terms of the particular
security agreement as well as the order of recordation of the agreement in the
appropriate recording office. Such a lien or title interest is not prior to the
lien for real estate taxes and assessments and other charges imposed under
governmental police powers.
Each Cooperative owns in fee or has a leasehold interest in all the real
property and owns in fee or leases the building and all separate dwelling units
therein. The Cooperative is directly responsible for property management and,
in most cases, payment of real estate taxes, other governmental impositions and
hazard and liability insurance. If there is a blanket mortgage or mortgages on
the cooperative apartment building or underlying land, as is generally the
case, or an underlying lease of the land, as is the case in some instances, the
Cooperative, as property mortgagor, or lessee, as the case may be, is also
responsible for meeting these mortgage or rental obligations. A blanket
mortgage is ordinarily incurred by the cooperative in connection with either
the construction or purchase of the Cooperative's apartment building or
obtaining of capital by the Cooperative. The interest of the occupant under
proprietary leases or occupancy agreements as to which that Cooperative is the
landlord are generally subordinate to the interest of the holder of a blanket
mortgage and to the interest of the holder of a land lease. If the Cooperative
is unable to meet the payment obligations (i) arising under a blanket mortgage,
the mortgagee holding a blanket mortgage could foreclose on that mortgage and
terminate all subordinate proprietary leases and occupancy agreements or (ii)
arising under its land lease, the holder of the landlord's interest under the
land lease could terminate it and all subordinate proprietary leases and
occupancy agreements. Also, a blanket mortgage on a cooperative may provide
financing in the form of a mortgage that does not fully amortize, with a
significant portion of principal being due in one final payment at maturity.
The inability of the Cooperative to refinance a mortgage and its consequent
inability to make such final payment could lead to foreclosure by the
mortgagee. Similarly, a land lease has an expiration date and the inability of
the Cooperative to extend its term or, in the alternative, to purchase the land
could lead to termination of the Cooperative's interest in the property and
termination of all proprietary leases and occupancy agreement. In either event,
a foreclosure by the holder of a blanket mortgage or the termination of the
underlying lease could eliminate or significantly diminish the value of any
collateral held by the lender that financed the purchase by an individual
tenant stockholder of cooperative shares or, in the case of the Mortgage Loans,
the collateral securing the Cooperative Loans.
The Cooperative is owned by tenant-stockholders who, through ownership of
stock or shares in the corporation, receive proprietary lease or occupancy
agreements which confer exclusive rights to occupy specific units. Generally, a
tenant-stockholder of a Cooperative must make a monthly payment to the
Cooperative representing such tenant-stockholder's pro rata share of the
Cooperative's payments for its blanket mortgage, real property taxes,
maintenance expenses and other capital or
71
ordinary expenses. An ownership interest in a Cooperative and accompanying
occupancy rights are financed through a Cooperative Loan evidenced by a
promissory note and secured by an assignment of and a security interest in the
occupancy agreement or proprietary lease and a security interest in the related
Cooperative shares. The lender generally takes possession of the share
certificate and a counterpart of the proprietary lease or occupancy agreement
and a financing statement covering the proprietary lease or occupancy agreement
and the cooperative shares is filed in the appropriate state and local offices
to perfect the lender's interest in its collateral. Subject to the limitations
discussed below, upon default of the tenant-stockholder, the lender may sue for
judgment on the promissory note, dispose of the collateral at a public or
private sale or otherwise proceed against the collateral or tenant-stockholder
as an individual as provided in the security agreement covering the assignment
of the proprietary lease or occupancy agreement and the pledge of Cooperative
shares. See "Foreclosure -- Cooperative Loans" below.
LAND SALE CONTRACTS
Under an installment land sale contract for the sale of real estate (a
"LAND SALE CONTRACT") the contract seller (hereinafter referred to as the
"CONTRACT LENDER") retains legal title to the property and enters into an
agreement with the contract purchaser (hereinafter referred to as the "CONTRACT
BORROWER") for the payment of the purchase price, plus interest, over the term
of the Land Sale Contract. Only after full performance by the borrower of the
contract is the Contract Lender obligated to convey title to the real estate to
the purchaser. As with mortgage or deed of trust financing, during the
effective period of the Land Sale Contract, the Contract Borrower is
responsible for maintaining the property in good condition and for paying real
estate taxes, assessments and hazard insurance premiums associated with the
property.
The method of enforcing the rights of the Contract Lender under an
installment contract varies on a state-by-state basis depending upon the extent
to which state courts are willing, or able pursuant to state statute, to
enforce the contract strictly according to its terms. The terms of Land Sale
Contracts generally provide that upon default by the Contract Borrower, the
borrower loses his or her right to occupy the property, the entire indebtedness
is accelerated, and the buyer's equitable interest in the property is
forfeited. The Contract Lender in 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 Contract Borrower has filed the Land Sale Contract in
local land records and an ejectment action may be necessary to recover
possession. In a few states, particularly in cases of Contract Borrower default
during the early years of a Land Sale Contract, the courts will permit
ejectment of the buyer and a forfeiture of his or her interest in the property.
However, most state legislatures have enacted provisions by analogy to mortgage
law protecting borrowers under Land Sale Contracts from the harsh consequences
of forfeiture. Under such statues, a judicial contract may be reinstated upon
full payment of the default amount and the borrower may have a post-foreclosure
statutory redemption right. In other states, courts in equity may permit a
Contract Borrower with significant investment in the property under a Land Sale
Contract for the sale of real estate to share the proceeds of sale of the
property after the indebtedness is repaid or may otherwise refuse to enforce
the forfeiture clause. Nevertheless, generally speaking, the Contract Lender's
procedures for obtaining possession and clear title under a Land Sale Contract
for the sale of real estate in a given state are simpler and less time
consuming and costly than are the procedures for foreclosing and obtaining
clear title to a mortgaged property.
FORECLOSURE
General
Foreclosure is a legal procedure that allows the mortgagee to recover its
mortgage debt by enforcing its rights and available legal remedies under the
mortgage. If the mortgagor defaults in payment or performance of its
obligations under the note or mortgage, the mortgagee has the right to
institute foreclosure proceedings to sell the mortgaged property at public
auction to satisfy the indebtedness.
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Foreclosure procedures with respect to the enforcement of a mortgage vary
from state to state. Two primary methods of foreclosing a mortgage are judicial
foreclosure and non-judicial foreclosure pursuant to a power of sale granted in
the mortgage instrument. There are several other foreclosure procedures
available in some states that are either infrequently used or available only in
certain limited circumstances, such as strict foreclosure.
Judicial Foreclosure
A judicial foreclosure proceeding is conducted in a court having
jurisdiction over the mortgaged property. Generally, the action is initiated by
the service of legal pleadings upon all parties having an interest of record in
the real property. Delays in completion of the foreclosure may occasionally
result from difficulties in locating defendants. When the lender's right to
foreclose is contested, the legal proceedings can be time-consuming. Upon
successful completion of a judicial foreclosure proceeding, the court generally
issues a judgment of foreclosure and appoints a referee or other officer to
conduct a public sale of the mortgaged property, the proceeds of which are used
to satisfy the judgment. Such sales are made in accordance with procedures that
vary from state to state.
Equitable Limitations on Enforceability of Certain Provisions
United States courts have traditionally imposed general equitable
principles to limit the remedies available to a mortgagee in connection with
foreclosure. These equitable principles are generally designed to relieve the
mortgagor from the legal effect of mortgage defaults, to the extent that such
effect is perceived as harsh or unfair. Relying on such principles, a court may
alter the specific terms of a loan to the extent it considers necessary to
prevent or remedy an injustice, undue oppression or overreaching, or may
require the lender to undertake affirmative and expensive actions to determine
the cause of the mortgagor's default and the likelihood that the mortgagor will
be able to reinstate the loan. In some cases, courts have substituted their
judgment for the lender's and have required that lenders reinstate loans or
recast payment schedules in order to accommodate mortgagors who are suffering
from a temporary financial disability. In other cases, courts have limited the
right of the lender to foreclose if the default under the mortgage is not
monetary, e.g., the mortgagor failed to maintain the mortgaged property
adequately or the mortgagor executed a junior mortgage on the mortgaged
property. The exercise by the court of its equity powers will depend on the
individual circumstances of each case presented to it. Finally, some courts
have been faced with the issue of whether federal or state constitutional
provisions reflecting due process concerns for adequate notice require that a
mortgagor receive notice in addition to statutorily-prescribed minimum notice.
For the most part, these cases have upheld the reasonableness of the notice
provisions or have found that a public sale under a mortgage providing for a
power of sale does not involve sufficient state action to afford constitutional
protections to the mortgagor.
Non-Judicial Foreclosure/Power of Sale
Foreclosure of a deed of trust is generally accomplished by a non-judicial
trustee's sale pursuant to the power of sale granted in the deed of trust. A
power of sale is typically granted in a deed of trust. It may also be contained
in any other type of mortgage instrument. A power of sale allows a non-judicial
public sale to be conducted generally following a request from the
beneficiary/lender to the trustee to sell the property upon any default by the
mortgagor under the terms of the mortgage note or the mortgage instrument and
after notice of sale is given in accordance with the terms of the mortgage
instrument, as well as applicable state law. In some states, prior to such
sale, the trustee under a deed of trust must record a notice of default and
notice of sale and send a copy to the mortgagor and to any other party who has
recorded a request for a copy of a notice of default and notice of sale. In
addition, in some states the trustee must provide notice to any other party
having an interest of record in the real property, including junior
lienholders. A notice of sale must be posted in a public place and, in most
states, published for a specified period of time in one or more newspapers. The
mortgagor or junior lienholder may then have the right, during a reinstatement
period required in some states, to cure the default by paying the entire actual
amount in arrears (without acceleration)
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plus the expenses incurred in enforcing the obligation. In other states, the
mortgagor or the junior lienholder is not provided a period to reinstate the
loan, but has only the right to pay off the entire debt to prevent the
foreclosure sale. Generally, the procedure for public sale, the parties
entitled to notice, the method of giving notice and the applicable time periods
are governed by state law and vary among the states. Foreclosure of a deed to
secure debt is also generally accomplished by a non-judicial sale similar to
that required by a deed of trust, except that the lender or its agent, rather
than a trustee, is typically empowered to perform the sale in accordance with
the terms of the deed to secure debt and applicable law.
Public Sale
A third party may be unwilling to purchase a mortgaged property at a
public sale because of the difficulty in determining the value of such property
at the time of sale, due to, among other things, redemption rights which may
exist and the possibility of physical deterioration of the property during the
foreclosure proceedings. For these reasons, it is common for the lender to
purchase the mortgaged property for an amount equal to or less than the
underlying debt and accrued and unpaid interest plus the expenses of
foreclosure. Generally, state law controls the amount of foreclosure costs and
expenses which may be recovered by a lender. Thereafter, subject to the
mortgagor's right in some states to remain in possession during a redemption
period, if applicable, the lender will become the owner of the property and
have both the benefits and burdens of ownership of the mortgaged property. For
example, the lender will become obligated to pay taxes, obtain casualty
insurance and to make 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. Moreover, a lender commonly incurs substantial legal fees and
court costs in acquiring a mortgaged property through contested foreclosure
and/or bankruptcy proceedings. Generally, state law controls the amount of
foreclosure expenses and costs, including attorneys' fees, that may be
recovered by a lender.
A junior mortgagee may not foreclose on the property securing the junior
mortgage unless it forecloses subject to senior mortgages and any other prior
liens, in which case it may be obliged to make payments on the senior mortgages
to avoid their foreclosure. In addition, in the event that the foreclosure of a
junior mortgage triggers the enforcement of a "due-on-sale" clause contained in
a senior mortgage, the junior mortgagee may be required to pay the full amount
of the senior mortgage to avoid its foreclosure. Accordingly, with respect to
those Mortgage Loans, if any, that are junior mortgage loans, if the lender
purchases the property the lender's title will be subject to all senior
mortgages, prior liens and certain governmental liens.
The proceeds received by the referee or trustee from the sale are applied
first to the costs, fees and expenses of sale and then in satisfaction of the
indebtedness secured by the mortgage under which the sale was conducted. Any
proceeds remaining after satisfaction of senior mortgage debt are generally
payable to the holders of junior mortgages and other liens and claims in order
of their priority, whether or not the mortgagor is in default. Any additional
proceeds are generally payable to the mortgagor. The payment of the proceeds to
the holders of junior mortgages may occur in the foreclosure action of the
senior mortgage or a subsequent ancillary proceeding or may require the
institution of separate legal proceedings by such holders.
Rights of Redemption
The purposes of a foreclosure action are to enable the mortgagee to
realize upon its security and to bar the mortgagor, and all persons who have an
interest in the property which is subordinate to the mortgage being foreclosed,
from exercise of their "equity of redemption." The doctrine of equity of
redemption provides that, until the property covered by a mortgage has been
sold in accordance with a properly conducted foreclosure and foreclosure sale,
those having an interest which is subordinate to that of the foreclosing
mortgagee have an equity of redemption and may redeem the property by
74
paying the entire debt with interest. In addition, in some states, when a
foreclosure action has been commenced, the redeeming party must pay certain
costs of such action. Those having an equity of redemption must generally be
made parties and joined in the foreclosure proceeding in order for their equity
of redemption to be cut off and terminated.
The equity of redemption is a common-law (non-statutory) right which
exists prior to completion of the foreclosure, is not waivable by the
mortgagor, must be exercised prior to foreclosure sale and should be
distinguished from the post-sale statutory rights of redemption. In some
states, after sale pursuant to a deed of trust or foreclosure of a mortgage,
the mortgagor and foreclosed junior lienors are given a statutory period in
which to redeem the property from the foreclosure sale. In some states,
statutory redemption may occur only upon payment of the foreclosure sale price.
In other states, redemption may be authorized if the former mortgagor pays only
a portion of the sums due. The effect of a statutory right of redemption is to
diminish the ability of the lender to sell the foreclosed property. The
exercise of a right of redemption would defeat the title of any purchaser from
a foreclosure sale or sale under a deed of trust. Consequently, the practical
effect of the redemption right is to force the lender to maintain the property
and pay the expenses of ownership until the redemption period has expired. In
some states, a post-sale statutory right of redemption may exist following a
judicial foreclosure, but not following a trustee's sale under a deed of trust.
Under the REMIC Provisions currently in effect, property acquired by
foreclosure generally must not be held for more than three calendar years
following the year the Trust Fund acquired the property. With respect to a
Series of Securities for which an election is made to qualify the Trust Fund or
a part thereof as a REMIC, the applicable Agreement will permit foreclosed
property to be held for more than such period of time if the IRS grants an
extension of time within which to sell such property or independent counsel
renders an opinion to the effect that holding such property for such additional
period is permissible under the REMIC Provisions. The applicability of these
limitations if a FASIT election is made with respect to all or a part of the
Trust Fund will be described in the applicable prospectus supplement.
Cooperative Loans
The Cooperative shares owned by the tenant-stockholder and pledged to the
lender are, in almost all cases, subject to restrictions on transfer as set
forth in the Cooperative's certificate of incorporation and by-laws, as well as
the proprietary lease or occupancy agreement, and may be canceled by the
Cooperative for failure by the tenant-stockholder to pay rent or other
obligations or charges owed by such tenant-stockholder, including mechanics'
liens against the cooperative apartment building incurred by such
tenant-stockholder. The proprietary lease or occupancy agreement generally
permit the Cooperative to terminate such lease or agreement in the event an
obligor fails to make payments or defaults in the performance of covenants
required thereunder. Typically, the lender and the Cooperative enter into a
recognition agreement which establishes the rights and obligations of both
parties in the event of a default by the tenant-stockholder under the
proprietary lease or occupancy agreement will usually constitute a default
under the security agreement between the lender and the tenant-stockholder.
The recognition agreement generally provides that, in the event that the
tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the Cooperative will take no action to terminate such lease or
agreement until the lender has been provided with an opportunity to cure the
default. The recognition agreement typically provides that if the proprietary
lease or occupancy agreement is terminated, the Cooperative will recognize the
lender's lien against proceeds from the sale of the Cooperative apartment,
subject, however, to the Cooperative's right to sums due under such proprietary
lease or occupancy agreement. The total amount owed to the Cooperative by the
tenant-stockholder, which the lender generally cannot restrict and does not
monitor, could reduce the value of the collateral below the outstanding
principal balance of the Cooperative Loan and accrued and unpaid interest
thereon.
Recognition agreements also provide that in the event of a foreclosure on
a Cooperative Loan, the lender must obtain the approval or consent of the
Cooperative as required by the proprietary
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lease before transferring the Cooperative shares or assigning the proprietary
lease. Generally, the lender is not limited in any rights it may have to
dispossess the tenant-stockholders.
In some states, foreclosure on the Cooperative shares is accomplished by a
sale in accordance with the provisions of Article 9 of the UCC and the security
agreement relating to those shares. Article 9 of the UCC requires that a sale
be conducted in a "commercially reasonable" manner. Whether a foreclosure sale
has been conducted in a "commercially reasonable" manner will depend on the
facts in each case. In determining commercial reasonableness, a court will look
to the notice given the debtor and the method, manner, time, place and terms of
the foreclosure. Generally, a sale conducted according to the usual practice of
banks selling similar collateral will be considered reasonably conducted.
Article 9 of the UCC provides that the proceeds of the sale will be
applied first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to reimbursement
is subject to the right of the Cooperatives to receive sums due under the
proprietary lease or occupancy agreement. If there are proceeds remaining, the
lender must account to the tenant-stockholder for the surplus. Conversely, if a
portion of the indebtedness remains unpaid, the tenant-stockholder is generally
responsible for the deficiency.
In the case of foreclosure on a building which was converted from a rental
building to a building owned by a Cooperative under a non-eviction plan, some
states require that a purchaser at a foreclosure sale take the property subject
to rent control and rent stabilization laws which apply to certain tenants who
elected to remain in a building so converted.
JUNIOR MORTGAGES
Some of the Mortgage Loans may be secured by junior mortgages or deeds of
trust, which are subordinate to first or other senior mortgages or deeds of
trust held by other lenders. The rights of the Trust Fund as the holder of a
junior deed of trust or a junior mortgage are subordinate in lien and in
payment to those of the holder of the senior mortgage or deed of trust,
including the prior rights of the senior mortgagee or beneficiary to receive
and apply hazard insurance and condemnation proceeds and, upon default of the
mortgagor, to cause a foreclosure on the property. Upon completion of the
foreclosure proceedings by the holder of the senior mortgage or the sale
pursuant to the deed of trust, the junior mortgagee's or junior beneficiary's
lien will be extinguished unless the junior lienholder satisfies the defaulted
senior loan or asserts its subordinate interest in a property in foreclosure
proceedings. See "-- Foreclosure" herein.
Furthermore, because the terms of the junior mortgage or deed of trust are
subordinate to the terms of the first mortgage or deed of trust, in the event
of a conflict between the terms of the first mortgage or deed of trust and the
junior mortgage or deed of trust, the terms of the first mortgage or deed of
trust will generally govern. Upon a failure of the mortgagor or trustor to
perform any of its obligations, the senior mortgagee or beneficiary, subject to
the terms of the senior mortgage or deed of trust, may have the right to
perform the obligation itself. Generally, all sums so expended by the mortgagee
or beneficiary become part of the indebtedness secured by the mortgage or deed
of trust. To the extent a first mortgagee expends such sums, such sums will
generally have priority over all sums due under the junior mortgage.
RIGHTS OF REDEMPTION
The purposes of a foreclosure action are to enable the mortgagee to
realize upon its security and to bar the mortgagor, and all persons who have an
interest in the property which is subordinate to the mortgage being foreclosed,
from exercise of their "equity of redemption." The doctrine of equity of
redemption provides that, until the property covered by a mortgage has been
sold in accordance with a properly conducted foreclosure and foreclosure sale,
those having an interest which is subordinate to that of the foreclosing
mortgagee have an equity of redemption and may redeem the property by
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paying the entire debt with interest. In addition, in some states, when a
foreclosure action has been commenced, the redeeming party must pay certain
costs of such action. Those having an equity of redemption must generally be
made parties and joined in the foreclosure proceeding in order for their equity
of redemption to be cut off and terminated.
The equity of redemption is a common-law (non-statutory) right which
exists prior to completion of the foreclosure, is not waivable by the
mortgagor, must be exercised prior to foreclosure sale and should be
distinguished from the post-sale statutory rights of redemption. In some
states, after sale pursuant to a deed of trust or foreclosure of a mortgage,
the mortgagor and foreclosed junior lienors are given a statutory period in
which to redeem the property from the foreclosure sale. In some states,
statutory redemption may occur only upon payment of the foreclosure sale price.
In other states, redemption may be authorized if the former mortgagor pays only
a portion of the sums due. The effect of a statutory right of redemption is to
diminish the ability of the lender to sell the foreclosed property. The
exercise of a right of redemption would defeat the title of any purchaser from
a foreclosure sale or sale under a deed of trust. Consequently, the practical
effect of the redemption right is to force the lender to maintain the property
and pay the expenses of ownership until the redemption period has expired. In
some states, a post-sale statutory right of redemption may exist following a
judicial foreclosure, but not following a trustee's sale under a deed of trust.
ANTI-DEFICIENCY LEGISLATION, THE BANKRUPTCY CODE AND OTHER LIMITATIONS ON
LENDERS
Certain states have imposed statutory prohibitions which limit the
remedies of a beneficiary under a deed of trust or a mortgagee under a
mortgage. In some states, statutes limit the right of the beneficiary or
mortgagee to obtain a deficiency judgment against the borrower following
foreclosure or sale under a deed of trust. A deficiency judgment would be 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. Finally, other statutory
provisions limit any deficiency judgment against the former borrower following
a judicial sale to the excess of the outstanding debt over the fair market
value of the property at the time of the public sale. The purpose of these
statutes is generally to prevent a beneficiary or a mortgagee from obtaining a
large deficiency judgment against the former borrower as a result of low or no
bids at the judicial sale.
In addition to anti-deficiency and related legislation, numerous other
federal and state statutory provisions, including the United States Bankruptcy
Code, 11 U.S.C. Sections 101 et seq. (the "BANKRUPTCY CODE"), and state laws
affording relief to debtors may interfere with or affect the ability of a
secured mortgage lender to obtain payment of a mortgage loan, to realize upon
collateral and/or enforce a deficiency judgment. For example, under the
Bankruptcy Code, virtually all actions (including foreclosure actions and
deficiency judgment proceedings) are automatically stayed upon the filing of a
bankruptcy petition, and, usually, no interest or principal payments are made
during the course of the bankruptcy case. Foreclosure of an interest in real
property of a debtor in a case under the Bankruptcy Code can typically occur
only if the bankruptcy court vacates the stay; an action the court may be
reluctant to take, particularly if the debtor has the prospect of restructuring
his or her debts and the mortgage collateral is not deteriorating in value. The
delay and the consequences thereof caused by such automatic stay can be
significant. Also, under the Bankruptcy Code, the filing of a petition in
bankruptcy by or on behalf of a junior lienor (a subordinate lender secured by
a mortgage on the property) may stay a senior lender from taking action to
foreclose.
A homeowner may file for relief under the Bankruptcy Code under any of
three different chapters of the Bankruptcy Code. Under Chapter 7, the assets of
the debtor are liquidated and a lender secured by a lien may "bid in" (i.e.,
bid up to the amount of the debt) at the sale of the asset. See "--
Foreclosure." A homeowner may also file for relief under Chapter 11 of the
bankruptcy code and reorganize his or her debts through his or her
reorganization plan. Alternatively, a homeowner
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may file for relief under Chapter 13 of the Bankruptcy Code and address his or
her debts in a rehabilitation plan. Chapter 13 is often referred to as the
"wage earner chapter" or "consumer chapter" because most individuals seeking to
restructure their debts file for relief under Chapter 13 rather than under
Chapter 11.
The Bankruptcy Code permits a mortgage loan that is secured by property
that does not consist solely of the debtor's principal residence to be modified
without the consent of the lender provided certain substantive and procedural
safeguards are met. Under the Bankruptcy Code, the lender's security interest
may be reduced to the then-current value of the property as determined by the
court if the value is less than the amount due on the loan, thereby leaving the
lender as a general unsecured creditor for the difference between the value of
the collateral and the outstanding balance of the mortgage loan. A borrower's
unsecured indebtedness will typically be discharged in full upon payment of a
substantially reduced amount. Other modifications to a mortgage loan may
include a reduction in the amount of each scheduled payment, which reduction
may result from a reduction in the rate of interest, an alteration of the
repayment schedule, an extension of the final maturity date, and/or a reduction
in the outstanding balance of the secured portion of the loan. In certain
circumstances, subject to the court's approval, a debtor in a case under
Chapter 11 of the Bankruptcy Code may have the power to grant liens senior to
the lien of a mortgage.
A reorganization plan under Chapter 11 and a rehabilitation plan under
Chapter 13 of the Bankruptcy Code may each allow a debtor to cure a default
with respect to a mortgage loan on such debtor's residence by paying arrearages
over a period of time and to deaccelerate and reinstate the original mortgage
loan payment schedule, even though the lender accelerated the loan and a final
judgment of foreclosure had been entered in state court (provided no sale of
the property had yet occurred) prior to the filing of the debtor's petition
under the Bankruptcy Code. Under a Chapter 13 plan, curing of defaults must be
accomplished within the five year maximum term permitted for repayment plans,
such term commencing when the repayment plan becomes effective, while defaults
may be cured over a longer period of time under a Chapter 11 plan of
reorganization.
Generally, a repayment plan in a case under Chapter 13 may not modify the
claim of a mortgage lender if the borrower elects to retain the property, the
property is the borrower's principal residence and the property is the lender's
only collateral. Certain courts have allowed modifications when the mortgage
loan is secured both by the debtor's principal residence and by collateral that
is not "inextricably bound" to the real property, such as appliances,
machinery, or furniture. Certain courts have also allowed modifications when
the Mortgage Loan is fully unsecured at the time of bankruptcy.
The general protection for mortgages secured only by the debtor's
principal residence is not applicable in a case under Chapter 13 if the last
payment on the original payment schedule is due before the final date for
payment under the debtor's Chapter 13 plan (which date could be up to five
years after the debtor emerges from bankruptcy). Under several recently decided
cases, the terms of such a loan can be modified in the manner described above.
While these decisions are contrary to the holding in a prior case by a senior
appellate court, it is possible that the later decisions will become the
accepted interpretation in view of the language of the applicable statutory
provision. If this interpretation is adopted by a court considering the
treatment in a Chapter 13 repayment plan of a Mortgage Loan, it is possible
that the Mortgage Loan could be modified.
State statutes and general principles of equity may also provide a
mortgagor with means to halt a foreclosure proceeding or sale and to force a
restructuring of a mortgage loan on terms a lender would not otherwise accept.
In a bankruptcy or similar proceeding of a mortgagor, action may be taken
seeking the recovery, as a preferential transfer or on other grounds, of any
payments made by the mortgagor under the related mortgage loan prior to the
bankruptcy or similar proceeding. Payments on long-term debt may be protected
from recovery as preferences if they are payments in the ordinary course of
business made on debts incurred in the ordinary course of business or if the
value of the collateral exceeds the debt at the time of payment. Whether any
particular payment would be protected depends upon the facts specific to a
particular transaction.
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A trustee in bankruptcy, in some cases, may be entitled to collect its
costs and expenses in preserving or selling the mortgaged property ahead of
payment to the lender. Moreover, the laws of certain states also give priority
to certain tax and mechanics liens over the lien of a mortgage. Under the
Bankruptcy Code, if the court finds that actions of the mortgagee have been
unreasonable and inequitable, the lien of the related mortgage may be
subordinated to the claims of unsecured creditors.
Bankruptcy reform legislation being considered by the Senate would amend
the Bankruptcy Code (such amendment, the "TILA AMENDMENT") to authorize
bankruptcy court judges to disallow claims based on secured debt if the
creditor failed to comply with certain provisions of the federal Truth in
Lending Act. As most recently proposed, such provision would apply
retroactively to secured debt incurred by a debtor prior to the date of
effectiveness of such legislation, including the Mortgage Loans. The House bill
does not include a comparable provision as of the date hereof. If the TILA
Amendment were to become law, a violation of the Truth in Lending act with
respect to a Mortgage Loan could result in a total loss with respect to such
loan in a bankruptcy proceeding. Any such violation would be a breach of
representation and warranty of the Depositor, and the Depositor would be
obligated to repurchase such Mortgage Loan as described herein.
Various proposals to amend the Bankruptcy Code in ways that could
adversely affect the value of the Mortgage Loans in a trust have been
considered by Congress, and more such proposed legislation may be considered in
the future. No assurance can be given that any particular proposal will or will
not be enacted into law, or that any provision so enacted will not differ
materially from the proposals described above.
The Bankruptcy Code provides priority to certain tax liens over the lien
of the mortgage. In addition, substantive requirements are imposed upon
mortgage lenders in connection with the origination and the servicing of
mortgage loans by numerous federal and some state consumer protection laws.
These laws include the federal Truth-in-Lending Act, Real Estate Settlement
Procedures Act, Equal Credit Opportunity Act, Fair Credit Billing Act, Fair
Credit Reporting Act, and related statutes. These federal laws impose specific
statutory liabilities upon lenders who originate mortgage loans and who fail to
comply with the provisions of the applicable laws. In some cases, this
liability may affect assignees of the Mortgage Loans.
ENFORCEABILITY OF CERTAIN PROVISIONS
Standard forms of note, mortgage and deed of trust generally 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 late charges which a lender may collect
from a borrower for delinquent payments. Certain states also limit the amounts
that a lender may collect from a borrower as an additional charge if the loan
is prepaid.
Courts have imposed general equitable principles upon foreclosure. These
equitable principles are generally designed to relieve the borrower from the
legal effect of defaults under the loan documents. Examples of judicial
remedies that may be fashioned include judicial requirements that the lender
undertake affirmative and expensive actions to determine the causes for 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 lenders to reinstate loans or recast
payment schedules to accommodate borrowers who are suffering from temporary
financial disability. In some cases, courts have limited the right of lenders
to foreclose if the default under the mortgage instrument is not monetary, such
as the borrower failing to adequately maintain the property or the borrower
executing a second mortgage or deed of trust affecting the property. In other
cases, some courts have been faced with the issue of whether federal or state
constitutional provisions reflecting due process concerns for adequate notice
require that borrowers under the deeds of trust receive notices in addition to
the statutorily-prescribed minimum requirements. For the most part,
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these cases have upheld the notice provisions as being reasonable or have found
that the sale by a trustee under a deed of trust or under a mortgage having a
power of sale does not involve sufficient state action to afford constitutional
protections to the borrower.
ENVIRONMENTAL CONSIDERATIONS
A lender may be subject to unforeseen environmental risks when taking a
security interest in real or personal property. Property subject to such a
security interest may be subject to federal, state, and local laws and
regulations relating to environmental protection. Such laws may regulate, among
other things: emissions of air pollutants; discharges of wastewater or storm
water; generation, transport, storage or disposal of hazardous waste or
hazardous substances; operation, closure and removal of underground storage
tanks; removal and disposal of asbestos-containing materials; management of
electrical or other equipment containing polychlorinated biphenyls ("PCBS").
Failure to comply with such laws and regulations may result in significant
penalties, including civil and criminal fines. Under the laws of certain
states, environmental contamination on a property may give rise to a lien on
the property to ensure the availability and/or reimbursement of cleanup costs.
Generally all subsequent liens on such property are subordinated to such a lien
and, in some states, even prior recorded liens are subordinated to such liens
("SUPERLIENS"). In the latter states, the security interest of the Trustee in a
property that is subject to such Superlien could be adversely affected.
Under the federal Comprehensive Environmental Response, Compensation and
Liability Act, as amended ("CERCLA"), and under state law in certain states, a
secured party which takes a deed in lieu of foreclosure, purchases a mortgaged
property at a foreclosure sale, operates a mortgaged property or undertakes
certain types of activities that may constitute management of the mortgaged
property may become liable in certain circumstances for the costs of remedial
action ("CLEANUP COSTS") if hazardous wastes or hazardous substances have been
released or disposed of on the property. Such Cleanup Costs may be substantial.
CERCLA imposes strict, as well as joint and several liability for environmental
remediation and/or damage costs on several classes of "potentially responsible
parties," including current "owners and/or operators" of property, irrespective
of whether those owners or operators caused or contributed to the contamination
on the property. In addition, owners and operators of properties that generate
hazardous substances that are disposed of at other "off-site" locations may be
held strictly, jointly and severally liable for environmental remediation
and/or damages at those off-site locations. Many states also have laws that are
similar to CERCLA. Liability under CERCLA or under similar state law could
exceed the value of the property itself as well as the aggregate assets of the
property owner.
The law is unclear as to whether and under what precise circumstances
cleanup costs, or the obligation to take remedial actions, could be imposed on
a secured lender such as the Trust Fund. Under the laws of some states and
under CERCLA, a lender may be liable as an "owner or operator" for costs of
addressing releases or threatened releases of hazardous substances on a
mortgaged property if such lender or its agents or employees have "participated
in the management" of the operations of the borrower, even though the
environmental damage or threat was caused by a prior owner or current owner or
operator or other third party. Excluded from CERCLA's definition of "owner or
operator" is a person "who without participating in the management of . . .
[the] facility, holds indicia of ownership primarily to protect his security
interest" (the "secured-creditor exemption"). This exemption for holders of a
security interest such as a secured lender applies only to the extent that a
lender seeks to protect its security interest in the contaminated facility or
property. Thus, if a lender's activities begin to encroach on the actual
management of such facility or property, the lender faces potential liability
as an "owner or operator" under CERCLA. Similarly, when a lender forecloses and
takes title to a contaminated facility or property, the lender may incur
potential CERCLA liability in various circumstances, including among others,
when it holds the facility or property as an investment (including leasing the
facility or property to a third party), fails to market the property in a
timely fashion or fails to properly address environmental conditions at the
property or facility.
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The Resource Conservation and Recovery Act, as amended ("RCRA"), contains
a similar secured-creditor exemption for those lenders who hold a security
interest in a petroleum underground storage tank ("UST") or in real estate
containing a UST, or that acquire title to a petroleum UST or facility or
property on which such a UST is located. As under CERCLA, a lender may lose its
secured-creditor exemption and be held liable under RCRA as a UST owner or
operator if such lender or its employees or agents participate in the
management of the UST. In addition, if the lender takes title to or possession
of the UST or the real estate containing the UST, under certain circumstances
the secured-creditor exemption may be deemed to be unavailable.
A decision in May 1990 of the United States Court of Appeals for the
Eleventh Circuit in United States v. Fleet Factors Corp. very narrowly
construed CERCLA's secured-creditor exemption. The court's opinion suggested
that a lender need not have involved itself in the day-to-day operations of the
facility or participated in decisions relating to hazardous waste to be liable
under CERCLA; rather, liability could attach to a lender if its involvement
with the management of the facility were broad enough to support the inference
that the lender had the capacity to influence the borrower's treatment of
hazardous waste. The court added that a lender's capacity to influence such
decisions could be inferred from the extent of its involvement in the
facility's financial management. A subsequent decision by the United States
Court of Appeals for the Ninth Circuit in In re Bergsoe Metal Corp., apparently
disagreeing with, but not expressly contradicting, the Fleet Factors court,
held that a secured lender had no liability absent "some actual management of
the facility" on the part of the lender.
Court decisions have taken varying views of the scope of the
secured-creditor exemption, leading to administrative and legislative efforts
to provide guidance to lenders on the scope of activities that would trigger
CERCLA and/or RCRA liability. Until recently, these efforts have failed to
provide substantial guidance.
On September 28, 1996, Congress enacted, and on September 30, 1996 the
President signed into law the Asset Conservation Lender Liability and Deposit
Insurance Protection Act of 1996 (the "ASSET CONSERVATION ACT"). The Asset
Conservation Act was intended to clarify the scope of the secured creditor
exemption. This legislation more clearly defines the kinds of activities that
would constitute "participation in management" and that therefore would trigger
liability for secured parties under CERCLA. It also identified certain
activities that ordinarily would not trigger liability, provided, however, that
such activities did not otherwise rise to the level of "participation in
management." The Asset Conservation Act specifically reverses the Fleet Factors
"capacity to influence" standard. The Asset Conservation Act also provides
additional protection against liability in the event of foreclosure. However,
since the courts have not yet had the opportunity to interpret the new
statutory provisions, the scope of the additional protections offered by the
Asset Conservation Act is not fully defined. It also is important to note that
the Asset Conservation Act does not offer complete protection to lenders and
that the risk of liability remains.
If a secured lender does become liable, it may be entitled to bring an
action for contribution against the owner or operator who created the
environmental contamination or against some other liable party, but that person
or entity may be bankrupt or otherwise judgment-proof. It is therefore possible
that cleanup or other environmental liability costs could become a liability of
the Trust Fund and occasion a loss to the Trust Fund and to Securityholders in
certain circumstances. The new secured creditor amendments to CERCLA, also,
would not necessarily affect the potential for liability in actions by either a
state or a private party under other federal or state laws which may impose
liability on "owners or operators" but do not incorporate the secured-creditor
exemption.
Traditionally, residential mortgage lenders have not taken steps to
evaluate whether hazardous wastes or hazardous substances are present with
respect to any mortgaged property prior to the origination of the mortgage loan
or prior to foreclosure or accepting a deed-in-lieu of foreclosure. Neither the
Depositor nor any Servicer makes any representations or warranties or assumes
any liability with respect to: environmental conditions of such Mortgaged
Property; the absence, presence or effect of hazardous wastes or hazardous
substances on, near or emanating from such Mortgaged
81
Property; the impact on Securityholders of any environmental condition or
presence of any substance on or near such Mortgaged Property; or the compliance
of any Mortgaged Property with any environmental laws. In addition, no agent,
person or entity otherwise affiliated with the Depositor is authorized or able
to make any such representation, warranty or assumption of liability relative
to any such Mortgaged Property.
DUE-ON-SALE CLAUSES
Unless the related prospectus supplement indicates otherwise, the Mortgage
Loans will contain due-on-sale clauses. These clauses generally provide that
the lender may accelerate the maturity of the loan if the mortgagor sells,
transfers or conveys the related Mortgaged Property. The enforceability of
due-on-sale clauses has been the subject of legislation or litigation in many
states and, in some cases, the enforceability of these clauses was limited or
denied. However, with respect to certain loans the Garn-St. Germain Depository
Institutions Act of 1982 (the "GARN-ST. GERMAIN ACT") preempts state
constitutional, statutory and case law that prohibits the enforcement of
due-on-sale clauses and permits lenders to enforce these clauses in accordance
with their terms, subject to certain limited exceptions. Due-on-sale clauses
contained in mortgage loans originated by federal savings and loan associations
of federal savings banks are fully enforceable pursuant to regulations of the
United States Federal Home Loan Bank Board, as succeeded by the Office of
Thrift Supervision ("OTS"), which preempt state law restrictions on the
enforcement of such clauses. Similarly, "due-on-sale" clauses in mortgage loans
made by national banks and federal credit unions are now fully enforceable
pursuant to preemptive regulations of the Comptroller of the Currency and the
National Credit Union Administration, respectively.
The Garn-St. Germain Act also sets forth nine specific instances in which
a mortgage lender covered by the act (including federal savings and loan
associations and federal savings banks) may not exercise a "due-on-sale"
clause, notwithstanding the fact that a transfer of the property may have
occurred. These include intra-family transfers, certain transfers by operation
of law, leases of fewer than three years and the creation of a junior
encumbrance. Regulations promulgated under the Garn-St. Germain Act also
prohibit the imposition of a prepayment penalty upon the acceleration of a loan
pursuant to a due-on-sale clause. The inability to enforce a "due-on-sale"
clause may result in a mortgage that bears an interest rate below the current
market rate being assumed by a new home buyer rather than being paid off, which
may affect the average life of the Mortgage Loans and the number of Mortgage
Loans which may extend to maturity.
PREPAYMENT CHARGES
Under certain state laws, prepayment charges may not be imposed after a
certain period of time following the origination of mortgage loans secured by
liens encumbering owner-occupied residential properties, if such loans are paid
prior to maturity. With respect to Mortgaged Properties that are
owner-occupied, it is anticipated that prepayment charges may not be imposed
with respect to many of the Mortgage Loans. The absence of such a restraint on
prepayment, particularly with respect to fixed rate Mortgage Loans having
higher Mortgage Rates, may increase the likelihood of refinancing or other
early retirement of such loans.
SUBORDINATE FINANCING
Where a mortgagor encumbers mortgaged property with one or more junior
liens, the senior lender is subjected to additional risk. First, the mortgagor
may have difficulty servicing and repaying multiple loans. In addition, if the
junior loan permits recourse to the mortgagor (as junior loans often do) and
the senior loan does not, a mortgagor may be more likely to repay sums due on
the junior loan than those on the senior loan. Second, acts of the senior
lender that prejudice the junior lender or impair the junior lender's security
may create a superior equity in favor of the junior lender. For example, if the
mortgagor and the senior lender agree to an increase in the principal amount of
or the interest rate payable on the senior loan, the senior lender may lose its
priority to the extent any
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existing junior lender is harmed or the mortgagor is additionally burdened.
Third, if the mortgagor defaults on the senior loan and/or any junior loan or
loans, the existence of junior loans and actions taken by junior lenders can
impair the security available to the senior lender and can interfere with or
delay the taking of action by the senior lender. Moreover, the bankruptcy of a
junior lender may operate to stay foreclosure or similar proceedings by the
senior lender.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980, enacted in March 1980 ("TITLE V"), provides that state usury
limitations shall not apply to certain types of residential first mortgage
loans originated by certain lenders after March 31, 1980. A similar federal
statute was in effect with respect to mortgage loans made during the first
three months of 1980. The Office of Thrift Supervision is authorized to issue
rules and regulations and to publish interpretations governing implementation
of Title V. The statute authorized any state to reimpose interest rate limits
by adopting, before April 1, 1983, a law or constitutional provision that
expressly rejects application of the federal law. In addition, even where Title
V is not so rejected, any state is authorized by the law to adopt a provision
limiting discount points or other charges on mortgage loans covered by Title V.
Certain states have taken action to reimpose interest rate limits and/or to
limit discount points or other charges.
The Depositor believes that a court interpreting Title V would hold that
residential first mortgage loans that are originated on or after January 1,
1980 are subject to federal preemption. Therefore, in a state that has not
taken the requisite action to reject application of Title V or to adopt a
provision limiting discount points or other charges prior to origination of
such mortgage loans, any such limitation under such state's usury law would not
apply to such mortgage loans.
In any state in which application of Title V has been expressly rejected
or a provision limiting discount points or other charges is adopted, no
mortgage loan originated after the date of such state action will be eligible
for inclusion in a Trust Fund unless (i) such mortgage loan provides for such
interest rate, discount points and charges as are permitted in such state or
(ii) such mortgage loan provides that the terms thereof shall be construed in
accordance with the laws of another state under which such interest rate,
discount points and charges would not be usurious and the mortgagor's counsel
has rendered an opinion that such choice of law provision would be given
effect.
Statutes differ in their provisions as to the consequences of a usurious
loan. One group of statutes requires the lender to forfeit the interest due
above the applicable limit or impose a specified penalty. Under this statutory
scheme, the mortgagor may cancel the recorded mortgage or deed of trust upon
paying its debt with lawful interest, and the lender may foreclose, but only
for the debt plus lawful interest. A second group of statutes is more severe. A
violation of this type of usury law results in the invalidation of the
transaction, thereby permitting the mortgagor to cancel the recorded mortgage
or deed of trust without any payment or prohibiting the lender from
foreclosing.
ALTERNATIVE MORTGAGE INSTRUMENTS
Alternative mortgage instruments, including adjustable rate mortgage loans
and early ownership mortgage loans, originated by non-federally chartered
lenders have historically been subject to a variety of restrictions. Such
restrictions differed from state to state, resulting in difficulties in
determining whether a particular alternative mortgage instrument originated by
a state-chartered lender was in compliance with applicable law. These
difficulties were alleviated substantially as a result of the enactment of
Title VIII of the Garn-St. Germain Act ("TITLE VIII"). Title VIII provides
that, notwithstanding any state law to the contrary, state-chartered banks may
originate alternative mortgage instruments in accordance with regulations
promulgated by the Comptroller of the Currency with respect to origination of
alternative mortgage instruments by national banks; state-chartered credit
unions may originate alternative mortgage instruments in accordance with
regulations promulgated by the National Credit Union Administration with
respect to origination of alternative mortgage instruments by federal credit
unions; and all other non-federally chartered housing creditors,
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including state-chartered savings and loan associations, state-chartered
savings banks and mutual savings banks and mortgage banking companies, may
originate alternative mortgage instruments in accordance with the regulations
promulgated by the Federal Home Loan Bank Board, predecessor to the Office of
Thrift Supervision, with respect to origination of alternative mortgage
instruments by federal savings and loan associations. Title VIII provides that
any state may reject applicability of the provisions of Title VIII by adopting,
prior to October 15, 1985, a law or constitutional provision expressly
rejecting the applicability of such provisions. Certain states have taken such
action.
HOMEOWNERS PROTECTION ACT OF 1998
The Homeowners Protection Act of 1998 ("HOPA") provides for certain
disclosure and termination requirements for primary mortgage insurance ("PMI").
The termination provisions of HOPA apply only to mortgage loans relating to
single-family primary residences originated on or after July 29, 1999. Such
termination provisions govern when a mortgagor may cancel the requirement to
maintain PMI and when the requirement to maintain PMI is automatically
terminated. In general, voluntary termination is permitted and automatic
termination occurs when the principal balance of the mortgage loan is reduced
to 80% or 78%, respectively, of the original property value. The disclosure
requirements of HOPA vary depending on whether the mortgage loan was originated
before or after July 29, 1999. Such disclosure requirements include
notification of the circumstances whereby a mortgagor may cancel PMI, the date
when PMI automatically terminates and servicer contact information. In
addition, HOPA provides that no later than 30 days after cancellation or
termination of PMI, the servicer shall provide written notification that such
PMI is terminated and no further payments are due or payable. Any servicer,
mortgagee or mortgage insurer that violates provisions of HOPA is subject to
possible liability which includes, but is not limited to, actual damages,
statutory damages and reasonable attorney's fees.
TEXAS HOME EQUITY LOANS
Generally, any "cash-out" refinance or other non-purchase money
transaction (except for rate/term refinance loans and certain other narrow
exceptions) secured by a Texas resident's principal residence is subject to the
provisions set forth in Section 50(a)(6) of Article XVI of the Constitution of
Texas (the "TEXAS HOME EQUITY LAWS"). The Texas Home Equity Laws provide for
certain disclosure requirements, caps on allowable fees, required loan closing
procedures and other restrictions. Failure, inadvertent or otherwise, to comply
with any requirement may render the Mortgage Loan unenforceable and/or the lien
on the Mortgaged Property invalid. Because mortgage loans which are subject to
the Texas Home Equity Laws can be foreclosed only pursuant to court order,
rather than non-judicial foreclosure as is available for other types of
mortgage loans in Texas, delays and increased losses may result in connection
with foreclosures of such loans. If a court were to find that any requirement
of the Texas Home Equity Laws was not complied with, the court could refuse to
allow foreclosure to proceed, declare the lien on the Mortgaged Property to be
invalid, and/or require the originating lender or the holder of the note to
forfeit some or all principal and interest of the related Mortgage Loan. Title
insurance generally available on such Mortgage Loans may exclude coverage for
some of the risks described in this paragraph.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940 AND SIMILAR LAWS
Generally, under the terms of the Soldiers' and Sailors' Civil Relief Act
of 1940, as amended (the "RELIEF ACT"), a borrower who enters military service
after the origination of such borrower's Mortgage Loan (including a borrower
who is a member of the National Guard or is in reserve status at the time of
the origination of the Mortgage Loan and is later called to active duty) may
not be charged interest above an annual rate of 6% during the period of such
borrower's active duty status, unless a court orders otherwise upon application
of the lender. It is possible that such action could have an effect, for an
indeterminate period of time, on the ability of the Servicer to collect full
amounts of interest on certain of the Mortgage Loans in a Trust Fund. Any
shortfall in interest collections resulting from the application of the Relief
Act could result in losses to the holders of the
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Certificates of the related Series. Further, the Relief Act imposes limitations
which would impair the ability of the Servicer to foreclose on an affected
Mortgage Loan during the borrower's period of active duty status. Thus, in the
event that such a Mortgage Loan goes into default, there may be delays and
losses occasioned by the inability to realize upon the Mortgaged Property in a
timely fashion. Certain states have enacted comparable legislation which may
interfere with or affect the ability of the Servicer to timely collect payments
of principal and interest on, or to foreclose on, Mortgage Loans of borrowers
in such states who are active or reserve members of the armed services.
FORFEITURES IN DRUG, RICO AND MONEY LAUNDERING VIOLATIONS
Federal law provides that property purchased or improved with assets
derived from criminal activity or otherwise tainted, or used in the commission
of certain offenses, can be seized and ordered forfeited to the United States
of America. The offenses which can trigger such a seizure and forfeiture
include, among others, violations of the Racketeer Influenced and Corrupt
Organizations Act, the Bank Secrecy Act, the anti-money laundering laws and
regulations, including the USA Patriot Act of 2001 and the regulations issued
thereunder, as well as the narcotic drug laws. In many instances, the United
States may seize the property even before a conviction occurs.
In the event of a forfeiture proceeding, a lender may be able to establish
its interest in the property by proving that (i) its mortgage was executed and
recorded before the commission of the illegal conduct from which the assets
used to purchase or improve the property were derived or before any other crime
upon which the forfeiture is based, or (ii) the lender, at the time of
execution of the mortgage, "did not know or was reasonably without cause to
believe that the property was subject to forfeiture." However, there can be no
assurance that such a defense will be successful.
CERTAIN LEGAL ASPECTS OF THE CONTRACTS
The following discussion contains summaries, which are general in nature,
of certain legal matters relating to the Contracts. Because such legal aspects
are governed primarily by applicable state law (which laws may differ
substantially), the summaries do not purport to be complete nor to reflect the
laws of any particular state, nor to encompass the laws of all states in which
the security for the Contracts is situated. The summaries are qualified in
their entirety by reference to the appropriate laws of the states in which
Contracts may be originated.
GENERAL
As a result of the assignment of the Contracts to the Trustee, the Trustee
will succeed collectively to all of the rights (including the right to receive
payment on the Contracts) of the obligee under the Contracts. Each Contract
evidences both (a) the obligation of the obligor to repay the loan evidenced
thereby, and (b) the grant of a security interest in the Manufactured Home to
secure repayment of such loan. Certain aspects of both features of the
Contracts are described more fully below.
The Contracts generally are "chattel paper" as defined in the UCC in
effect in the states in which the Manufactured Homes initially were registered.
Pursuant to the UCC, the sale of chattel paper is treated in a manner similar
to perfection of a security interest in chattel paper. Under the applicable
Agreement, the Servicer will transfer physical possession of the Contracts to
the Trustee or its custodian or may retain possession of the Contracts as
custodian for the Trustee. In addition, the Servicer will make an appropriate
filing of a UCC-1 financing statement in the appropriate states to give notice
of the Trustee's ownership of the Contracts. The Contracts will be stamped or
marked otherwise to reflect their assignment from the Company to the Trustee
only if provided in the related prospectus supplement. 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 Contracts could be defeated.
SECURITY INTERESTS IN THE MANUFACTURED HOMES
The Manufactured Homes securing the Contracts may be located in all 50
states. Security interests in manufactured homes may be perfected either by
notation of the secured party's lien on the
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certificate of title or by delivery of the required documents and payment of a
fee to the state motor vehicle authority, depending on state law. In some
nontitle states, perfection pursuant to the provisions of the UCC is required.
The Asset Seller may effect such notation or delivery of the required documents
and fees, and obtain possession of the certificate of title, as appropriate
under the laws of the state in which any manufactured home securing a
manufactured housing conditional sales contract is registered. In the event the
Asset Seller fails, due to clerical error, to effect such notation or delivery,
or files the security interest under the wrong law (for example, under a motor
vehicle title statute rather than under the UCC, in a few states), the Asset
Seller may not have a first priority security interest in the Manufactured Home
securing a Contract. As manufactured homes have become larger and often have
been attached to their sites without any apparent intention to move them,
courts in many states have held that manufactured homes, under certain
circumstances, may become subject to real estate title and recording laws. As a
result, a security interest in a manufactured home could be rendered
subordinate to the interests of other parties claiming an interest in the home
under applicable state real estate law. In order to perfect a security interest
in a manufactured home under real estate laws, the holder of the security
interest must file either a "fixture filing" under the provisions of the UCC or
a real estate mortgage under the real estate laws of the state where the home
is located. These filings must be made in the real estate records office of the
county where the home is located. Substantially all of the Contracts contain
provisions prohibiting the borrower from permanently attaching the Manufactured
Home to its site. So long as the borrower does not violate this agreement, a
security interest in the Manufactured Home will be governed by the certificate
of title laws or the UCC, and the notation of the security interest on the
certificate of title or the filing of a UCC financing statement will be
effective to maintain the priority of the security interest in the Manufactured
Home. If, however, a Manufactured Home is permanently attached to its site,
other parties could obtain an interest in the Manufactured Home which is prior
to the security interest originally retained by the Asset Seller and
transferred to the Depositor. With respect to a Series of Securities and if so
described in the related prospectus supplement, the Servicer may be required to
perfect a security interest in the Manufactured Home under applicable real
estate laws. The Warranting Party will represent that as of the date of the
sale to the Depositor it has obtained a perfected first priority security
interest by proper notation or delivery of the required documents and fees with
respect to substantially all of the Manufactured Homes securing the Contracts.
The Depositor will cause the security interests in the Manufactured Homes
to be assigned to the Trustee on behalf of the Securityholders. The Depositor
or the Trustee will amend the certificates of title (or file UCC-3 statements)
to identify the Trustee as the new secured party, and will deliver the
certificates of title to the Trustee or note thereon the interest of the
Trustee only if specified in the related prospectus supplement. Accordingly,
the Asset Seller (or other originator of the Contracts) will continue to be
named as the secured party on the certificates of title relating to the
Manufactured Homes. In some states, such assignment is an effective conveyance
of such security interest without amendment of any lien noted on the related
certificate of title and the new secured party succeeds to Servicer's rights as
the secured party. However, in some states, in the absence of an amendment to
the certificate of title (or the filing of a UCC-3 statement), such assignment
of the security interest in the Manufactured Home may not be held effective or
such security interests may not be perfected and in the absence of such
notation or delivery to the Trustee, the assignment of the security interest in
the Manufactured Home may not be effective against creditors of the Asset
Seller (or such other originator of the Contracts) or a trustee in bankruptcy
of the Asset Seller (or such other originator).
In the absence of fraud, forgery or permanent affixation of the
Manufactured Home to its site by the Manufactured Home owner, or administrative
error by state recording officials, the notation of the lien of the Asset
Seller (or other originator of the Contracts) on the certificate of title or
delivery of the required documents and fees will be sufficient to protect the
Securityholders against the rights of subsequent purchasers of a Manufactured
Home or subsequent lenders who take a security interest in the Manufactured
Home. If there are any Manufactured Homes as to which the security interest
assigned to the Trustee is not perfected, such security interest would be
subordinate to, among others, subsequent purchasers for value of Manufactured
Homes and holders of perfected security interests. There also exists a risk in
not identifying the Trustee as the new secured party on the certificate of
title that, through fraud or negligence, the security interest of the Trustee
could be released.
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In the event that the owner of a Manufactured Home moves it to a state
other than the state in which such 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 such relocation and
thereafter only if and after the owner re-registers the Manufactured Home in
such state. If the owner were to relocate a Manufactured Home to another state
and not re-register the Manufactured Home in such state, and if steps are not
taken to re-perfect the Trustee's security interest in such state, the security
interest in the Manufactured Home would cease to be perfected. A majority of
states generally require surrender of a certificate of title to re-register a
Manufactured Home; accordingly, the Servicer must surrender possession if it
holds the certificate of title to such Manufactured Home or, in the case of
Manufactured Homes registered in states which provide for notation of lien, the
Asset Seller (or other originator) would receive notice of surrender if the
security interest in the Manufactured Home is noted on the certificate of
title. Accordingly, the Trustee would have the opportunity to re-perfect its
security interest in the Manufactured Home in the state of relocation. In
states which do not require a certificate of title for registration of a
manufactured home, re-registration could defeat perfection. In the ordinary
course of servicing the manufactured housing contracts, the Servicer takes
steps to effect such re-perfection upon receipt of notice of re-registration or
information from the obligor as to relocation. Similarly, when an obligor under
a manufactured housing contract sells a manufactured home, the Servicer must
surrender possession of the certificate of title or, if it is noted as
lienholder on the certificate of title, will receive notice as a result of its
lien noted thereon and accordingly will have an opportunity to require
satisfaction of the related manufactured housing conditional sales contract
before release of the lien. Under the applicable Agreement, the Servicer is
obligated to take such steps, at the Servicer's expense, as are necessary to
maintain perfection of security interests in the Manufactured Homes.
Under the laws of most states, liens for repairs performed on a
Manufactured Home and liens for personal property taxes take priority even over
a perfected security interest. The Warranting Party will represent in the
applicable Agreement that it has no knowledge of any such liens with respect to
any Manufactured Home securing payment on any Contract. However, such liens
could arise at any time during the term of a Contract. No notice will be given
to the Trustee or Securityholders in the event such a lien arises.
ENFORCEMENT OF SECURITY INTERESTS IN MANUFACTURED HOMES
The Servicer on behalf of the Trustee, to the extent required by the
applicable Agreement, may take action to enforce the Trustee's security
interest with respect to Contracts in default by repossession and resale of the
Manufactured Homes securing such defaulted Contracts. So long as the
Manufactured Home has not become subject to the real estate law, a creditor can
repossess a Manufactured Home securing a Contract by voluntary surrender, by
"self-help" repossession that is "peaceful" (i.e., without breach of the peace)
or, in the absence of voluntary surrender and the ability to repossess without
breach of the peace, by judicial process. The holder of a Contract must give
the debtor a number of days' notice, which varies from 10 to 30 days depending
on the state, prior to commencement of any repossession. The UCC and consumer
protection laws in most states place restrictions on repossession sales,
including requiring prior notice to the debtor and commercial reasonableness in
effecting such a sale. The law in most states also requires that the debtor be
given notice of any sale prior to resale of the unit so that the debtor may
redeem at or before such resale. In the event of such repossession and resale
of a Manufactured Home, the Trustee would be entitled to be paid out of the
sale proceeds before such proceeds could be applied to the payment of the
claims of unsecured creditors or the holders of subsequently perfected security
interests or, thereafter, to the debtor.
Under the laws applicable in most states, a creditor is entitled to obtain
a deficiency judgment from a debtor for any deficiency on repossession and
resale of the manufactured home securing such debtor's loan. However, some
states impose prohibitions or limitations on deficiency judgments, and in many
cases the defaulting borrower would have no assets with which to pay a
judgment.
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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.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940 AND SIMILAR LAWS
The terms of the Relief Act apply to an obligor on a Contract as described
for a mortgagor on a Mortgage Loan under "Certain Legal Aspects of Mortgage
Loans -- Soldiers' and Sailors' Civil Relief Act of 1940 and Similar Laws."
CONSUMER PROTECTION LAWS
The so-called "Holder-in-Due-Course" rule of the Federal Trade Commission
is intended to defeat the ability of the transferor of a consumer credit
contract which is the seller of goods which gave rise to the transaction (and
certain related lenders and assignees) to transfer such contract free of notice
of claims by the debtor thereunder. The effect of this rule is to subject the
assignee of such a contract to all claims and defenses which the debtor could
assert against the seller of goods. Liability under this rule is limited to
amounts paid under a Contract; however, the obligor also may be able to assert
the rule to set off remaining amounts due as a defense against a claim brought
by the Trustee against 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.
TRANSFERS OF MANUFACTURED HOMES; ENFORCEABILITY OF DUE-ON-SALE CLAUSES
The Contracts, in general, prohibit the sale or transfer of the related
Manufactured Homes without the consent of the Servicer and permit the
acceleration of the maturity of the Contracts by the Servicer upon any such
sale or transfer that is not consented to. Generally, it is expected that the
Servicer will permit most transfers of Manufactured Homes and not accelerate
the maturity of the related Contracts. In certain cases, the transfer may be
made by a delinquent obligor in order to avoid a repossession proceeding with
respect to a Manufactured Home.
In the case of a transfer of a Manufactured Home after which the Servicer
desires to accelerate the maturity of the related Contract, the Servicer's
ability to do so will depend on the enforceability under state law of the
"due-on-sale" clause. The Garn-St. Germain Act preempts, subject to certain
exceptions and conditions, state laws prohibiting enforcement of "due-on-sale"
clauses applicable to the Manufactured Homes. Consequently, in some states the
Servicer may be prohibited from enforcing a "due-on-sale" clause in respect of
certain Manufactured Homes.
APPLICABILITY OF USURY LAWS
Title V provides that, subject to the following conditions, state usury
limitations shall not apply to any loan which is secured by a first lien on
certain kinds of manufactured housing. The Contracts would be covered if they
satisfy certain conditions, among other things, governing the terms of any
prepayments, late charges and deferral fees and requiring a 30-day notice
period prior to instituting any action leading to repossession of or
foreclosure with respect to the related unit.
Title V authorized any state to reimpose limitations on interest rates and
finance charges by adopting before April 1, 1983 a law or constitutional
provision which expressly rejects application of the federal law. Fifteen
states adopted such a law prior to the April 1, 1983 deadline. In addition,
even where Title V was not so rejected, any state is authorized by the law to
adopt a provision limiting discount points or other charges on loans covered by
Title V. The related Asset Seller will represent that all of the Contracts
comply with applicable usury law.
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FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following discussion is based on the advice of Cadwalader, Wickersham
& Taft and Orrick, Herrington & Sutcliffe LLP as to the anticipated material
federal income tax consequences of the purchase, ownership and disposition of
the Securities offered hereunder. As to any Securities offered pursuant hereto,
Cadwalader, Wickersham & Taft or Orrick, Herrington & Sutcliffe LLP is of the
opinion that the following discussion, as supplemented by the discussion under
the heading "Federal Income Tax Consequences," if any, in the Prospectus
Supplement accompanying this Prospectus with respect to those Securities, is
correct in all material respects. Except as specifically set forth elsewhere
herein, the opinion set forth in the preceding sentence is the only opinion
being rendered with respect to tax matters affecting the Securities offered
hereunder by Cadwalader, Wickersham & Taft or Orrick, Herrington & Sutcliffe
LLP. This discussion is directed solely to Securityholders that hold the
Securities as capital assets within the meaning of Section 1221 of the Internal
Revenue Code of 1986, as amended (the "CODE") and does not purport to discuss
all federal income tax consequences that may be applicable to particular
categories of investors, some of which (such as banks, insurance companies and
foreign investors) may be subject to special rules. Further, the authorities on
which this discussion, and the opinion referred to below, are based are subject
to change or differing interpretations, which could apply retroactively. In
addition to the federal income tax consequences described herein, potential
investors should consider the state and local tax consequences, if any, of the
purchase, ownership and disposition of the Securities. See "State and Other Tax
Consequences." Securityholders are advised to consult their own tax advisors
concerning the federal, state, local or other tax consequences to them of the
purchase, ownership and disposition of the Securities offered hereunder.
The following discussion addresses securities of four general types:
o securities ("REMIC SECURITIES") representing interests in a Trust
Fund, or a portion thereof, that the Trustee will elect to have
treated as a REMIC under Sections 860A through 860G (the "REMIC
PROVISIONS") of the Code,
o securities ("GRANTOR TRUST SECURITIES") representing interests in a
Trust Fund ("GRANTOR TRUST FUND") as to which no such election will be
made,
o securities ("PARTNERSHIP SECURITIES") representing interests in a
Trust Fund ("PARTNERSHIP TRUST FUND") which is treated as a
partnership for federal income tax purposes, and
o securities ("DEBT SECURITIES") representing indebtedness of a
Partnership Trust Fund for federal income tax purposes.
The prospectus supplement for each Series of Securities will indicate which of
the foregoing treatments will apply to such Series and, if a REMIC election (or
elections) will be made for the related Trust Fund, will identify all "regular
interests" and "residual interests" in the REMIC. For purposes of this tax
discussion, (i) references to a "Securityholder" or a "holder" are to the
beneficial owner of a Security, (ii) references to "REMIC Pool" are to an
entity or portion thereof as to which a REMIC election will be made and (iii)
unless indicated otherwise in the applicable prospectus supplement, references
to "Mortgage Loans" include Contracts. Except as set forth in the applicable
prospectus supplement, no REMIC election will be made with respect to Unsecured
Home Improvement Loans. The discussion below assumes that no election will be
made to treat the Trust Fund, or any portion thereof, as a FASIT under Sections
860H through 860L of the Code. If a FASIT election is made for a particular
Series, the prospectus supplement for that Series will address the material
federal income tax consequences of such election. Securities issued with
respect to a Series for which a FASIT election has been made are referred to
herein as "FASIT Securities."
The following discussion is based in part upon the rules governing
original issue discount that are set forth in Sections 1271-1273 and 1275 of
the Code and in the Treasury regulations issued
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thereunder (the "OID REGULATIONS"), and in part upon the REMIC Provisions and
the Treasury regulations issued thereunder (the "REMIC REGULATIONS"). The OID
Regulations do not adequately address certain issues relevant to, and in some
instances provide that they are not applicable to, securities such as the
Securities.
Taxable Mortgage Pools
Corporate income tax can be imposed on the net income of certain entities
issuing non-REMIC debt obligations secured by real estate mortgages ("TAXABLE
MORTGAGE POOLS"). Any entity other than a REMIC or a FASIT will be considered a
Taxable Mortgage Pool if:
o substantially all of the assets of the entity consist of debt
obligations and more than 50% of such obligations consist of "real
estate mortgages,"
o such entity is the obligor under debt obligations with two or more
maturities, and
o under the terms of the debt obligations on which the entity is the
obligor, payments on such obligations bear a relationship to payments
on the obligations held by the entity.
Furthermore, a group of assets held by an entity can be treated as a separate
Taxable Mortgage Pool if the assets are expected to produce significant cash
flow that will support one or more of the entity's issues of debt obligations.
The Depositor generally will structure offerings of non-REMIC Securities to
avoid the application of the Taxable Mortgage Pool rules.
REMICS
Classification of REMICs
With respect to each Series of REMIC Securities, assuming compliance with
all provisions of the related Pooling and Servicing Agreement, the related
Trust Fund (or each applicable portion thereof) will qualify as a REMIC and the
REMIC Securities offered with respect thereto will be considered to evidence
ownership of "regular interests" ("REGULAR SECURITIES") or "residual interests"
("RESIDUAL SECURITIES") in that REMIC within the meaning of the REMIC
Provisions.
In order for the REMIC Pool to qualify as a REMIC, there must be ongoing
compliance on the part of the REMIC Pool with the requirements set forth in the
Code. The REMIC Pool must fulfill an asset test, which requires that no more
than a de minimis portion of the assets of the REMIC Pool, as of the close of
the third calendar month beginning after the "Startup Day" (which for purposes
of this discussion is the date of issuance of the REMIC Securities) and at all
times thereafter, may consist of assets other than "qualified mortgages" and
"permitted investments." The REMIC Regulations provide a safe harbor pursuant
to which the de minimis requirement will be met if at all times the aggregate
adjusted basis of the nonqualified assets is less than 1% of the aggregate
adjusted basis of all the REMIC Pool's assets. An entity that fails to meet the
safe harbor may nevertheless demonstrate that it holds no more than a de
minimis amount of nonqualified assets. A REMIC Pool also must provide
"reasonable arrangements" to prevent its residual interests from being held by
"disqualified organizations" or agents thereof and must furnish applicable tax
information to transferors or agents that violate this requirement. The Pooling
and Servicing Agreement with respect to each Series of REMIC Securities will
contain provisions meeting these requirements. See "-- Taxation of Owners of
Residual Securities -- Tax-Related Restrictions on Transfer of Residual
Securities -- Disqualified Organizations."
A qualified mortgage is any obligation that is principally secured by an
interest in real property and that is either transferred to the REMIC Pool on
the Startup Day or is purchased by the REMIC Pool within a three-month period
thereafter pursuant to a fixed price contract in effect on the Startup Day.
Qualified mortgages include whole mortgage loans, such as the Mortgage Loans,
and, generally, certificates of beneficial interest in a grantor trust that
holds mortgage loans and regular interests in another REMIC, such as lower-tier
regular interests in Tiered REMICs. The REMIC Regulations
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specify that loans secured by timeshare interests, shares held by a tenant
stockholder in a cooperative housing corporation, and manufactured housing that
qualifies as a "single family residence" under Code section 25(e)(10) can be
qualified mortgages. A qualified mortgage includes a qualified replacement
mortgage, which is any property that would have been treated as a qualified
mortgage if it were transferred to the REMIC Pool on the Startup Day and that
is received either (i) in exchange for any qualified mortgage within a
three-month period thereafter or (ii) in exchange for a "defective obligation"
within a two-year period thereafter. A "defective obligation" includes:
o a mortgage in default or as to which default is reasonably
foreseeable,
o a mortgage as to which a customary representation or warranty made at
the time of transfer to the REMIC Pool has been breached,
o a mortgage that was fraudulently procured by the mortgagor, and
o a mortgage that was not in fact principally secured by real property
(but only if such mortgage is disposed of within 90 days of
discovery). A Mortgage Loan that is "defective" as described in this
clause that is not sold or, if within two years of the Startup Day,
exchanged, within 90 days of discovery, ceases to be a qualified
mortgage after such 90-day period.
Permitted investments include cash flow investments, qualified reserve
assets, and foreclosure property. A cash flow investment is an investment,
earning a return in the nature of interest, of amounts received on or with
respect to qualified mortgages for a temporary period, not exceeding 13 months,
until the next scheduled distribution to holders of interests in the REMIC
Pool. A qualified reserve asset is any intangible property held for investment
that is part of any reasonably required reserve maintained by the REMIC Pool to
provide for payments of expenses of the REMIC Pool or amounts due on the
regular or residual interests in the event of defaults (including
delinquencies) on the qualified mortgages, lower than expected reinvestment
returns, prepayment interest shortfalls and certain other contingencies. The
reserve fund will be disqualified if more than 30% of the gross income from the
assets in such fund for the year is derived from the sale or other disposition
of property held for less than three months, unless required to prevent a
default on the regular interests caused by a default on one or more qualified
mortgages. A reserve fund must be reduced "promptly and appropriately" as
payments on the Mortgage Loans are received. Foreclosure property is real
property acquired by the REMIC Pool in connection with the default or imminent
default of a qualified mortgage and generally may not be held beyond the close
of the third calendar year beginning after the taxable year of acquisition
unless an extension is granted by the IRS.
In addition to the foregoing requirements, the various interests in a
REMIC Pool also must meet certain requirements. All of the interests in a REMIC
Pool must be either of the following: (i) one or more Classes of regular
interests or (ii) a single class of residual interests on which distributions,
if any, are made pro rata. A regular interest is an interest in a REMIC Pool
that is issued on the Startup Day with fixed terms, is designated as a regular
interest, and unconditionally entitles the holder to receive a specified
principal amount (or other similar amount), and provides that interest payments
(or other similar amounts), if any, at or before maturity either are payable
based on a fixed rate or a qualified variable rate, or consist of a specified,
nonvarying portion of the interest payments on qualified mortgages. Such a
specified portion may consist of a fixed number of basis points, a fixed
percentage of the total interest, or a qualified variable rate, inverse
variable rate or difference between two fixed or qualified variable rates on
some or all of the qualified mortgages. The specified principal amount of a
regular interest that provides for interest payments consisting of a specified,
nonvarying portion of interest payments on qualified mortgages may be zero. A
residual interest is an interest in a REMIC Pool other than a regular interest
that is issued on the Startup Day and that is designated as a residual
interest. An interest in a REMIC Pool may be treated as a regular interest even
if payments of principal with respect to such interest are subordinated to
payments on other regular interests or the residual interest in the REMIC Pool,
and are dependent on the absence of defaults or delinquencies on qualified
mortgages or permitted investments, lower than reasonably expected returns on
permitted investments, unanticipated expenses incurred by the REMIC Pool or
prepayment
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interest shortfalls. Accordingly, the Regular Securities of a Series will
constitute one or more Classes of regular interests, and the Residual
Securities with respect to that Series will constitute a single Class of
residual interests with respect to each REMIC Pool.
If an entity electing to be treated as a REMIC fails to comply with one or
more of the ongoing requirements of the Code for such status during any taxable
year, the Code provides that the entity will not be treated as a REMIC for such
year and thereafter. In that event, such entity may be taxable as a corporation
under Treasury regulations, and the related REMIC Securities may not be
accorded the status or given the tax treatment described below. Although the
Code authorizes the Treasury Department to issue regulations providing relief
in the event of an inadvertent termination of REMIC status, no such regulations
have been issued. Any such relief, moreover, may be accompanied by sanctions,
such as the imposition of a corporate tax on all or a portion of the Trust
Fund's income for the period in which the requirements for such status are not
satisfied. The Pooling and Servicing Agreement with respect to each REMIC Pool
will include provisions designed to maintain the Trust Fund's status as a REMIC
under the REMIC Provisions. It is not anticipated that the status of any Trust
Fund as a REMIC will be terminated.
Characterization of Investments in REMIC Securities
In general, the REMIC Securities will be treated as "real estate assets"
within the meaning of Section 856(c)(4)(A) of the Code and assets described in
Section 7701(a)(19)(C) of the Code in the same proportion that the assets of
the REMIC Pool underlying such Securities would be so treated. Moreover, if 95%
or more of the assets of the REMIC Pool qualify for either of the foregoing
treatments at all times during a calendar year, the REMIC Securities will
qualify for the corresponding status in their entirety for that calendar year.
If the assets of the REMIC Pool include Buydown Mortgage Loans, it is possible
that the percentage of such assets constituting "loans . . . secured by an
interest in real property which is . . . residential real property" for
purposes of Code Section 7701(a)(19)(C)(v) may be required to be reduced by the
amount of the related funds paid thereon (the "BUYDOWN FUNDS"). Interest
(including original issue discount) on the Regular Securities and income
allocated to the Class of Residual Securities will be interest described in
Section 856(c)(3)(B) of the Code to the extent that such Securities are treated
as "real estate assets" within the meaning of Section 856(c)(4)(A) of the Code.
In addition, the Regular Securities generally will be "qualified mortgages"
within the meaning of Section 860G(a)(3) of the Code if transferred to another
REMIC on its Startup Day in exchange for regular or residual interests therein.
Regular Securities held by a FASIT will qualify for treatment as "permitted
assets" within the meaning of Section 860L(c)(1)(G) of the Code. The
determination as to the percentage of the REMIC Pool's assets that constitute
assets described in the foregoing sections of the Code will be made with
respect to each calendar quarter based on the average adjusted basis of each
category of the assets held by the REMIC Pool during such calendar quarter. The
REMIC will report those determinations to Securityholders in the manner and at
the times required by applicable Treasury regulations. The Small Business Job
Protection Act of 1996 (the "SBJPA OF 1996") repealed the reserve method of bad
debts of domestic building and loan associations and mutual savings banks, and
thus has eliminated the asset category of "qualifying real property loans" in
former Code Section 593(d) for taxable years beginning after December 31, 1995.
The requirements in the SBJPA of 1996 that such institutions must "recapture" a
portion of their existing bad debt reserves are suspended if a certain portion
of their assets are maintained in "residential loans" under Code Section
7701(a)(19)(C)(v), but only if such loans were made to acquire, construct or
improve the related real property and not for the purpose of refinancing.
However, no effort will be made to identify the portion of the Mortgage Loans
of any Series meeting this requirement, and no representation is made in this
regard.
The assets of the REMIC Pool will include, in addition to Mortgage Loans,
payments on Mortgage Loans held pending distribution on the REMIC Securities
and property acquired by foreclosure held pending sale, and may include amounts
in reserve accounts. It is unclear whether property acquired by foreclosure
held pending sale and amounts in reserve accounts would be considered to be
part of the Mortgage Loans, or whether such assets (to the extent not invested
in
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assets described in the foregoing sections) otherwise would receive the same
treatment as the Mortgage Loans for purposes of all of the foregoing sections.
The REMIC Regulations do provide, however, that payments on Mortgage Loans held
pending distribution are considered part of the Mortgage Loans for purposes of
Section 856(c)(4)(A) of the Code. Furthermore, foreclosure property generally
will qualify as "real estate assets" under Section 856(c)(4)(A) of the Code.
Tiered REMIC Structures
For certain Series of REMIC Securities, two or more separate elections may
be made to treat designated portions of the related Trust Fund as REMICs
("TIERED REMICS") for federal income tax purposes. Upon the issuance of any
such Series of REMIC Securities, Cadwalader, Wickersham & Taft or Orrick,
Herrington & Sutcliffe LLP will deliver its opinion generally to the effect
that, assuming compliance with all provisions of the related Pooling and
Servicing Agreement, the Tiered REMICs will each qualify as a REMIC and the
REMIC Securities issued by the Tiered REMICs will be considered to evidence
ownership of Regular Securities or Residual Securities in the related REMIC
within the meaning of the REMIC Provisions.
Solely for purposes of determining whether the REMIC Securities will be
"real estate assets" within the meaning of Section 856(c)(4)(A) of the Code and
"loans secured by an interest in real property" under Section 7701(a)(19)(C) of
the Code, and whether the income on such Securities is interest described in
Section 856(c)(3)(B) of the Code, the Tiered REMICs will be treated as one
REMIC.
Taxation of Owners of Regular Securities
General
In general, interest, original issue discount, and market discount on a
Regular Security will be treated as ordinary income to a holder of the Regular
Security (the "REGULAR SECURITYHOLDER"), and principal payments on a Regular
Security will be treated as a return of capital to the extent of the Regular
Securityholder's basis in the Regular Security allocable thereto. Regular
Securityholders must use the accrual method of accounting with regard to
Regular Securities, regardless of the method of accounting otherwise used by
such Regular Securityholder.
Original Issue Discount
Accrual Securities will be, and other Classes of Regular Securities may
be, issued with "original issue discount" within the meaning of Code Section
1273(a). Holders of any Class or subclass of Regular Securities having original
issue discount generally must include original issue discount in ordinary
income for federal income tax purposes as it accrues, in accordance with a
constant yield method that takes into account the compounding of interest, in
advance of the receipt of the cash attributable to such income. The following
discussion is based in part on temporary and final Treasury regulations issued
on February 2, 1994, as amended on June 14, 1996, (the "OID REGULATIONS") under
Code Section 1271 through 1273 and 1275 and in part on the provisions of the
1986 Act. Regular Securityholders should be aware, however, that the OID
Regulations do not adequately address certain issues relevant to prepayable
securities, such as the Regular Securities. To the extent such issues are not
addressed in such regulations, the Depositor intends to apply the methodology
described in the Conference Committee Report to the 1986 Act. No assurance can
be provided that the IRS will not take a different position as to those matters
not currently addressed by the OID Regulations. Moreover, the OID Regulations
include an anti-abuse rule allowing the IRS to apply or depart from the OID
Regulations where necessary or appropriate to ensure a reasonable tax result in
light of the applicable statutory provisions. A tax result will not be
considered unreasonable under the anti-abuse rule in the absence of a
substantial effect on the present value of a taxpayer's tax liability.
Investors are advised to consult their own tax advisors as to the discussion
therein and the appropriate method for reporting interest and original issue
discount with respect to the Regular Securities.
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Each Regular Security (except to the extent described below with respect
to a Regular Security on which principal is distributed in a single installment
or by lots of specified principal amounts upon the request of a Securityholder
or by random lot (a "NON-PRO RATA SECURITY")) will be treated as a single
installment obligation for purposes of determining the original issue discount
includable in a Regular Securityholder's income. The total amount of original
issue discount on a Regular Security is the excess of the "stated redemption
price at maturity" of the Regular Security over its "issue price." The issue
price of a Class of Regular Securities offered pursuant to this prospectus
generally is the first price at which a substantial amount of such Class is
sold to the public (excluding bond houses, brokers and underwriters). Although
unclear under the OID Regulations, it is anticipated that the Trustee will
treat the issue price of a Class as to which there is no substantial sale as of
the issue date or that is retained by the Depositor as the fair market value of
the Class as of the issue date. The issue price of a Regular Security also
includes any amount paid by an initial Regular Securityholder for accrued
interest that relates to a period prior to the issue date of the Regular
Security, unless the Regular Securityholder elects on its federal income tax
return to exclude such amount from the issue price and to recover it on the
first Distribution Date. The stated redemption price at maturity of a Regular
Security always includes the original principal amount of the Regular Security,
but generally will not include distributions of interest if such distributions
constitute "qualified stated interest." Under the OID Regulations, qualified
stated interest generally means interest payable at a single fixed rate or a
qualified variable rate (as described below), provided that such interest
payments are unconditionally payable at intervals of one year or less during
the entire term of the Regular Security. Because there is no penalty or default
remedy in the case of nonpayment of interest with respect to a Regular
Security, it is possible that no interest on any Class of Regular Securities
will be treated as qualified stated interest. However, except as provided in
the following three sentences or in the applicable prospectus supplement,
because the underlying Mortgage Loans provide for remedies in the event of
default, it is anticipated that the Trustee will treat interest with respect to
the Regular Securities as qualified stated interest. Distributions of interest
on an Accrual Security, or on other Regular Securities with respect to which
deferred interest will accrue, will not constitute qualified stated interest,
in which case the stated redemption price at maturity of such Regular
Securities includes all distributions of interest as well as principal thereon.
Likewise, it is anticipated that the Trustee will treat an interest-only Class
or a Class on which interest is substantially disproportionate to its principal
amount (a so-called "SUPER-PREMIUM" Class) as having no qualified stated
interest. Where the interval between the issue date and the first Distribution
Date on a Regular Security is shorter than the interval between subsequent
Distribution Dates, the interest attributable to the additional days will be
included in the stated redemption price at maturity.
Under a de minimis rule, original issue discount on a Regular Security
will be considered to be zero if such original issue discount is less than
0.25% of the stated redemption price at maturity of the Regular Security
multiplied by the weighted average maturity of the Regular Security. For this
purpose, the weighted average maturity of the Regular Security is computed as
the sum of the amounts determined by multiplying the number of full years
(i.e., rounding down partial years) from the issue date until each distribution
in reduction of stated redemption price at maturity is scheduled to be made by
a fraction, the numerator of which is the amount of each distribution included
in the stated redemption price at maturity of the Regular Security and the
denominator of which is the stated redemption price at maturity of the Regular
Security. The Conference Committee Report to the 1986 Act provides that the
schedule of such distributions should be determined in accordance with the
assumed rate of prepayment of the Mortgage Loans (the "PREPAYMENT ASSUMPTION")
and the anticipated reinvestment rate, if any, relating to the Regular
Securities. The Prepayment Assumption with respect to a Series of Regular
Securities will be set forth in the applicable prospectus supplement. Holders
generally must report de minimis original issue discount pro rata as principal
payments are received, and such income will be capital gain if the Regular
Security is held as a capital asset. Under the OID Regulations, however,
Regular Securityholders may elect to accrue all de minimis original issue
discount as well as market discount and market premium, under the constant
yield method. See "-- Election to Treat All Interest Under the Constant Yield
Method."
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A Regular Securityholder generally must include in gross income for any
taxable year the sum of the "daily portions," as defined below, of the original
issue discount on the Regular Security accrued during an accrual period for
each day on which it holds the Regular Security, including the date of purchase
but excluding the date of disposition. The Trustee will treat the monthly
period ending on the day before each Distribution Date as the accrual period.
With respect to each Regular Security, a calculation will be made of the
original issue discount that accrues during each successive full accrual period
(or shorter period from the date of original issue) that ends on the day before
the related Distribution Date on the Regular Security. The Conference Committee
Report to the 1986 Act states that the rate of accrual of original issue
discount is intended to be based on the Prepayment Assumption. The original
issue discount accruing in a full accrual period would be the excess, if any,
of (i) the sum of (a) the present value of all of the remaining distributions
to be made on the Regular Security as of the end of that accrual period, and
(b) the distributions made on the Regular Security during the accrual period
that are included in the Regular Security's stated redemption price at
maturity, over (ii) the adjusted issue price of the Regular Security at the
beginning of the accrual period. The present value of the remaining
distributions referred to in the preceding sentence is calculated based on (i)
the yield to maturity of the Regular Security at the issue date, (ii) events
(including actual prepayments) that have occurred prior to the end of the
accrual period, and (iii) the Prepayment Assumption. For these purposes, the
adjusted issue price of a Regular Security at the beginning of any accrual
period equals the issue price of the Regular Security, increased by the
aggregate amount of original issue discount with respect to the Regular
Security that accrued in all prior accrual periods and reduced by the amount of
distributions included in the Regular Security's stated redemption price at
maturity that were made on the Regular Security in such prior periods. The
original issue discount accruing during any accrual period (as determined in
this paragraph) will then be divided by the number of days in the period to
determine the daily portion of original issue discount for each day in the
period. With respect to an initial accrual period shorter than a full accrual
period, the daily portions of original issue discount must be determined
according to an appropriate allocation under any reasonable method.
Under the method described above, the daily portions of original issue
discount required to be included in income by a Regular Securityholder
generally will increase to take into account prepayments on the Regular
Securities as a result of prepayments on the Mortgage Loans that exceed the
Prepayment Assumption, and generally will decrease (but not below zero for any
period) if the prepayments are slower than the Prepayment Assumption. An
increase in prepayments on the Mortgage Loans with respect to a Series of
Regular Securities can result in both a change in the priority of principal
payments with respect to certain Classes of Regular Securities and either an
increase or decrease in the daily portions of original issue discount with
respect to such Regular Securities.
In the case of a Non-Pro Rata Security, it is anticipated that the Trustee
will determine the yield to maturity of such Security based upon the
anticipated payment characteristics of the Class as a whole under the
Prepayment Assumption. In general, the original issue discount accruing on each
Non-Pro Rata Security in a full accrual period would be its allocable share of
the original issue discount with respect to the entire Class, as determined in
accordance with the preceding paragraph. However, in the case of a distribution
in retirement of the entire unpaid principal balance of any Non-Pro Rata
Security (or portion of such unpaid principal balance), (a) the remaining
unaccrued original issue discount allocable to such Security (or to such
portion) will accrue at the time of such distribution, and (b) the accrual of
original issue discount allocable to each remaining Security of such Class will
be adjusted by reducing the present value of the remaining payments on such
Class and the adjusted issue price of such Class to the extent attributable to
the portion of the unpaid principal balance thereof that was distributed. The
Depositor believes that the foregoing treatment is consistent with the "pro
rata prepayment" rules of the OID Regulations, but with the rate of accrual of
original issue discount determined based on the Prepayment Assumption for the
Class as a whole. Investors are advised to consult their tax advisors as to
this treatment.
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Acquisition Premium
A purchaser of a Regular Security having original issue discount at a
price greater than its adjusted issue price but less than its stated redemption
price at maturity will be required to include in gross income the daily
portions of the original issue discount on the Regular Security reduced pro
rata by a fraction, the numerator of which is the excess of its purchase price
over such adjusted issue price and the denominator of which is the excess of
the remaining stated redemption price at maturity over the adjusted issue
price. Alternatively, such a subsequent purchaser may elect to treat all such
acquisition premium under the constant yield method, as described below under
the heading "-- Election to Treat All Interest Under the Constant Yield
Method."
Variable Rate Regular Securities
Regular Securities may provide for interest based on a variable rate.
Under the OID Regulations, interest is treated as payable at a variable rate
if, generally, (i) the issue price does not exceed the original principal
balance by more than a specified amount and (ii) the interest compounds or is
payable at least annually at current values of (a) one or more "qualified
floating rates," (b) a single fixed rate and one or more qualified floating
rates, (c) a single "objective rate," or (d) a single fixed rate and a single
objective rate that is a "qualified inverse floating rate." A floating rate is
a qualified floating rate if variations can reasonably be expected to measure
contemporaneous variations in the cost of newly borrowed funds. A multiple of a
qualified floating rate is considered a qualified floating rate only if the
rate is equal to either (a) the product of a qualified floating rate and a
fixed multiple that is greater than 0.65 but not more than 1.35 or (b) the
product of a qualified floating rate and a fixed multiple that is greater that
0.65 but not more than 1.35, increased or decreased by a fixed rate. Such rate
may also be subject to a fixed cap or floor, or a cap or floor that is not
reasonably expected as of the issue date to affect the yield of the instrument
significantly. An objective rate is any rate (other than a qualified floating
rate) that is determined using a single fixed formula and that is based on
objective financial or economic information, provided that such information is
not (i) within the control of the issuer or a related party or (ii) unique to
the circumstances of the issuer or a related party. A qualified inverse
floating rate is a rate equal to a fixed rate minus a qualified floating rate
that inversely reflects contemporaneous variations in the cost of newly
borrowed funds; an inverse floating rate that is not a qualified inverse
floating rate may nevertheless be an objective rate. A Class of Regular
Securities may be issued under this prospectus that does not have a variable
rate under the foregoing rules, for example, a Class that bears different rates
at different times during the period it is outstanding such that it is
considered significantly "front-loaded" or "back-loaded" within the meaning of
the OID Regulations. It is possible that such a Class may be considered to bear
"contingent interest" within the meaning of the OID Regulations. The OID
Regulations, as they relate to the treatment of contingent interest, are by
their terms not applicable to Regular Securities. However, if final regulations
dealing with contingent interest with respect to Regular Securities apply the
same principles as the OID Regulations, such regulations may lead to different
timing of income inclusion that would be the case under the OID Regulations.
Furthermore, application of such principles could lead to the characterization
of gain on the sale of contingent interest Regular Securities as ordinary
income. Investors should consult their tax advisors regarding the appropriate
treatment of any Regular Security that does not pay interest at a fixed rate or
variable rate as described in this paragraph.
Under the REMIC Regulations, a Regular Security (i) bearing interest at a
rate that qualifies as a variable rate under the OID Regulations that is tied
to current values of a variable rate (or the highest, lowest or average of two
or more variable rates, including a rate based on the average cost of funds of
one or more financial institutions), or a positive or negative multiple of such
a rate (plus or minus a specified number of basis points), or that represents a
weighted average of rates on some or all of the Mortgage Loans, including such
a rate that is subject to one or more caps or floors, or (ii) bearing one or
more such variable rates for one or more periods, or one or more fixed rates
for one or more periods, and a different variable rate or fixed rate for other
periods, qualifies as a regular interest in a REMIC. Accordingly, unless
otherwise indicated in the applicable prospectus supplement, it is anticipated
that the Trustee will treat Regular Securities that qualify as regular
interests under this rule in the same manner as obligations bearing a variable
rate for original issue discount reporting purposes.
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The amount of original issue discount with respect to a Regular Security
bearing a variable rate of interest will accrue in the manner described above
under "Original Issue Discount," with the yield to maturity and future payments
on such Regular Security generally to be determined by assuming that interest
will be payable for the life of the Regular Security based on the initial rate
(or, if different, the value of the applicable variable rate as of the pricing
date) for the relevant Class. Unless required otherwise by applicable final
regulations, it is anticipated that the Trustee will treat such variable
interest as qualified stated interest, other than variable interest on an
interest-only or super-premium Class, which will be treated as non-qualified
stated interest includable in the stated redemption price at maturity. Ordinary
income reportable for any period will be adjusted based on subsequent changes
in the applicable interest rate index.
Although unclear under the OID Regulations, unless required otherwise by
applicable final regulations, the Seller intends to treat Regular Securities
bearing an interest rate that is a weighted average of the net interest rates
on Mortgage Loans as having qualified stated interest, except to the extent
that initial "teaser" rates cause sufficiently "back-loaded" interest to create
more than de minimis original issue discount. The yield on such Regular
Securities for purposes of accruing original issue discount will be a
hypothetical fixed rate based on the fixed rates, in the case of fixed-rate
Mortgage Loans, and initial "teaser rates" followed by fully indexed rates, in
the case of adjustable-rate Mortgage Loans. In the case of adjustable-rate
Mortgage Loans, the applicable index used to compute interest on the Mortgage
Loans in effect on the pricing date (or possibly the issue date) will be deemed
to be in effect beginning with the period in which the first weighted average
adjustment date occurring after the issue date occurs. Adjustments will be made
in each accrual period either increasing or decreasing the amount of ordinary
income reportable to reflect the actual Pass-Through Rate on the Regular
Securities.
Market Discount
A subsequent purchaser of a Regular Security also may be subject to the
market discount rules of Code Sections 1276 through 1278. Under these sections
and the principles applied by the OID Regulations in the context of original
issue discount, "market discount" is the amount by which the purchaser's
original basis in the Regular Security (i) is exceeded by the remaining
outstanding principal payments and interest payments other than qualified
stated interest payments due on a Regular Security, or (ii) in the case of a
Regular Security having original issue discount, is exceeded by the adjusted
issue price of such Regular Security at the time of purchase. Such purchaser
generally will be required to recognize ordinary income to the extent of
accrued market discount on such Regular Security as distributions includable in
the stated redemption price at maturity thereof are received, in an amount not
exceeding any such distribution. Such market discount would accrue in a manner
to be provided in Treasury regulations and should take into account the
Prepayment Assumption. The Conference Committee Report to the 1986 Act provides
that until such regulations are issued, such market discount would accrue
either (i) on the basis of a constant interest rate, or (ii) in the ratio of
stated interest allocable to the relevant period to the sum of the interest for
such period plus the remaining interest as of the end of such period, or in the
case of a Regular Security issued with original issue discount, in the ratio of
original issue discount accrued for the relevant period to the sum of the
original issue discount accrued for such period plus the remaining original
issue discount as of the end of such period. Such purchaser also generally will
be required to treat a portion of any gain on a sale or exchange of the Regular
Security as ordinary income to the extent of the market discount accrued to the
date of disposition under one of the foregoing methods, less any accrued market
discount previously reported as ordinary income as partial distributions in
reduction of the stated redemption price at maturity were received. Such
purchaser will be required to defer deduction of a portion of the excess of the
interest paid or accrued on indebtedness incurred to purchase or carry a
Regular Security over the interest distributable thereon. The deferred portion
of such interest expense in any taxable year generally will not exceed the
accrued market discount on the Regular Security for such year. Any such
deferred interest expense is, in general, allowed as a deduction not later than
the year in which the related market discount income is recognized or the
Regular Security is disposed of. As an alternative to the inclusion of market
discount in income on
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the foregoing basis, the Regular Securityholder may elect to include market
discount in income currently as it accrues on all market discount instruments
acquired by such Regular Securityholder in that taxable year or thereafter, in
which case the interest deferral rule will not apply. See "-- Election to Treat
All Interest Under the Constant Yield Method" below regarding an alternative
manner in which such election may be deemed to be made. A person who purchases
a Regular Security at a price lower than the remaining amounts includable in
the stated redemption price at maturity of the security, but higher than its
adjusted issue price, does not acquire the Regular Security with market
discount, but will be required to report original issue discount, appropriately
adjusted to reflect the excess of the price paid over the adjusted issue price.
Market discount with respect to a Regular Security will be considered to
be zero if such market discount is less than 0.25% of the remaining stated
redemption price at maturity of such Regular Security (or, in the case of a
Regular Security having original issue discount, the adjusted issue price of
such Regular Security) multiplied by the weighted average maturity of the
Regular Security (determined as described above in the third paragraph under
"-- Original Issue Discount") remaining after the date of purchase. It appears
that de minimis market discount would be reported in a manner similar to de
minimis original issue discount. See "-- Original Issue Discount" above.
Under provisions of the OID Regulations relating to contingent payment
obligations, a secondary purchaser of a Regular Security that has "contingent
interest" at a discount generally would continue to accrue interest and
determine adjustments on the Regular Security based on the original projected
payment schedule devised by the issuer of the Security. The holder of such a
Regular Security would be required, however, to allocate the difference between
the adjusted issue price of the Regular Security and its basis in the Regular
Security as positive adjustments to the accruals or projected payments on the
Regular Security over the remaining term of the Regular Security in a manner
that is reasonable (e.g., based on a constant yield to maturity).
Treasury regulations implementing the market discount rules have not yet
been issued, and uncertainty exists with respect to many aspects of those
rules. Due to the substantial lack of regulatory guidance with respect to the
market discount rules, it is unclear how those rules will affect any secondary
market that develops for a given Class of Regular Securities. Prospective
investors in Regular Securities should consult their own tax advisors regarding
the application of the market discount rules to the Regular Securities.
Investors should also consult Revenue Procedure 92-67 concerning the elections
to include market discount in income currently and to accrue market discount on
the basis of the constant yield method.
Amortizable Premium
A Regular Security purchased at a cost greater than its remaining stated
redemption price at maturity generally is considered to be purchased at a
premium. If the Regular Securityholder holds such Regular Security as a
"capital asset" within the meaning of Code Section 1221, the Regular
Securityholder may elect under Code Section 171 to amortize such premium under
a constant yield method that reflects compounding based on the interval between
payments on the Regular Security. Such election will apply to all taxable debt
obligations (including REMIC regular interests) acquired by the Regular
Securityholder at a premium held in that taxable year or thereafter, unless
revoked with the permission of the IRS. Final Treasury regulations have been
issued with respect to amortizable bond premiums which do not by their terms
apply to prepayable debt instruments such as the Regular Securities. However,
the Conference Committee Report to the 1986 Act indicates a Congressional
intent that the same rules that apply to the accrual of market discount on
installment obligations will also apply to amortizing bond premium under Code
Section 171 on installment obligations such as the Regular Securities, although
it is unclear whether the alternatives to the constant interest method
described above under "-- Market Discount" are available. Amortizable bond
premium generally will be treated as an offset to interest income on a Regular
Security, rather than as a separate deduction. See "-- Election to Treat All
Interest Under the Constant Yield Method" below regarding an alternative manner
in which the Code Section 171 election may be deemed to be made.
98
Amortizable premium on a Regular Security that is subject to redemption at
the option of the issuer generally must be amortized as if the optional
redemption price and date were the Security's principal amount and maturity
date if doing so would result in a smaller amount of premium amortization
during the period ending with the optional redemption date. Thus, a holder of a
Regular Security would not be able to amortize any premium on a Regular
Security that is subject to optional redemption at a price equal to or greater
than the Securityholder's acquisition price unless and until the redemption
option expires. A Regular Security subject to redemption at the option of the
issuer described in the preceding sentence will be treated as having matured on
the redemption date for the redemption price and then as having been reissued
on that date for that price. Any premium remaining on the Regular Security at
the time of the deemed reissuance will be amortized on the basis of (i) the
original principal amount and maturity date or (ii) the price and date of any
succeeding optional redemption, under the principles described above.
Election to Treat All Interest Under the Constant Yield Method
A holder of a debt instrument such as a Regular Security may elect to
treat all interest that accrues on the instrument using the constant yield
method, with none of the interest being treated as qualified stated interest.
For purposes of applying the constant yield method to a debt instrument subject
to such an election, (i) "interest" includes stated interest, original issue
discount, de minimis original issue discount, market discount and de minimis
market discount, as adjusted by any amortizable bond premium or acquisition
premium and (ii) the debt instrument is treated as if the instrument were
issued on the holder's acquisition date in the amount of the holder's adjusted
basis immediately after acquisition. It is unclear whether, for this purpose,
the initial Prepayment Assumption would continue to apply or if a new
prepayment assumption as of the date of the holder's acquisition would apply. A
holder generally may make such an election on an instrument by instrument basis
or for a Class or group of debt instruments. However, if the holder makes such
an election with respect to a debt instrument with amortizable bond premium or
with market discount, the holder is deemed to have made elections to amortize
bond premium or to report market discount income currently as it accrues under
the constant yield method, respectively, for all premium bonds held or market
discount bonds acquired by the holder in the same taxable year or thereafter.
The election is made on the holder's federal income tax return for the year in
which the debt instrument is acquired and is irrevocable except with the
approval of the IRS. Investors should consult their own tax advisors regarding
the advisability of making such an election.
Treatment of Losses
Regular Securityholders will be required to report income with respect to
Regular Securities on the accrual method of accounting, without giving effect
to delays or reductions in distributions attributable to defaults or
delinquencies on the Mortgage Loans, except to the extent it can be established
that such losses are uncollectable. Accordingly, the holder of a Regular
Security, particularly a Subordinate Security, may have income, or may incur a
diminution in cash flow as a result of a default or delinquency, but may not be
able to take a deduction (subject to the discussion below) for the
corresponding loss until a subsequent taxable year. In this regard, investors
are cautioned that while they may generally cease to accrue interest income if
it reasonably appears that the interest will be uncollectable, the IRS may take
the position that original issue discount must continue to be accrued in spite
of its uncollectibility until the debt instrument is disposed of in a taxable
transaction or becomes worthless in accordance with the rules of Code Section
166. Under Code Section 166, it appears that Regular Securityholders that are
corporations or that otherwise hold the Regular Securities in connection with a
trade or business should in general be allowed to deduct as an ordinary loss
such loss with respect to principal sustained during the taxable year on
account of any such Regular Securities becoming wholly or partially worthless,
and that, in general, Regular Securityholders that are not corporations and do
not hold the Regular Securities in connection with a trade or business should
be allowed to deduct as a short-term capital loss any loss sustained during the
taxable year on account of a portion of any such Regular Securities becoming
wholly worthless. Although the matter is not free from doubt, such
non-corporate Regular Securityholders should be
99
allowed a bad debt deduction at such time as the principal balance of such
Regular Securities is reduced to reflect losses resulting from any liquidated
Mortgage Loans. The IRS, however, could take the position that non-corporate
holders will be allowed a bad debt deduction to reflect such losses only after
all the Mortgage Loans remaining in the Trust Fund have been liquidated or the
applicable Class of Regular Securities has been otherwise retired. The IRS
could also assert that losses on the Regular Securities are deductible based on
some other method that may defer such deductions for all holders, such as
reducing future cashflow for purposes of computing original issue discount.
This may have the effect of creating "negative" original issue discount which
would be deductible only against future positive original issue discount or
otherwise upon termination of the Class. Regular Securityholders are urged to
consult their own tax advisors regarding the appropriate timing, amount and
character of any loss sustained with respect to such Regular Securities. While
losses attributable to interest previously reported as income should be
deductible as ordinary losses by both corporate and non-corporate holders, the
IRS may take the position that losses attributable to accrued original issue
discount may only be deducted as capital losses in the case of non-corporate
holders who do not hold the Regular Securities in connection with a trade or
business. Special loss rules are applicable to banks and thrift institutions,
including rules regarding reserves for bad debts. Such taxpayers are advised to
consult their tax advisors regarding the treatment of losses on Regular
Securities.
Sale or Exchange of Regular Securities
If a Regular Securityholder sells or exchanges a Regular Security, the
Regular Securityholder will recognize gain or loss equal to the difference, if
any, between the amount received and its adjusted basis in the Regular
Security. The adjusted basis of a Regular Security generally will equal the
original cost of the Regular Security to the seller, increased by any original
issue discount or market discount previously included in the seller's gross
income with respect to the Regular Security and reduced by amounts included in
the stated redemption price at maturity of the Regular Security that were
previously received by the seller, by any amortized premium, and by any
recognized losses.
Except as described above with respect to market discount, and except as
provided in this paragraph, any gain or loss on the sale or exchange of a
Regular Security realized by an investor who holds the Regular Security as a
capital asset will be capital gain or loss and will be long-term or short-term
depending on whether the Regular Security has been held for the long-term
capital gain holding period (currently, more than one year). Such gain will be
treated as ordinary income (i) if a Regular Security is held as part of a
"conversion transaction" as defined in Code Section 1258(c), up to the amount
of interest that would have accrued on the Regular Securityholder's net
investment in the conversion transaction at 120% of the appropriate applicable
Federal rate in effect at the time the taxpayer entered into the transaction
minus any amount previously treated as ordinary income with respect to any
prior disposition of property that was held as part of such transaction, (ii)
in the case of a non-corporate taxpayer, to the extent such taxpayer has made
an election under Code Section 163(d)(4) to have net capital gains taxed as
investment income at ordinary income rates, or (iii) to the extent that such
gain does not exceed the excess, if any, of (a) the amount that would have been
includable in the gross income of the holder if its yield on such Regular
Security were 110% of the applicable Federal rate as of the date of purchase,
over (b) the amount of income actually includable in the gross income of such
holder with respect to such Regular Security. In addition, gain or loss
recognized from the sale of a Regular Security by certain banks or thrift
institutions will be treated as ordinary income or loss pursuant to Code
Section 582(c). Long-term capital gains of certain noncorporate taxpayers
generally are subject to a lower maximum tax rate than ordinary income or
short-term capital gains of such taxpayers for property held for more than one
year. Currently, the maximum tax rate for corporations is the same with respect
to both ordinary income and capital gains.
Taxation of Owners of Residual Securities
Taxation of REMIC Income
Generally, the "daily portions" of REMIC taxable income or net loss will
be includable as ordinary income or loss in determining the federal taxable
income of holders of Residual Securities
100
("RESIDUAL HOLDERS"), and will not be taxed separately to the REMIC Pool. The
daily portions of REMIC taxable income or net loss of a Residual Holder are
determined by allocating the REMIC Pool's taxable income or net loss for each
calendar quarter ratably to each day in such quarter and by allocating such
daily portion among the Residual Holders in proportion to their respective
holdings of Residual Securities in the REMIC Pool on such day. REMIC taxable
income is generally determined in the same manner as the taxable income of an
individual using the accrual method of accounting, except that (i) the
limitations on deductibility of investment interest expense and expenses for
the production of income do not apply, (ii) all bad loans will be deductible as
business bad debts, and (iii) the limitation on the deductibility of interest
and expenses related to tax-exempt income will apply. The REMIC Pool's gross
income includes interest, original issue discount income and market discount
income, if any, on the Mortgage Loans, reduced by amortization of any premium
on the Mortgage Loans, plus income from amortization of issue premium, if any,
on the Regular Securities, plus income on reinvestment of cash flows and
reserve assets, plus any cancellation of indebtedness income upon allocation of
realized losses to the Regular Securities. The REMIC Pool's deductions include
interest and original issue discount expense on the Regular Securities,
servicing fees on the Mortgage Loans, other administrative expenses of the
REMIC Pool and realized losses on the Mortgage Loans. The requirement that
Residual Holders report their pro rata share of taxable income or net loss of
the REMIC Pool will continue until there are no Securities of any Class of the
related Series outstanding.
The taxable income recognized by a Residual Holder in any taxable year
will be affected by, among other factors, the relationship between the timing
of recognition of interest, original issue discount or market discount income
or amortization of premium with respect to the Mortgage Loans, on the one hand,
and the timing of deductions for interest (including original issue discount)
or income from amortization of issue premium on the Regular Securities, on the
other hand. In the event that an interest in the Mortgage Loans is acquired by
the REMIC Pool at a discount, and one or more of such Mortgage Loans is
prepaid, the prepayment may be used in whole or in part to make distributions
in reduction of principal on the Regular Securities, and (ii) the discount on
the Mortgage Loans which is includable in income may exceed the deduction
allowed upon such distributions on those Regular Securities on account of any
unaccrued original issue discount relating to those Regular Securities. When
there is more than one Class of Regular Securities that distribute principal
sequentially, this mismatching of income and deductions is particularly likely
to occur in the early years following issuance of the Regular Securities when
distributions in reduction of principal are being made in respect of earlier
Classes of Regular Securities to the extent that such Classes are not issued
with substantial discount or are issued at a premium. If taxable income
attributable to such a mismatching is realized, in general, losses would be
allowed in later years as distributions on the later maturing Classes of
Regular Securities are made. Taxable income may also be greater in earlier
years than in later years as a result of the fact that interest expense
deductions, expressed as a percentage of the outstanding principal amount of
such a Series of Regular Securities, may increase over time as distributions in
reduction of principal are made on the lower yielding Classes of Regular
Securities, whereas, to the extent the REMIC Pool consists of fixed rate
Mortgage Loans, interest income with respect to any given Mortgage Loan will
remain constant over time as a percentage of the outstanding principal amount
of that loan. Consequently, Residual Holders must have sufficient other sources
of cash to pay any federal, state, or local income taxes due as a result of
such mismatching or unrelated deductions against which to offset such income,
subject to the discussion of "excess inclusions" below under "-- Limitations on
Offset or Exemption of REMIC Income." The timing of such mismatching of income
and deductions described in this paragraph, if present with respect to a Series
of Securities, may have a significant adverse effect upon a Residual Holder's
after-tax rate of return.
A portion of the income of a Residual Securityholder may be treated
unfavorably in three contexts:
o it may not be offset by current or net operating loss deductions;
o it will be considered unrelated business taxable income to tax-exempt
entities; and
101
o it is ineligible for any statutory or treaty reduction in the 30%
withholding tax otherwise available to a foreign Residual
Securityholder.
See "-- Limitations on Offset or Exemption of REMIC Income" below. In addition,
a Residual Holder's taxable income during certain periods may exceed the income
reflected by such Residual Holders for such periods in accordance with
generally accepted accounting principles. Investors should consult their own
accountants concerning the accounting treatment of their investment in Residual
Securities.
Basis and Losses
The amount of any net loss of the REMIC Pool that may be taken into
account by the Residual Holder is limited to the adjusted basis of the Residual
Security as of the close of the quarter (or time of disposition of the Residual
Security if earlier), determined without taking into account the net loss for
the quarter. The initial adjusted basis of a purchaser of a Residual Security
is the amount paid for qsuch Residual Security. Such adjusted basis will be
increased by the amount of taxable income of the REMIC Pool reportable by the
Residual Holder and will be decreased (but not below zero), first, by a cash
distribution from the REMIC Pool and, second, by the amount of loss of the
REMIC Pool reportable by the Residual Holder. Any loss that is disallowed on
account of this limitation may be carried over indefinitely with respect to the
Residual Holder as to whom such loss was disallowed and may be used by such
Residual Holder only to offset any income generated by the same REMIC Pool.
A Residual Holder will not be permitted to amortize directly the cost of
its Residual Security as an offset to its share of the taxable income of the
related REMIC Pool. However, the taxable income will not include cash received
by the REMIC Pool that represents a recovery of the REMIC Pool's basis in its
assets. Although the law is unclear in certain respects, such recovery of basis
by the REMIC Pool will have the effect of amortization of the issue price of
the Residual Securities over their life. However, in view of the possible
acceleration of the income of Residual Holders described above under "--
Taxation of REMIC Income," the period of time over which such issue price is
effectively amortized may be longer than the economic life of the Residual
Securities.
A Residual Security may have a negative value if the net present value of
anticipated tax liabilities exceeds the present value of anticipated cash
flows. The REMIC Regulations appear to treat the issue price of such a residual
interest as zero rather than such negative amount for purposes of determining
the REMIC Pool's basis in its assets. The preamble to the REMIC Regulations
states that the IRS may provide future guidance on the proper tax treatment of
payments made by a transferor of such a residual interest to induce the
transferee to acquire the interest, and Residual Holders should consult their
own tax advisors in this regard.
Further, to the extent that the initial adjusted basis of a Residual
Holder (other than an original holder) in the Residual Security is greater than
the corresponding portion of the REMIC Pool's basis in the Mortgage Loans, the
Residual Holder will not recover a portion of such basis until termination of
the REMIC Pool unless future Treasury regulations provide for periodic
adjustments to the REMIC income otherwise reportable by such holder. The REMIC
Regulations currently in effect do not so provide. See "-- Treatment of Certain
Items of REMIC Income and Expense -- Market Discount" below regarding the basis
of Mortgage Loans to the REMIC Pool and "-- Sale or Exchange of a Residual
Security" below regarding possible treatment of a loss upon termination of the
REMIC Pool as a capital loss.
Treatment of Certain Items of REMIC Income and Expense
Although it is anticipated that the Trustee will compute REMIC income and
expense in accordance with the Code and applicable regulations, the authorities
regarding the determination of specific items of income and expense are subject
to differing interpretations. The Depositor makes no representation as to the
specific method that will be used for reporting income with respect to the
Mortgage Loans and expenses with respect to the Regular Securities, and
different methods could result in different timing or reporting of taxable
income or net loss to Residual Holders or differences in capital gain versus
ordinary income.
102
Original Issue Discount and Premium. Generally, the REMIC Pool's
deductions for original issue discount and income from amortization of premium
will be determined in the same manner as original issue discount income on
Regular Securities as described above under "-- Taxation of Owners of Regular
Securities -- Original Issue Discount" and "-- Variable Rate Regular
Securities," without regard to the de minimis rule described therein, and "--
Taxation of Owners of Regular Securities -- Amortizable Premium."
Market Discount. The REMIC Pool will have market discount income in
respect of Mortgage Loans if, in general, the basis of the REMIC Pool in such
Mortgage Loans is exceeded by their unpaid principal balances. The REMIC Pool's
basis in such Mortgage Loans is generally the fair market value of the Mortgage
Loans immediately after the transfer thereof to the REMIC Pool. The REMIC
Regulations provide that such basis is equal in the aggregate to the issue
prices of all regular and residual interests in the REMIC Pool. The accrued
portion of such market discount would be recognized currently as an item of
ordinary income in a manner similar to original issue discount. Market discount
income generally should accrue in the manner described above under "-- Taxation
of Owners of Regular Securities -- Market Discount."
Premium. Generally, if the basis of the REMIC Pool in the Mortgage Loans
exceeds the unpaid principal balances thereof, the REMIC Pool will be
considered to have acquired such Mortgage Loans at a premium equal to the
amount of such excess. As stated above, the REMIC Pool's basis in Mortgage
Loans is the fair market value of the Mortgage Loans, based on the aggregate of
the issue prices of the regular and residual interests in the REMIC Pool
immediately after the transfer thereof to the REMIC Pool. In a manner analogous
to the discussion above under "-- Taxation of Owners of Regular Securities --
Amortizable Premium," a person that holds a Mortgage Loan as a capital asset
under Code Section 1221 may elect under Code Section 171 to amortize premium on
Mortgage Loans originated after September 27, 1985 under the constant yield
method. Amortizable bond premium will be treated as an offset to interest
income on the Mortgage Loans, rather than as a separate deduction item. Because
substantially all of the mortgagors on the Mortgage Loans are expected to be
individuals, Code Section 171 will not be available for premium on Mortgage
Loans originated on or prior to September 27, 1985. Premium with respect to
such Mortgage Loans may be deductible in accordance with a reasonable method
regularly employed by the holder thereof. The allocation of such premium pro
rata among principal payments should be considered a reasonable method;
however, the IRS may argue that such premium should be allocated in a different
manner, such as allocating such premium entirely to the final payment of
principal.
Limitations on Offset or Exemption of REMIC Income
A portion (or all) of the REMIC taxable income includable in determining
the federal income tax liability of a Residual Holder will be subject to
special treatment. That portion, referred to as the "excess inclusion," is
equal to the excess of REMIC taxable income for the calendar quarter allocable
to a Residual Security over the daily accruals for such quarterly period of (i)
120% of the long-term applicable Federal rate that would have applied to the
Residual Security (if it were a debt instrument) on the Startup Day under Code
Section 1274(d), multiplied by (ii) the adjusted issue price of such Residual
Security at the beginning of such quarterly period. For this purpose, the
adjusted issue price of a Residual Security at the beginning of a quarter is
the issue price of the Residual Security, plus the amount of such daily
accruals of REMIC income described in this paragraph for all prior quarters,
decreased by any distributions made with respect to such Residual Security
prior to the beginning of such quarterly period. Accordingly, the portion of
the REMIC Pool's taxable income that will be treated as excess inclusions will
be a larger portion of such income as the adjusted issue price of the Residual
Securities diminishes.
The portion of a Residual Holder's REMIC taxable income consisting of the
excess inclusions generally may not be offset by other deductions, including
net operating loss carryforwards, on such Residual Holder's return. However,
net operating loss carryovers are determined without regard to excess inclusion
income. Further, if the Residual Holder is an organization subject to the tax
on unrelated business income imposed by Code Section 511, the Residual Holder's
excess inclusions will
103
be treated as unrelated business taxable income of such Residual Holder for
purposes of Code Section 511. In addition, REMIC taxable income is subject to
30% withholding tax with respect to certain persons who are not U.S. Persons
(as defined below under "-- Tax-Related Restrictions on Transfer of Residual
Securities -- Foreign Investors"), and the portion thereof attributable to
excess inclusions is not eligible for any reduction in the rate of withholding
tax (by treaty or otherwise). See "-- Taxation of Certain Foreign Investors --
Residual Securities" below. Finally, if a real estate investment trust or a
regulated investment company owns a Residual Security, a portion (allocated
under Treasury regulations yet to be issued) of dividends paid by the real
estate investment trust or regulated investment company could not be offset by
net operating losses of its shareholders, would constitute unrelated business
taxable income for tax-exempt shareholders, and would be ineligible for
reduction of withholding to certain persons who are not U.S. Persons. The SBJPA
of 1996 has eliminated the special rule permitting Section 593 institutions
("THRIFT INSTITUTIONS") to use net operating losses and other allowable
deductions to offset their excess inclusion income from Residual Securities
that have "significant value" within the meaning of the REMIC Regulations,
effective for taxable years beginning after December 31, 1995, except with
respect to Residual Securities continuously held by a thrift institution since
November 1, 1995.
In addition, the SBJPA of 1996 provides three rules for determining the
effect of excess inclusions on the alternative minimum taxable income of a
Residual Holder. First, alternative minimum taxable income for a Residual
Holder is determined without regard to the special rule, discussed above, that
taxable income cannot be less than excess inclusions. Second, a Residual
Holder's alternative minimum taxable income for a taxable year cannot be less
than the excess inclusions for the year. Third, the amount of any alternative
minimum tax net operating loss deduction must be computed without regard to any
excess inclusions. These rules are effective for taxable years beginning after
December 31, 1986, unless a Residual Holder elects to have such rules apply
only to taxable years beginning after August 20, 1996.
Tax-Related Restrictions on Transfer of Residual Securities
Disqualified Organizations. If any legal or beneficial interest in a
Residual Security is transferred to a Disqualified Organization (as defined
below), a tax would be imposed in an amount equal to the product of (i) the
present value of the total anticipated excess inclusions with respect to such
Residual Security for periods after the transfer and (ii) the highest marginal
federal income tax rate applicable to corporations. The REMIC Regulations
provide that the anticipated excess inclusions are based on actual prepayment
experience to the date of the transfer and projected payments based on the
Prepayment Assumption. The present value rate equals the applicable Federal
rate under Code Section 1274(d) as of the date of the transfer for a term
ending with the last calendar quarter in which excess inclusions are expected
to accrue. Such rate is applied to the anticipated excess inclusions from the
end of the remaining calendar quarters in which they arise to the date of the
transfer. Such a tax generally would be imposed on the transferor of the
Residual Security, except that where such transfer is through an agent
(including a broker, nominee, or other middleman) for a Disqualified
Organization, the tax would instead be imposed on such agent. However, a
transferor of a Residual Security would in no event be liable for such tax with
respect to a transfer if the transferee furnished to the transferor an
affidavit stating that the transferee is not a Disqualified Organization and,
as of the time of the transfer, the transferor does not have actual knowledge
that such affidavit is false. The tax also may be waived by the IRS if the
Disqualified Organization promptly disposes of the Residual Security and the
transferor pays income tax at the highest corporate rate on the excess
inclusion for the period the Residual Security is actually held by the
Disqualified Organization.
In addition, if a "Pass-Through Entity" (as defined below) has excess
inclusion income with respect to a Residual Security during a taxable year and
a Disqualified Organization is the record holder of an equity interest in such
entity, then a tax is imposed on such entity equal to the product of (i) the
amount of excess inclusions that are allocable to the interest in the
Pass-Through Entity during the period such interest is held by such
Disqualified Organization, and (ii) the highest marginal federal corporate
income tax rate. Such tax would be deductible from the ordinary gross income of
the
104
Pass-Through Entity for the taxable year. The Pass-Through Entity would not be
liable for such tax if it has received an affidavit from such record holder
that it is not a Disqualified Organization or stating such holder's taxpayer
identification number and, during the period such person is the record holder
of the Residual Security, the Pass-Through Entity does not have actual
knowledge that such affidavit is false.
For taxable years beginning on or after January 1, 1998, if an "electing
large partnership" holds a Residual Security, all interests in the electing
large partnership are treated as held by Disqualified Organizations for
purposes of the tax imposed upon a Pass-Through Entity by section 860E(c) of
the Code. An exception to this tax, otherwise available to a Pass-Through
Entity that is furnished certain affidavits by record holders of interests in
the entity and that does not know such affidavits are false, is not available
to an electing large partnership.
For these purposes, (i) "DISQUALIFIED ORGANIZATION" means the United
States, any state or political subdivision thereof, any foreign government, any
international organization, any agency or instrumentality of any of the
foregoing (provided, that such term does not include an instrumentality if all
of its activities are subject to tax and a majority of its board of directors
in not selected by any such governmental entity), any cooperative organization
furnishing electric energy or providing telephone service or persons in rural
areas as described in Code Section 1381(a)(2)(C), and any organization (other
than a farmers' cooperative described in Code Section 531) that is exempt from
taxation under the Code unless such organization is subject to the tax on
unrelated business income imposed by Code Section 511, (II) "PASS-THROUGH
ENTITY" means any regulated investment company, real estate investment trust,
common trust fund, partnership, trust or estate and certain corporations
operating on a cooperative basis. Except as may be provided in Treasury
regulations, any person holding an interest in a Pass-Through Entity as a
nominee for another will, with respect to such interest, be treated as a
Pass-Through Entity, and (iii) an "ELECTING LARGE PARTNERSHIP" means any
partnership having more than 100 members during the preceding tax year (other
than certain service partnerships and commodity pools), which elect to apply
simplified reporting provisions under the Code.
The Pooling and Servicing Agreement with respect to a Series will provide
that no legal or beneficial interest in a Residual Security may be transferred
or registered unless (i) the proposed transferee furnished to the transferor
and the Trustee an affidavit providing its taxpayer identification number and
stating that such transferee is the beneficial owner of the Residual Security
and is not a Disqualified Organization and is not purchasing such Residual
Security on behalf of a Disqualified Organization (i.e., as a broker, nominee
or middleman thereof) and (ii) the transferor provides a statement in writing
to the Trustee that it has no actual knowledge that such affidavit is false.
Moreover, the Pooling and Servicing Agreement will provide that any attempted
or purported transfer in violation of these transfer restrictions will be null
and void and will vest no rights in any purported transferee. Each Residual
Security with respect to a Series will bear a legend referring to such
restrictions on transfer, and each Residual Holder will be deemed to have
agreed, as a condition of ownership thereof, to any amendments to the related
Pooling and Servicing Agreement required under the Code or applicable Treasury
regulations to effectuate the foregoing restrictions. Information necessary to
compute an applicable excise tax must be furnished to the IRS and to the
requesting party within 60 days of the request, and the Depositor or the
Trustee may charge a fee for computing and providing such information.
Noneconomic Residual Interests. The REMIC Regulations would disregard
certain transfers of Residual Securities, in which case the transferor would
continue to be treated as the owner of the Residual Securities and thus would
continue to be subject to tax on its allocable portion of the net income of the
REMIC Pool. Under the REMIC Regulations, a transfer of a "noneconomic residual
interest" (as defined below) to a Residual Holder (other than a Residual Holder
who is not a U.S. Person as defined below under "-- Foreign Investors") is
disregarded to all federal income tax purposes if a significant purpose of the
transfer is to impede the assessment or collection of tax. A residual interest
in REMIC (including a residual interest with a positive value at issuance) is a
"noneconomic residual interest" unless at the time of the transfer, (i) the
present value of the
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expected future distributions on the residual interest at least equals the
product of the present value of the anticipated excess inclusions and the
highest corporate income tax rate in effect for the year in which the transfer
occurs, and (ii) the transferor reasonably expects that the transferee will
receive distributions from the REMIC at or after the time at which taxes accrue
on the anticipated excess inclusions in an amount sufficient to satisfy the
accrued taxes on each excess inclusion. The anticipated excess inclusions and
the present value rate are determined in the same manner as set forth above
under "-- Disqualified Organizations." The REMIC Regulations explain that a
significant purpose to impede the assessment or collection of tax exists if the
transferor, at the time of the transfer, either knew or should have know that
the transferee would be unwilling or unable to pay taxes due on its share of
the taxable income of the REMIC. Under the REMIC Regulations, as amended on
July 19, 2002, a safe harbor is provided if (i) the transferor conducted, at
the time of the transfer, a reasonable investigation of the financial condition
of the transferee and found that the transferee historically had paid its debts
as they came due and found no significant evidence to indicate that the
transferee would not continue to pay its debts as they come due in the future,
(ii) the transferee represents to the transferor that it understands that, as
the holder of the non-economic residual interest, the transferee may incur
liabilities in excess of any cash flows generated by the interest and that the
transferee intents to pay taxes associated with holding the residual interest
as they become due, (iii) the transferee represents to the transferor that it
will not cause income from the Residual Security to be attributable to a
foreign permanent establishment or fixed base, within the meaning of an
applicable income tax treaty, and the Residual Security is, in fact, not
transferred to such a permanent establishment or fixed base of the transferee
or any other person and (iv) one of the two following test must be satisfied:
Either
(a) the present value of the anticipated tax liabilities associated
with holding the noneconomic residual interest not exceed the sum of:
(1) the present value of any consideration given to the
transferee to acquire the interest;
(2) the present value of the expected future distributions on
the interest; and
(3) the present value of the anticipated tax savings associated
with holding the interest as the REMIC generates losses.
For purposes of these computations, the transferee is assumed to pay tax at the
highest corporate rate of tax specified in the Code or, in certain
circumstances, the alternative minimum tax rate. Further, present values
generally are computed using a discount rate equal to the short-term Federal
rate set forth in Section 1247(d) of the Code for the month of the transfer and
the compounding period used by the transferee; or
(b) (1) the transferee must be a domestic "C" corporation (other
than a corporation exempt from taxation or a regulated investment company
or real estate investment trust) that meets certain asset test; (2) the
transferee must agree in writing that any subsequent transfer of the
residual interest would be to an eligible "C" corporation and would meet
the requirements for a safe harbor transfer; and (3) the facts and
circumstances known to the transferor on or before the date of the transfer
must not reasonably indicate that the taxes associated with ownership of
the residual interest will not be paid by the transferee.
The Pooling and Servicing Agreement with respect to each Series of
Certificates will require the transferee of a Residual Security to certify to
the matters in requirements (i)-(iv) above as part of the affidavit described
above under the heading "Disqualified Organizations." Unless otherwise
indicated in the applicable Prospectus Supplement, the Pooling and Servicing
Agreement will not require that transfers of the Residual Securities meet the
requirement (iv) above, and thus meet the safe harbor. Persons considering the
purchase of the Residual Securities should consult their advisors regarding the
advisability of meeting the safe harbor in any transfer of the Residual
Securities.
Foreign Investors. The REMIC Regulations provide that the transfer of a
Residual Security that has "tax avoidance potential" to a "foreign person" will
be disregarded for all federal tax purposes.
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This rule appears intended to apply to a transferee who is not a "U.S. Person"
(as defined below), unless such transferee's income is effectively connected
with the conduct of a trade or business within the United States. A Residual
Security is deemed to have tax avoidance potential unless, at the time of the
transfer, (i) the future value of expected distributions equals at least 30% of
the anticipated excess inclusions after the transfer, and (ii) the transferor
reasonably expects that the transferee will receive sufficient distributions
from the REMIC Pool at or after the time at which the excess inclusions accrue
and prior to the end of the next succeeding taxable year for the accumulated
withholding tax liability to be paid. If the non-U.S. Person transfers the
Residual Security back to a U.S. Person, the transfer will be disregarded and
the foreign transferor will continue to be treated as the owner unless
arrangements are made so that the transfer does not have the effect of allowing
the transferor to avoid tax on accrued excess inclusions.
The prospectus supplement relating to the Certificates of a Series may
provide that a Residual Security may not be purchased by or transferred to any
person that is not a U.S. Person or may describe the circumstances and
restrictions pursuant to which such a transfer may be made. The term "U.S.
PERSON" means a citizens or resident of the United States, a corporation or
partnership (unless, in the case of a partnership, Treasury regulations are
adopted that provide otherwise) created or organized in or under the laws of
the United States, any state thereof or the District of Columbia, including an
entity treated as a corporation or partnership for federal income tax purposes,
an estate that is subject to U.S. federal income tax regardless of the source
of its income, or a trust if a court within the United States is able to
exercise primary supervision over the administration of such trust and one or
more such U.S. Persons have the authority to control all substantial decisions
of such trust (or, to the extent provided in applicable Treasury regulations,
certain trusts in existence on August 20, 1996 which are eligible to elect to
be treated as U.S. Persons).
Sale or Exchange of a Residual Security
Upon the sale or exchange of a Residual Security, the Residual Holder will
recognize gain or loss equal to the excess, if any, of the amount realized over
the adjusted basis (as described above under "-- Taxation of Owners of Residual
Securities -- Basis and Losses") of such Residual Holder in such Residual
Security at the time of the sale or exchange. In addition to reporting the
taxable income of the REMIC Pool, a Residual Holder will have taxable income to
the extent that any cash distribution to it from the REMIC Pool exceeds such
adjusted basis on that Distribution Date. Such income will be treated as gain
from the sale or exchange of the Residual Holder's Residual Security, in which
case, if the Residual Holder has an adjusted basis in its Residual Security
remaining when its interest in the REMIC Pool terminates, and if it holds such
Residual Security as a capital asset under Code Section 1221, then it will
recognize a capital loss at that time in the amount of such remaining adjusted
basis.
Any gain on the sale of a Residual Security will be treated as ordinary
income (i) if a Residual Security is held as part of a "conversion transaction"
as defined in Code Section 1258(c), up to the amount of interest that would
have accrued on the Residual Holder's net investment in the conversion
transaction at 120% of the appropriate applicable Federal rate in effect at the
time the taxpayer entered into the transaction minus any amount previously
treated as ordinary income with respect to any prior disposition of property
that was held as a part of such transaction or (ii) in the case of a
non-corporate taxpayer, to the extent such taxpayer has made an election under
Code Section 163(d)(4) to have net capital gains taxed as investment income at
ordinary income rates. In addition, gain or loss recognized from the sale of a
Residual Security by certain banks or thrift institutions will be treated as
ordinary income or loss pursuant to Code Section 582(c).
The Conference Committee Report to the 1986 Act provides that, except as
provided in Treasury regulations yet to be issued, the wash sale rules of Code
Section 1091 will apply to dispositions of Residual Securities where the seller
of the Residual Security, during the period beginning six months before the
sale or disposition of the Residual Security and ending six months after such
sale or disposition, acquires (or enters into any other transaction that
results in the application of Code Section 1091) any residual interest in any
REMIC or any interest in a "taxable mortgage pool" (such as a non-REMIC owner
trust) that is economically comparable to a Residual Security.
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Mark to Market Regulations
On December 24, 1996, the IRS issued final regulations (the "MARK TO
MARKET REGULATIONS") under Code Section 475 relating to the requirement that a
securities dealer mark to market securities held for sale to customers. This
mark-to-market requirement applies to all securities of a dealer, except to the
extent that the dealer has specifically identified a security as held for
investment. The Mark to Market Regulations provide that, for purposes of this
mark to market requirement, a Residual Security is not treated as a security
and thus may not be marked to market. The Mark to Market Regulations apply to
all Residual Securities acquired on or after January 4, 1995.
Taxes That May Be Imposed on the REMIC Pool
Prohibited Transactions
Income from certain transaction by the REMIC Pool, called prohibited
transactions, will not be part of the calculation of income or loss includable
in the federal income tax returns of Residual Holders, but rather will be taxed
directly to the REMIC Pool at a 100% rate. Prohibited transactions generally
include:
o the disposition of a qualified mortgages other than for (a)
substitution within two years of the Startup Day for a defective
(including a defaulted) obligation (or repurchase in lieu of
substitution of a defective (including a defaulted) obligation at any
time) or for any qualified mortgage within three months of the Startup
Day, (b) foreclosure, default, or imminent default of a qualified
mortgage, (c) bankruptcy or insolvency of the REMIC Pool, or (d) a
qualified (complete) liquidation,
o the receipt of income from assets that are not the type of mortgages
or investments that the REMIC Pool is permitted to hold,
o the receipt of compensation for services, or
o the receipt of gain from disposition of cash flow investments other
than pursuant to a qualified liquidation.
Notwithstanding the first and fourth bullet points above, it is not a
prohibited transaction to sell a qualified mortgage or cash flow investment
held by a REMIC Pool to prevent a default on Regular Securities as a result of
a default on qualified mortgages or to facilitate a clean-up call (generally,
an optional termination to save administrative costs when no more than a small
percentage of the Securities is outstanding). The REMIC Regulations indicate
that the modification of a Mortgage Loan generally will not be treated as a
disposition if it is occasioned by a default or reasonably foreseeable default,
an assumption of the Mortgage Loan, the waiver of a due-on-sale or
due-on-encumbrance clause, or the conversion of an interest rate by a mortgagor
pursuant to the terms of a convertible adjustable rate Mortgage Loan.
Contributions to the REMIC Pool After the Startup Day
In general, the REMIC Pool will be subject to a tax at a 100% rate on the
value of any property contributed to the REMIC Pool after the Startup Day.
Exceptions are provided for cash contributions to the REMIC Pool
o during the three months following the Startup Day,
o made to a qualified reserve fund by a Residual Holder,
o in the nature of a guarantee,
o made to facilitate a qualified liquidation or clean-up call, and
o as otherwise permitted in Treasury regulations yet to be issued.
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It is not anticipated that there will be any contributions to the REMIC Pool
after the Startup Day.
Net Income from Foreclosure Property
The REMIC Pool will be subject of federal income tax at the highest
corporate rate on "net income from foreclosure property," determined by
reference to the rules applicable to real estate investment trusts. Generally,
property acquired by deed in lieu of foreclosure would be treated as
"foreclosure property" for a period ending with the close of the third calendar
year beginning after the year in which the REMIC Pool acquires such property,
with a possible extension. Net income from foreclosure property generally means
gain from the sale of a foreclosure property that is inventory property and
gross income from foreclosure property other than qualifying rents and other
qualifying income for a real estate investment trust. It is not anticipated
that the REMIC Pool will have any taxable net income from foreclosure property.
Liquidation of the REMIC Pool
If a REMIC Pool adopts a plan of complete liquidation, within the meaning
of Code Section 860F(a)(4)(A)(i), which may be accomplished by designating in
the REMIC Pool's final tax return a date on which such adoption is deemed to
occur, and sells all of its assets (other than cash) within a 90-day period
beginning on such date, the REMIC Pool will not be subject to the prohibited
transaction rules on the sale of its assets, provided that the REMIC Pool
credits or distributes in liquidation all of the sale proceeds plus its cash
(other than amounts retained to meet claims) to holders of Regular Securities
and Residual Holders within the 90-day period.
Administrative Matters
The REMIC Pool will be required to maintain its books on a calendar year
basis and to file federal income tax returns for federal income tax purposes in
a manner similar to a partnership. The form for such income tax return is Form
1066, U.S. Real Estate Mortgage Investment Conduit Income Tax Return. The
Trustee will be required to sign the REMIC Pool's returns. Treasury regulations
provide that, except where there is a single Residual Holder for an entire
taxable year, the REMIC Pool will be subject to the procedural and
administrative rules of the Code applicable to partnerships, including the
determination by the IRS of any adjustments to, among other things, items of
REMIC income, gain, loss, deduction, or credit in a unified administrative
proceeding. The Master Servicer will be obligated to act as "tax matters
person," as defined in applicable Treasury regulations, with respect to the
REMIC Pool as agent of the Residual Holders holding the largest percentage
interest in the Residual Securities. If the Code or applicable Treasury
regulations do not permit the Master Servicer to act as tax matters person in
its capacity as agent of such Residual Holder, such Residual Holder or such
other person specified pursuant to Treasury regulations will be required to act
as tax matters person. The tax matters person generally has responsibility for
overseeing and providing notice to the other Residual Holders of certain
administrative and judicial proceedings regarding the REMIC Pool's tax affairs,
although other holders of the Residual Securities of the same Series would be
able to participate in such proceedings in appropriate circumstances.
Limitations on Deduction of Certain Expenses
An investor who is an individual, estate, or trust will be subject to
limitation with respect to certain itemized deductions described in Code
Section 67, to the extent that such itemized deductions, in the aggregate, do
not exceed 2% of the investor's adjusted gross income. In addition, Code
Section 68 provides that itemized deductions otherwise allowable for a taxable
year of an individual taxpayer will be reduced by the lesser or (i) 3% of the
excess, if any, of adjusted gross income over $137,300 for 2002 ($68,650 in the
case of a married individual filing a separate return) (subject to annual
adjustments for inflation each year thereafter), or (ii) 80% of the amount of
itemized deductions otherwise allowable for such year. In the case of a REMIC
Pool, such deductions may include deductions under Code Section 212 for the
Servicing Fee and all administrative and other expenses
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relating to the REMIC Pool, or any similar expenses allocated to the REMIC Pool
with respect to a regular interest it holds in another REMIC. Such investors
who hold REMIC Securities either directly or indirectly through certain
pass-through entities may have their pro rata share of such expenses allocated
to them as additional gross income, but may be subject to such limitation on
deductions. In addition, such expenses are not deductible at all for purposes
of computing the alternative minimum tax, and may cause such investors to be
subject to significant additional tax liability. Temporary Treasury regulations
provide that the additional gross income and corresponding amount of expenses
generally are to be allocated entirely to the holders of Residual Securities in
the case of a REMIC Pool that would not qualify as a fixed investment trust in
the absence of a REMIC election. With respect to a REMIC Pool that would be
classified as an investment trust in the absence of a REMIC election or that is
substantially similar to an investment trust, any holder of a Regular Security
that is an individual, trust, estate, or pass-through entity also will be
allocated its pro rata share of such expenses and a corresponding amount of
income and will be subject to the limitations or deductions imposed by Code
Sections 67 and 68, as described above. Unless indicated otherwise in the
applicable prospectus supplement, all such expenses will be allocable to the
Residual Securities. In general, such allocable portion will be determined
based on the ratio that a REMIC Securityholder's income, determined on a daily
basis, bears to the income of all holders of Regular Securities and Residual
Securities with respect to a REMIC Pool. As a result, individuals, estates or
trusts holding REMIC Securities (either directly or indirectly through a
grantor trust, partnership, S corporation, REMIC, or certain other pass-through
entities described in the foregoing temporary Treasury regulations) may have
taxable income in excess of the interest income at the pass-through rate on
Regular Securities that are issued in a single Class or otherwise consistently
with fixed investment trust status or in excess of cash distributions for the
related period on Residual Securities.
Taxation of Certain Foreign Investors
Regular Securities
Interest, including original issue discount, distributable to Regular
Securityholders who are non-resident aliens, foreign corporations, or other
Non-U.S. Persons (as defined below), generally will be considered "portfolio
interest" and, therefore, generally will not be subject to 30% United States
withholding tax, provided that (i) such interest is not effectively connected
with the conduct of a trade or business in the United States of the
Securityholder, (ii) such Non-U.S. Person is not a "10-percent shareholder"
within the meaning of Code Section 871(h)(3)(B) or a controlled foreign
corporation described in Code Section 881(c)(3)(C) and (iii) such Non-U.S.
Person provides the Trustee, or the person who would otherwise be required to
withhold tax from such distributions under Code Section 1441 or 1442, with an
appropriate statement, signed under penalties of perjury, identifying the
beneficial owner and stating, among other things, that the beneficial owner of
the Regular Security is a Non-U.S. Person. If such statement, or any other
required statement, is not provided, 30% withholding will apply unless reduced
or eliminated pursuant to an applicable tax treaty or unless the interest on
the Regular Security is effectively connected with the conduct of a trade or
business within the United States by such Non-U.S. Person. In the latter case,
such Non-U.S. Person will be subject to United States federal income tax at
regular rates. Investors who are Non-U.S. Persons should consult their own tax
advisors regarding the specific tax consequences to them of owning a Regular
Security. The term "NON-U.S. PERSON" means any person who is not a U.S. Person.
The IRS has recently issued final regulations (the "NEW REGULATIONS")
which would provide alternative methods of satisfying the beneficial ownership
certification requirement described above effective January 1, 2001. The New
Regulations provide for a new series of withholding certificates that must be
used for all payments after December 31, 2000. The New Regulations require, in
the case of Regular Securities held by a foreign partnership, that (x) the
certification described above be provided by the partners rather than by the
foreign partnership and (y) the partnership provide certain information,
including a United States taxpayer identification number in certain
circumstances. A look-through rule applies in the case of tiered partnerships.
Non-U.S. Persons should consult their own tax advisors concerning the
application of the certification requirements in the New Regulations.
110
Residual Securities
The Conference Committee Report to the 1986 Act indicates that amounts
paid to Residual Holders who are Non-U.S. Persons generally should be treated
as interest for purposes of the 30% (or lower treaty rate) United States
withholding tax. Treasury regulations provide that amount distributed to
Residual Holders may qualify as "portfolio interest," subject to the conditions
described in "-- Regular Securities" above, but only to the extent that (i) the
Mortgage Loans were issued after July 18, 1984 and (ii) the Trust Fund or
segregated pool of assets therein (as to which a separate REMIC election will
be made), to which the Residual Security relates, consists of obligations
issued in "registered form" within the meaning of Code Section 163(f)(1).
Generally, Mortgage Loans will not be, but regular interests in another REMIC
Pool will be, considered obligations issued in registered form. Furthermore,
Residual Holders will not be entitled to any exemption from the 30% withholding
tax (or lower treaty rate) to the extent of that portion of REMIC taxable
income that constitutes an "excess inclusion." See "-- Taxation of Owners of
Residual Securities -- Limitations on Offset or Exemption of REMIC Income." If
the amounts paid to Residual Holders who are Non-U.S. Persons are effectively
connected with the conduct of a trade or business within the United States by
such Non-U.S. Persons, 30% (or lower treaty rate) withholding will not apply.
Instead, the amounts paid to such Non-U.S. Persons will be subject to United
States federal income tax at regular rates. If 30% (or lower treaty rate)
withholding is applicable, such amounts generally will be taken into account
for purposes of withholding only when paid or otherwise distributed (or when
the Residual Security is disposed of) under rules similar to withholding upon
disposition of debt instruments that have original issue discount. See "--
Taxation of Owners of Residual Securities -- Tax-Related Restrictions on
Transfer of Residual Securities -- Foreign Investors" above concerning the
disregard of certain transfers having "tax avoidance potential." Investors who
are Non-U.S. Persons should consult their own tax advisors regarding the
specific tax consequences to them of owning Residual Securities.
Backup Withholding
Distributions made on the Regular Securities, and proceeds from the sale
of the Regular Securities to or through certain brokers, may be subject to a
"backup" withholding tax under Code Section 3406 of 30% (29% in 2004-2005, and
28% beginning in 2006) on "reportable payments" (including interest
distributions, original issue discount, and, under certain circumstances,
principal distributions) unless the Regular Holder complies with certain
reporting and/or certification procedures, including the provision of its
taxpayer identification number to the Trustee, its agent or the broker who
effected the sale of the Regular Security, or such Holder is otherwise an
exempt recipient under applicable provisions of the Code. Any amounts to be
withheld from distribution on the Regular Securities would be refunded by the
IRS or allowed as a credit against the Regular Holder's federal income tax
liability. The New Regulations change certain of the rules relating to certain
presumptions relating to information reporting and backup withholding. Non-U.S.
Persons are urged to contact their own tax advisors regarding the application
to them of backup withholding and information reporting.
Reporting Requirements
Reports of accrued interest, original issue discount and information
necessary to compute the accrual of market discount will be made annually to
the IRS and to individuals, estates, non-exempt and non-charitable trusts, and
partnerships who are either holders of record of Regular Securities or
beneficial owners who own Regular Securities through a broker or middleman as
nominee. All brokers, nominees and all other non-exempt holders of record of
Regular Securities (including corporations, non-calendar year taxpayers,
securities or commodities dealers, real estate investment trusts, investment
companies, common trust funds, thrift institutions and charitable trusts) may
request such information for any calendar quarter by telephone or in writing by
contacting the person designated in Internal Revenue Service Publication 938
with respect to a particular Series of Regular Securities. Holders through
nominees must request such information from the nominee.
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The IRS's Form 1066 has an accompanying Schedule Q, Quarterly Notice to
Residual Interest Holders of REMIC Taxable Income or Net Loss Allocation.
Treasury regulations require that Schedule Q be furnished by the REMIC Pool to
each Residual Holder by the end of the month following the close of each
calendar quarter (41 days after the end of a quarter under proposed Treasury
regulations) in which the REMIC Pool is in existence). Treasury regulations
require that, in addition to the foregoing requirements, information must be
furnished quarterly to Residual Holders, furnished annually, if applicable, to
holders of Regular Securities, and filed annually with the IRS concerning Code
Section 67 expenses (see "-- Taxes That May Be Imposed on the REMIC Pool --
Limitations on Deduction of Certain Expenses" above) allocable to such holders.
Furthermore, under such regulations, information must be furnished quarterly to
Residual Holders, furnished annually to holders of Regular Securities, and
filed annually with the IRS concerning the percentage of the REMIC Pool's
assets meeting the qualified asset tests described above under
"Characterization of Investments in REMIC Securities."
Residual Holders should be aware that their responsibilities as holders of
the residual interest in a REMIC Pool, including the duty to account for their
shares of the REMIC Pool's income or loss on their returns, continue for the
life of the REMIC Pool, even after the principal and interest on their Residual
Securities have been paid in full.
Treasury regulations provide that a Residual Holder is not required to
treat items on its return consistently with their treatment on the REMIC Pool's
return if the Holder owns 100% of the Residual Securities for the entire
calendar year. Otherwise, each Residual Holder is required to treat items on
its returns consistently with their treatment on the REMIC Pool's return,
unless the Holder either files a statement identifying the inconsistency or
establishes that the inconsistency resulted from incorrect information received
from the REMIC Pool. The IRS may assess a deficiency resulting from a failure
to comply with the consistency requirement without instituting an
administrative proceeding at the REMIC Pool level. A REMIC Pool typically will
not register as a tax shelter pursuant to Code Section 6111 because it
generally will not have a net loss for any of the first five taxable years of
its existence. Any person that holds a Residual Security as a nominee for
another person may be required to furnish the related REMIC Pool, in a manner
to be provided in Treasury regulations, with the name and address of such
person and other specified information.
GRANTOR TRUST FUNDS
Classification of Grantor Trust Funds
With respect to each Series of Grantor Trust Securities, assuming
compliance with all provisions of the applicable Agreement, the related Grantor
Trust Fund will be classified as a grantor trust under subpart E, part I of
subchapter J of the Code and not as a partnership, an association taxable as a
corporation, or a "taxable mortgage pool" within the meaning of Code Section
7701(i). Accordingly, each holder of a Grantor Trust Security generally will be
treated as the beneficial owner of an undivided interest in the Mortgage Loans
included in the Grantor Trust Fund.
STANDARD SECURITIES
General
Where there is no Retained Interest or "excess" servicing with respect to
the Mortgage Loans underlying the Securities of a Series, and where such
Securities are not designated as "Stripped Securities," the holder of each such
Security in such Series (referred to herein as "STANDARD SECURITIES") will be
treated as the owner of a pro rata undivided interest in the ordinary income
and corpus portions of the Grantor Trust Fund represented by its Standard
Security and will be considered the beneficial owner of a pro rata undivided
interest in each of the Mortgage Loans, subject to the discussion below under
"-- Recharacterization of Servicing Fees." Accordingly, the holder of a
Standard Security of a particular Series will be required to report on its
federal income tax return its
112
pro rata share of the entire income from the Mortgage Loans represented by its
Standard Security, including interest at the coupon rate on such Mortgage
Loans, original issue discount (if any), prepayment fees, assumption fees, and
late payment charges received by the Servicer, in accordance with such
Securityholder's method of accounting. A Securityholder generally will be able
to deduct its share of the Servicing Fee and all administrative and other
expenses of the Trust Fund in accordance with its method of accounting,
provided that such amounts are reasonable compensation for services rendered to
that Grantor Trust Fund. However, investors who are individuals, estates or
trusts who own Securities, either directly or indirectly through certain
pass-through entities, will be subject to limitations with respect to certain
itemized deductions described in Code Section 67, including deductions under
Code Section 212 for the Servicing Fee and all such administrative and other
expenses of the Grantor Trust Fund, to the extent that such deductions, in the
aggregate, do not exceed two percent of an investor's adjusted gross income. In
addition, Code Section 68 provides that itemized deductions otherwise allowable
for a taxable year of an individual taxpayer will be reduced by the lesser of
(i) 3% of the excess, if any, of adjusted gross income over $137,300 in 2002
($68,650 in the case of a married individual filing a separate return) (in each
case, as adjusted annually for each year thereafter)(in each case, adjusted
annually for post-1991 inflation), or (ii) 80% of the amount of itemized
deductions otherwise allowable for such year. As a result, such investors
holding Standard Securities, directly or indirectly through a pass-through
entity, may have aggregate taxable income in excess of the aggregate amount of
cash received on such Standard Securities with respect to interest at the
pass-through rate or as discount income on such Standard Securities. In
addition, such expenses are not deductible at all for purposes of computing the
alternative minimum tax, and may cause such investors to be subject to
significant additional tax liability. Moreover, where there is Retained
Interest with respect to the Mortgage Loans underlying a Series of Securities
or where the servicing fees are in excess of reasonable servicing compensation,
the transaction will be subject to the application of the "stripped bond" and
"stripped coupon" rules of the Code, as described below under "-- Stripped
Securities" and "-- Recharacterization of Servicing Fees," respectively.
Holders of Standard Securities, particularly any Class of a Series which
is a Subordinate Security, may incur losses of interest or principal with
respect to the Mortgage Loans. Such losses would be deductible generally only
as described above under "-- REMICs -- Taxation of Owners of Regular Securities
- -- Treatment of Losses," except that Securityholders on the cash method of
accounting would not be required to report qualified stated interest as income
until actual receipt.
Tax Status
With respect to a Series, Cadwalader, Wickersham & Taft or Orrick,
Herrington & Sutcliffe LLP has advised the Depositor that, except with respect
to a Trust Fund consisting of Unsecured Home Improvement Loans:
o A Standard Security owned by a "domestic building and loan
association" within the meaning of Code Section 7701(a)(19) will be
considered to represent "loans . . . secured by an interest in real
property which is . . . residential real property" within the meaning
of Code Section 7701(a)(19)(C)(v), provided that the real property
securing the Mortgage Loans represented by that Standard Security is
of the type described in such section of the Code.
o A Standard Security owned by a real estate investment trust will be
considered to represent "real estate assets" within the meaning of
Code Section 856(c)(4)(A) to the extent that the assets of the related
Grantor Trust Fund consist of qualified assets, and interest income on
such assets will be considered "interest on obligations secured by
mortgages on real property" to such extent within the meaning of Code
Section 856(c)(3)(B).
o A Standard Security owned by a REMIC will be considered to represent
an "obligation (including any participation or certificate of
beneficial ownership therein) which is principally secured by an
interest in real property" within the meaning of Code Section
860G(a)(3)(A) to the extent that the assets of the related Grantor
Trust Fund consist of "qualified mortgages" within the meaning of Code
Section 860G(a)(3).
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An issue arises as to whether Buydown Mortgage Loans may be characterized
in their entirety under the Code provisions cited in the first two bullet
pointed paragraphs above or whether the amount qualifying for such treatment
must be reduced by the amount of the Buydown Funds. There is indirect authority
supporting treatment of an investment in a Buydown Mortgage Loan as entirely
secured by real property if the fair market value of the real property securing
the loan exceeds the principal amount of the loan at the time of issuance or
acquisition, as the case may be. There is no assurance that the treatment
described above is proper. Accordingly, Securityholders are urged to consult
their own tax advisors concerning the effects of such arrangements on the
characterization of such Securityholder's investment for federal income tax
purposes.
Premium and Discount
Securityholders are advised to consult with their tax advisors as to the
federal income tax treatment of premium and discount arising either upon
initial acquisition of Standard Securities or thereafter.
Premium. The treatment of premium incurred upon the purchase of a Standard
Security will be determined generally as described above under "-- REMICs --
Taxation of Owners of Residual Securities -- Premium." The rules allowing for
the amortization of premium are available with respect to Mortgage Loans
originated after September 27, 1985.
Original Issue Discount. The original issue discount rules of Code Section
1271 through 1275 will be applicable to a Securityholder's interest in those
Mortgage Loans as to which the conditions for the application of those sections
are met. Rules regarding periodic inclusion of original issue discount income
generally are applicable to mortgages originated after March 2, 1984. Under the
OID Regulations, original issue discount could arise by the charging of points
by the originator of the mortgages in an amount greater than the statutory de
minimis exception, including a payment of points that is currently deductible
by the borrower under applicable Code provisions or, under certain
circumstances, by the presence of "teaser" rates on the Mortgage Loans. See "--
Stripped Securities" below regarding original issue discount on Stripped
Securities.
Original issue discount generally must be reported as ordinary gross
income as it accrues under a constant interest method that takes into account
the compounding of interest, in advance of the cash attributable to such
income. Unless indicated otherwise in the applicable prospectus supplement, no
prepayment assumption will be assumed for purposes of such accrual. However,
Code Section 1272 provides for a reduction in the amount of original issue
discount includable in the income of a holder of an obligation that acquires
the obligation after its initial issuance at a price greater than the sum of
the original issue price and the previously accrued original issue discount,
less prior payments of principal. Accordingly, if such Mortgage Loans acquired
by a Securityholder are purchased at a price equal to the then unpaid principal
amount of such Mortgage Loans, no original issue discount attributable to the
difference between the issue price and the original principal amount of such
Mortgage Loans (i.e., points) will be includable by such holder.
Market Discount. Securityholders also will be subject to the market
discount rules to the extent that the conditions for application of those
sections are met. Market discount on the Mortgage Loans will be determined and
will be reported as ordinary income generally in the manner described above
under "-- REMICs -- Taxation of Owners of Regular Securities -- Market
Discount," except that the ratable accrual methods described therein will not
apply. Rather, the holder will accrue market discount pro rata over the life of
the Mortgage Loans, unless the constant yield method is elected. Unless
indicated otherwise in the applicable prospectus supplement, no prepayment
assumption will be assumed for purposes of such accrual.
Recharacterization of Servicing Fees
If the servicing fees paid to a Servicer were deemed to exceed reasonable
servicing compensation, the amount of such excess would represent neither
income nor a deduction to Securityholders. In this regard, there are no
authoritative guidelines for federal income tax purposes as to either the
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maximum amount of servicing compensation that may be considered reasonable in
the context of this or similar transactions or whether, in the case of Standard
Securities, the reasonableness of servicing compensation should be determined
on a weighted average or loan-by-loan basis. If a loan-by-loan basis is
appropriate, the likelihood that such amount would exceed reasonable servicing
compensation as to some of the Mortgage Loans would be increased. IRS guidance
indicates that a servicing fee in excess of reasonable compensation ("EXCESS
SERVICING") will cause the Mortgage Loans to be treated under the "stripped
bond" rules. Such guidance provides safe harbors for servicing deemed to be
reasonable and requires taxpayers to demonstrate that the value of servicing
fees in excess of such amounts is not greater than the value of the services
provided.
Accordingly, if the IRS's approach is upheld, a Servicer who receives a
servicing fee in excess of such amounts would be viewed as retaining an
ownership interest in a portion of the interest payments on the Mortgage Loans.
Under the rules of Code Section 1286, the separation of ownership of the right
to receive some or all of the interest payments on an obligation from the right
to receive some or all of the principal payments on the obligation would result
in treatment of such Mortgage Loans as "stripped coupons" and "stripped bonds."
Subject to the de minimis rule discussed below under "-- Stripped Securities,"
each stripped bond or stripped coupon could be considered for this purpose as a
non-interest bearing obligation issued on the date of issue of the Standard
Securities, and the original issue discount rules of the Code would apply to
the holder thereof. While Securityholders would still be treated as owners of
beneficial interests in a grantor trust for federal income tax purposes, the
corpus of such trust could be viewed as excluding the portion of the Mortgage
Loans the ownership of which is attributed to the Servicer, or as including
such portion as a second Class of equitable interest. Applicable Treasury
regulations treat such an arrangement as a fixed investment trust, since the
multiple Classes of trust interests should be treated as merely facilitating
direct investments in the trust assets and the existence of multiple Classes of
ownership interests is incidental to that purpose. In general, such a
recharacterization should not have any significant effect upon the timing or
amount of income reported by a Securityholder, except that the income reported
by a cash method holder may be slightly accelerated. See "-- Stripped
Securities" below for a further description of the federal income tax treatment
of stripped bonds and stripped coupons.
Sale or Exchange of Standard Securities
Upon sale or exchange of a Standard Securities, a Securityholder will
recognize gain or loss equal to the difference between the amount realized on
the sale and its aggregate adjusted basis in the Mortgage Loans and other
assets represented by the Security. In general, the aggregate adjusted basis
will equal the Securityholder's cost for the Standard Security, exclusive of
accrued interest, increased by the amount of any income previously reported
with respect to the Standard Security and decreased by the amount of any losses
previously reported with respect to the Standard Security and the amount of any
distributions (other than accrued interest) received thereon. Except as
provided above with respect to market discount on any Mortgage Loans, and
except for certain financial institutions subject to the provisions of Code
Section 582(c), any such gain or loss generally would be capital gain or loss
if the Standard Security was held as a capital asset. However, gain on the sale
of a Standard Security will be treated as ordinary income (i) if a Standard
Security is held as part of a "conversion transaction" as defined in Code
Section 1258(c), up to the amount of interest that would have accrued on the
Securityholder's net investment in the conversion transaction at 120% of the
appropriate applicable Federal rate in effect at the time the taxpayer entered
into the transaction minus any amount previously treated as ordinary income
with respect to any prior disposition of property that was held as part of such
transaction or (ii) in the case of a non-corporate taxpayer, to the extent such
taxpayer has made an election under Code Section 163(d)(4) to have net capital
gains taxed as investment income at ordinary income rates. Long-term capital
gains of certain noncorporate taxpayers generally are subject to a lower
maximum tax rate than ordinary income or short-term capital gains of such
taxpayers for property held for more than one year. The maximum tax rate for
corporations currently is the same with respect to both ordinary income and
capital gains.
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STRIPPED SECURITIES
General
Pursuant to Code Section 1286, the separation of ownership of the right to
receive some or all of the principal payments on an obligation from ownership
of the right to receive some or all of the interest payments results in the
creation of "stripped bonds" with respect to principal payments and "stripped
coupons" with respect to interest payments. For purposes of this discussion,
Securities that are subject to those rules will be referred to as "STRIPPED
SECURITIES." The Securities will be subject to those rules if (i) the Depositor
or any of its affiliates retains (for its own account or for purposes of
resale), in the form of Retained Interest or otherwise, an ownership interest
in a portion of the payments on the Mortgage Loans, (ii) the Depositor or any
of its affiliates is treated as having an ownership interest in the Mortgage
Loans to the extent it is paid (or retains) servicing compensation in an amount
greater than reasonable consideration for servicing the Mortgage Loans (see
"-- Standard Securities -- Recharacterization of Servicing Fees" above), and
(iii) a Class of Securities are issued in two or more Classes or subclasses
representing the right to non-pro-rata percentages of the interest and
principal payments on the Mortgage Loans.
In general, a holder of a Stripped Security will be considered to own
"stripped bonds" with respect to its pro rata share of all or a portion of the
principal payments on each Mortgage Loan and/or "stripped coupons" with respect
to its pro rata share of all or a portion of the interest payments on each
Mortgage Loan, including the Stripped Security's allocable share of the
servicing fees paid to a Servicer, to the extent that such fees represent
reasonable compensation for services rendered. See the discussion above under
"-- Standard Securities -- Recharacterization of Servicing Fees." Although not
free from doubt, for purposes of reporting to Stripped Securityholders, the
servicing fees will be allocated to the Classes of Stripped Securities in
proportion to the distributions to such Classes for the related period or
periods. The holder of a Stripped Security generally will be entitled to a
deduction each year in respect of the servicing fees, as described above under
"-- Standard Securities -- General," subject to the limitation described
therein.
Code Section 1286 treats a stripped bond or a stripped coupon generally as
an obligation issued at an original issue discount on the date that such
stripped interest is purchased. Although the treatment of Stripped Securities
for federal income tax purposes is not clear in certain respects, particularly
where such Stripped Securities are issued with respect to a Mortgage Pool
containing variable-rate Mortgage Loans, the Depositor has been advised by
counsel that (i) the Grantor Trust Fund will be treated as a grantor trust
under subpart E, part I of subchapter J of the Code and not as an association
taxable as a corporation or a "taxable mortgage pool" within the meaning of
Code Section 7701(i), and (ii) each Stripped Security should be treated as a
single installment obligation for purposes of calculating original issue
discount and gain or loss on disposition. This treatment is based on the
interrelationship of Code Section 1286, Code Sections 1272 through 1275, and
the OID Regulations. Although it is possible that computations with respect to
Stripped Securities could be made in one of the ways described below under "--
Possible Alternative Characterizations," the OID Regulations state, in general,
that two or more debt instruments issued by a single issuer to a single
investor in a single transaction should be treated as a single debt instrument.
Accordingly, for original issue discount purposes, all payments on any Stripped
Securities should be aggregated and treated as though they were made on a
single debt instrument. The Pooling and Servicing Agreement will require that
the Trustee make and report all computations described below using this
aggregate approach, unless substantial legal authority requires otherwise.
Furthermore, Treasury regulations provide for treatment of a Stripped
Security as a single debt instrument issued on the date it is purchased for
purposes of calculating any original issue discount. In addition, under such
regulations, a Stripped Security that represents a right to payments of both
interest and principal may be viewed either as issued with original issue
discount or market discount (as described below), at a de minimis original
issue discount, or, presumably, at a premium. This treatment indicates that the
interest component of such a Stripped Security would be treated as qualified
stated interest under the OID Regulations, assuming it is not an interest-only
or
116
super-premium Stripped Security. Further, these regulations provide that the
purchaser of such a Stripped Security will be required to account for any
discount as market discount rather than original issue discount if either (i)
the initial discount with respect to the Stripped Security was treated as zero
under the de minimis rule, or (ii) no more than 100 basis points in excess of
reasonable servicing is stripped off the related Mortgage Loans. Any such
market discount would be reportable as described above under "-- REMICs --
Taxation of Owners of Regular Securities -- Market Discount," without regard to
the de minimis rule therein, assuming that a prepayment assumption is employed
in such computation.
The holder of a Stripped Security will be treated as owning an interest in
each of the Mortgage Loans held by the Grantor Trust Fund and will recognize an
appropriate share of the income and expenses associated with the Mortgage
Loans. Accordingly, an individual, trust or estate that holds a Stripped
Security directly or through a pass-through entity will be subject to the
limitations on deductions imposed by Code Sections 67 and 68.
A holder of a Stripped Security, particularly any Class of a Series which
is a Subordinate Security, may deduct losses incurred with respect to the
Stripped Security as described above under
"-- Standard Securities -- General."
Status of Stripped Securities
No specific legal authority exists as to whether the character of the
Stripped Securities, for federal income tax purposes, will be the same as that
of the Mortgage Loans. Although the issue is not free from doubt, counsel has
advised the Depositor that, except with respect to a Trust Fund consisting of
Unsecured Home Improvement Loans, Stripped Securities owned by applicable
holders should be considered to represent "real estate assets" within the
meaning of Code Section 856(c)(4)(A), "obligation[s] . . . principally secured
by an interest in real property which is . . . residential real estate" within
the meaning of Code Section 860G(a)(3)(A), and "loans . . . secured by an
interest in real property" within the meaning of Code Section
7701(a)(19)(C)(v), and interest (including original issue discount) income
attributable to Stripped Securities should be considered to represent "interest
on obligations secured by mortgages on real property" within the meaning of
Code Section 856(c)(3)(B), provided that in each case the Mortgage Loans and
interest on such Mortgage Loans qualify for such treatment. The application of
such Code provisions to Buydown Mortgage Loans is uncertain. See "-- Standard
Securities -- Tax Status" above.
Taxation of Stripped Securities
Original Issue Discount. Except as described above under "-- General,"
each Stripped Security will be considered to have been issued at an original
issue discount for federal income tax purposes. Original issue discount with
respect to a Stripped Security must be included in ordinary income as it
accrues, in accordance with a constant yield method that takes into account the
compounding of interest, which may be prior to the receipt of the cash
attributable to such income. Based in part on the issue discount required to be
included in the income of a holder of a Stripped Security (referred to in this
discussion as a "STRIPPED SECURITYHOLDER") in any taxable year likely will be
computed generally as described above under "-- REMICs -- Taxation of Owner of
Regular Securities -- Original Issue Discount" and "-- Variable Rate Regular
Securities." However, with the apparent exception of a Stripped Security
qualifying as a market discount obligation as described above under "--
General," the issue price of a Stripped Security will be the purchase price
paid by each holder thereof, and the stated redemption price at maturity will
include the aggregate amount of the payments, other than qualified stated
interest, to be made on the Stripped Security to such Securityholder,
presumably under the Prepayment Assumption.
If the Mortgage Loans prepay at a rate either faster or slower than that
under the Prepayment Assumption, a Securityholder's recognition of original
issue discount will be either accelerated or decelerated and the amount of such
original issue discount will be either increased or decreased depending on the
relative interests in principal and interest on each Mortgage Loan represented
by
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such Securityholder's Stripped Security. While the matter is not free from
doubt, the holder of a Stripped Security should be entitled in the year that it
becomes certain (assuming no further prepayments) that the holder will not
recover a portion of its adjusted basis in such Stripped Security to recognize
a loss (which may be a capital loss) equal to such portion of unrecoverable
basis.
As an alternative to the method described above, the fact that some or all
of the interest payments with respect to the Stripped Securities will not be
made if the Mortgage Loans are prepaid could lead to the interpretation that
such interest payments are "contingent" within the meaning of the OID
Regulations. The OID Regulations, as they relate to the treatment of contingent
interest, are by their terms not applicable to prepayable securities such as
the Stripped Securities. However, if final regulations dealing with contingent
interest with respect to the Stripped Securities apply the same principles as
the OID Regulations, such regulations may lead to different timing of income
inclusion that would be the case under the OID Regulations. Furthermore,
application of such principles could lead to the characterization of gain on
the sale of contingent interest Stripped Securities as ordinary income.
Investors should consult their tax advisors regarding the appropriate tax
treatment of Stripped Securities.
Sale or Exchange of Stripped Securities. Sale or exchange of a Stripped
Security prior to its maturity will result in gain or loss equal to the
difference, if any, between the amount received and the Securityholder's
adjusted basis in such Stripped Security, as described above under "-- REMICs
- -- Taxation of Owners of Regular Securities -- Sale or Exchange of Regular
Securities." Gain or loss from the sale or exchange of a Stripped Security
generally will be capital gain or loss to the Securityholder if the Stripped
Security is held as a "capital asset" within the meaning of Code section 1221,
and will be long-term or short-term depending on whether the Stripped Security
has been held for the long-term capital gain holding period (currently, more
than one year). To the extent that a subsequent purchaser's purchase price is
exceeded by the remaining payments on the Stripped Securities, such subsequent
purchaser will be required for federal income tax purposes to accrue and report
such excess as if it were original issue discount in the manner described
above. It is not clear for this purpose whether the assumed prepayment rate
that is to be used in the case of a Securityholder other than an original
Securityholder should be the Prepayment Assumption or a new rate based on the
circumstances at the date of subsequent purchase.
Purchase of More Than One Class of Stripped Securities. When an investor
purchases more than one Class of Stripped Securities, it is currently unclear
whether for federal income tax purposes such Classes of Stripped Securities
should be treated separately or aggregated for purposes of the rules described
above.
Possible Alternative Characterization. The characterizations of the
Stripped Securities discussed above are not the only possible interpretations
of the applicable Code provisions. For example, the Securityholder may be
treated as the owner of (i) one installment obligation consisting of such
Stripped Security's pro rata share of the payments attributable to principal on
each Mortgage Loan and a second installment obligation consisting of such
Stripped Security's pro rata share of the payments attributable to interest on
each Mortgage Loan, (ii) as many stripped bonds or stripped coupons as there
are scheduled payments of principal and/or interest on each Mortgage Loan, or
(iii) a separate installment obligation for each Mortgage Loan, representing
the Stripped Security's pro rata share of payments of principal and/or interest
to be made with respect thereto. Alternatively, the holder of one or more
Classes of Stripped Securities may be treated as the owner of a pro rata
fractional undivided interest in each Mortgage Loan to the extent that such
Stripped Security, or Classes of Stripped Securities in the aggregate,
represent the same pro rata portion of principal and interest on each such
Mortgage Loan, and a stripped bond or stripped coupon (as the case may be),
treated as an installment obligation or contingent payment obligation, as to
the remainder. Treasury regulations regarding original issue discount on
stripped obligations make the foregoing interpretations less likely to be
applicable. The preamble to such regulations states that they are premised on
the assumption that an aggregation approach is appropriate for determining
whether original issue discount on a stripped bond or stripped coupon is de
minimis, and solicits comments on appropriate rules for aggregating stripped
bonds and stripped coupons under Code Section 1286.
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Because of these possible varying characterizations of Stripped Securities
and the resultant differing treatment of income recognition, Securityholders
are urged to consult their own tax advisors regarding the proper treatment of
Stripped Securities for federal income tax purposes.
Reporting Requirements and Backup Withholding
The Trustee will furnish, within a reasonable time after the end of each
calendar year, to each Securityholder at any time during such year, such
information (prepared on the basis described above) as is necessary to enable
such Securityholder to prepare its federal income tax returns. Such information
will include the amount of original issue discount accrued on Securities held
by persons other than Securityholders exempted from the reporting requirements.
However, the amount required to be reported by the Trustee may not be equal to
the proper amount of original issue discount required to be reported as taxable
income by a Securityholder, other than an original Securityholder that
purchased at the issue price. In particular, in the case of Stripped
Securities, unless provided otherwise in the applicable prospectus supplement,
such reporting will be based upon a representative initial offering price of
each Class of Stripped Securities. The Trustee will also file such original
issue discount information with the IRS. If a Securityholder fails to supply an
accurate taxpayer identification number or if the Secretary of the Treasury
determines that a Securityholder has not reported all interest and dividend
income required to be shown on his federal income tax return, backup
withholding may be required in respect of any reportable payments, as described
above under "-- REMICs -- Taxation of Certain Foreign Investors -- Backup
Withholding."
Taxation of Certain Foreign Investors
To the extent that a Security evidences ownership in Mortgage Loans that
are issued on or before July 18, 1984, interest or original issue discount paid
by the person required to withhold tax under Code Section 1441 or 1442 to
nonresident aliens, foreign corporations, or other Non-U.S. Persons generally
will be subject to 30% United States withholding tax, or such lower rate as may
be provided for interest by an applicable tax treaty. Accrued original issue
discount recognized by the Securityholder on the sale or exchange of such a
Security also will be subject to federal income tax at the same rate.
Treasury regulations provide that interest or original issue discount paid
by the Trustee or other withholding agent to a Non-U.S. Person evidencing
ownership interest in Mortgage Loans issued after July 18, 1984 will be
"portfolio interest" and will be treated in the manner, and such persons will
be subject to the same certification requirements, described above under "--
REMICs -- Taxation of Certain Foreign Investors -- Regular Securities."
PARTNERSHIP TRUST FUNDS
Classification of Partnership Trust Funds
With respect to each Series of Partnership Securities or Debt Securities,
Cadwalader, Wickersham & Taft or Orrick, Herrington & Sutcliffe LLP will
deliver its opinion that the Trust Fund will not be a taxable mortgage pool or
an association (or publicly traded partnership) taxable as a corporation for
federal income tax purposes. This opinion will be based on the assumption that
the terms of the applicable Agreement and related documents will be complied
with, and on counsel's conclusion 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.
Characterization of Investments in Partnership Securities and Debt
Securities
For federal income tax purposes, (i) Partnership Securities and Debt
Securities held by a thrift institution taxed as a domestic building and loan
association will not constitute "loans . . . secured by an interest in real
property which is . . . residential real property" within the meaning of Code
Section 7701(a)(19)(C)(v) and (ii) interest on Debt Securities held by a real
estate investment trust will not be
119
treated as "interest on obligations secured by mortgages on real property or on
interests in real property" within the meaning of Code Section 856(c)(3)(B),
and Debt Securities held by a real estate investment trust will not constitute
"real estate assets" within the meaning of Code Section 856(c)(4)(A), but
Partnership Securities held by a real estate investment trust will qualify
under those sections based on the real estate investments trust's proportionate
interest in the assets of the Partnership Trust Fund qualifying for such
treatments based on capital accounts.
Taxation of Debt Securityholders
Treatment of the Debt Securities as Indebtedness
The Depositor will agree, and the Securityholders will agree by their
purchase of Debt Securities, to treat the Debt Securities as debt for federal
income tax purposes. No regulations, published rulings, or judicial decisions
exist that discuss the characterization for federal income tax purposes of
securities with terms substantially the same as the Debt Securities. However,
with respect to each Series of Debt Securities, Cadwalader, Wickersham & Taft
or Orrick, Herrington & Sutcliffe LLP will deliver its opinion that the Debt
Securities will be classified as indebtedness for federal income tax purposes.
The discussion below assumes this characterization of the Debt Securities is
correct.
If, contrary to the opinion of counsel, the IRS successfully asserted that
the Debt Securities were not debt for federal income tax purposes, the Debt
Securities might be treated as equity interests in the Partnership Trust, and
the timing and amount of income allocable to holders of such Debt Securities
may be different than as described in the following paragraph.
Debt Securities generally will be subject to the same rules of taxation as
Regular Securities issued by a REMIC, as described above, except that (i)
income reportable on Debt Securities is not required to be reported under the
accrual method unless the holder otherwise uses the accrual method and (ii) the
special rule treating a portion of the gain on sale or exchange of a Regular
Security as ordinary income is inapplicable to Debt Securities. See "-- REMICs
- -- Taxation of Owners of Regular Securities."
Taxation of Owners of Partnership Securities
Treatment of the Partnership Trust Fund as a Partnership
If so specified in the applicable prospectus supplement, the Depositor
will agree, and the Securityholders will agree by their purchase of Securities,
to treat the Partnership Trust Fund as a partnership for purposes of federal
and state income tax, franchise tax and any other tax measured in whole or in
part by income, with the assets of the partnership being the assets held by the
Partnership Trust Fund, the partners of the partnership being the
Securityholders (including the Depositor), and the Debt Securities (if any)
being debt of the partnership. However, the proper characterization of the
arrangement involving the Partnership Trust Fund, the Partnership Securities,
the Debt Securities, and the Depositor 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 one or more of the Classes of Partnership Securities have certain
features characteristic of debt, the Partnership Securities might be considered
debt of the Depositor or the Partnership Trust Fund. Any such characterization
would not result in materially adverse tax consequences to Securityholders as
compared to the consequences from treatment of the Partnership Securities as
equity in a partnership, described below. The following discussion assumes that
the Partnership Securities represent equity interests in a partnership.
Partnership Taxation
As a partnership, the Partnership Trust Fund will not be subject to
federal income tax. Rather, each Securityholder will be required to separately
take into account such holder's allocated share of
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income, gains, losses, deductions and credits of the Partnership Trust Fund. It
is anticipated that the Partnership Trust Fund's income will consist primarily
of interest earned on the Mortgage Loans (including appropriate adjustments for
market discount, original issue discount and bond premium) as described above
under "-- Standard Securities -- General" and "-- Premium and Discount") and
any gain upon collection or disposition of Mortgage Loans. The Partnership
Trust Fund's deductions will consist primarily of interest accruing with
respect to the Debt Securities, servicing and other fees, and losses or
deductions upon collection or disposition of Debt Securities.
The tax items of a partnership are allocable to the partners in accordance
with the Code, Treasury regulations and the partnership agreement (here, the
Agreements and related documents). The applicable Agreement will provide, in
general, that the Securityholders will be allocated taxable income of the
Partnership Trust Fund for each Due Period equal to the sum of (i) the interest
that accrues on the Partnership Securities in accordance with their terms for
such Due Period, including interest accruing at the applicable pass-through
rate for such Due Period and interest on amounts previously due on the
Partnership Securities but not yet distributed; (ii) any Partnership Trust Fund
income attributable to discount on the Mortgage Loans that corresponds to any
excess of the principal amount of the Partnership Securities over their initial
issue price; and (iii) any other amounts of income payable to the
Securityholders for such Due Period. Such allocation will be reduced by any
amortization by the Partnership Trust Fund of premium on Mortgage Loans that
corresponds to any excess of the issue price of Partnership Securities over
their principal amount. All remaining taxable income of the Partnership Trust
Fund will be allocated to the Depositor. Based on the economic arrangement of
the parties, this approach for allocating Partnership 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 Securityholders. Moreover, even under the foregoing method of
allocation, Securityholders 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 such
amount. Thus, cash basis holders will in effect be required to report income
from the Partnership Securities on the accrual basis and Securityholders may
become liable for taxes on Partnership Trust Fund income even if they have not
received cash from the Partnership Trust Fund to pay such taxes.
Part or all of the taxable income allocated to a Securityholder 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 such a holder under the Code.
A share of expenses of the Partnership Trust Fund (including fees of the
Master Servicer but not interest expense) allocable to an individual, estate or
trust Securityholder would be miscellaneous itemized deductions subject to the
limitations described above under "-- Standard Securities -- General".
Accordingly, 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 such holder over the life of
the Partnership Trust Fund.
Discount income or premium amortization with respect to each Mortgage Loan
would be calculated in a manner similar to the description above under "--
Standard Securities -- General" and "-- Premium and Discount." Notwithstanding
such description, it is intended that the Partnership Trust Fund will make all
tax calculations relating to income and allocations to Securityholders on an
aggregate basis with respect to all Mortgage Loans held by the Partnership
Trust Fund rather than on a Mortgage Loan-by-Mortgage Loan basis. If the IRS
were to require that such calculations be made separately for each Mortgage
Loan, the Partnership Trust Fund might be required to incur additional expense,
but it is believed that there would not be a material adverse effect on
Securityholders.
Discount and Premium
Unless indicated otherwise in the applicable prospectus supplement, it is
not anticipated that the Mortgage Loans will have been issued with original
issue discount and, therefore, the Partnership Trust Fund should not have
original issue discount income. However, the purchase price paid by the
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Partnership Trust Fund for the Mortgage Loans may be greater or less than the
remaining principal balance of the Mortgage Loans at the time of purchase. If
so, the Mortgage Loans will have been acquired at a premium or discount, as the
case may be. See "-- Standard Securities -- Premium and Discount." (As
indicated above, the Partnership Trust Fund will make this calculation on an
aggregate basis, but might be required to recompute it on a Mortgage
Loan-by-Mortgage Loan basis).
If the Partnership Trust Fund acquires the Mortgage Loans at a market
discount or premium, the Partnership Trust Fund will elect to include any such
discount in income currently as it accrues over the life of the Mortgage Loans
or to offset any such premium against interest income on the Mortgage Loans. As
indicated above, a portion of such market discount income or premium deduction
may be allocated to Securityholders.
Section 708 Termination
Under Section 708 of the Code, the Partnership Trust Fund will be deemed
to terminate for federal income tax purposes if 50% or more of the capital and
profits interests in the Partnership Trust Fund are sold or exchanged within a
12-month period. If such a termination occurs, it would cause a deemed
contribution of the assets of a Partnership Trust Fund (the "OLD PARTNERSHIP")
to a new Partnership Trust Fund (the "NEW PARTNERSHIP") in exchange for
interests in the new partnership. Such interests would be deemed distributed to
the partners of the old partnership in liquidation thereof, which would not
constitute a sale or exchange. The Partnership Trust Fund will not comply with
certain technical requirements that might apply when such a constructive
termination occurs. As a result, the Partnership Trust Fund may be subject to
certain tax penalties and may incur additional expenses if it is required to
comply with those requirements. Furthermore, the Partnership Trust Fund might
not be able to comply due to lack of data.
Disposition of Securities
Generally, capital gain or loss will be recognized on a sale of
Partnership Securities in an amount equal to the difference between the amount
realized and the seller's tax basis in the Partnership Securities sold. A
Securityholder's tax basis in an Partnership Security will generally equal the
holder's cost increased by the holder's share of Partnership Trust Fund income
(includable in income) and decreased by any distributions received with respect
to such Partnership Security. In addition, both the tax basis in the
Partnership Securities and the amount realized on a sale of an Partnership
Security would include the holder's share of the Debt Securities and other
liabilities of the Partnership Trust Fund. A holder acquiring Partnership
Securities at different prices may be required to maintain a single aggregate
adjusted tax basis in such Partnership Securities, and, upon sale or other
disposition of some of the Partnership Securities, allocate a portion of such
aggregate tax basis to the Partnership Securities sold (rather than maintaining
a separate tax basis in each Partnership Security for purposes of computing
gain or loss on a sale of that Partnership Security).
Any gain on the sale of a Partnership Security attributable to the
holder's share of unrecognized accrued market discount on the Mortgage Loans
would generally be treated as ordinary income to the holder and would give rise
to special tax reporting requirements. The Partnership Trust Fund does not
expect to have any other assets that would give rise to such special reporting
considerations. Thus, to avoid those special reporting requirements, the
Partnership Trust Fund will elect to include market discount in income as it
accrues.
If a Securityholder is required to recognize an aggregate amount of income
(not including income attributable to disallowed itemized deductions described
above) over the life of the Partnership Securities that exceeds the aggregate
cash distributions with respect thereto, such excess will generally give rise
to a capital loss upon the retirement of the Partnership Securities.
Allocations Between Transferors and Transferees
In general, the Partnership Trust Fund's taxable income and losses will be
determined each Due Period and the tax items for a particular Due Period will
be apportioned among the Securityholders in
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proportion to the principal amount of Partnership Securities owned by them as
of the close of the last day of such Due Period. As a result, a holder
purchasing Partnership Securities 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 Due Period convention may not be permitted by existing
regulations. If a Due Period convention is not allowed (or only applies to
transfers of less than all of the partner's interest), taxable income or losses
of the Partnership Trust Fund might be reallocated among the Securityholders.
The Depositor will be authorized to revise the Partnership Trust Fund's method
of allocation between transferors and transferees to conform to a method
permitted by future regulations.
Section 731 Distributions
In the case of any distribution to a Securityholder, no gain will be
recognized to that Securityholder as long as the amount of any money
distributed with respect to such Security does not exceed the adjusted basis of
such Securityholder's interest in the Security. To the extent that the amount
of money distributed exceeds such Securityholder's adjusted basis, gain will be
currently recognized. In the case of any distribution to a Securityholder, no
loss will be recognized except upon a distribution in liquidation of a
Securityholder's interest. Any gain or loss recognized by a Securityholder will
be capital gain or loss.
Section 754 Election
In the event that a Securityholder sells its Partnership Securities at a
profit (loss), the purchasing Securityholder will have a higher (lower) basis
in the Partnership Securities than the selling Securityholder had. The tax
basis of the Partnership Trust Fund's assets would not be adjusted to reflect
that higher (or lower) basis unless the Partnership 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 Partnership
Trust Fund will not make such an election. As a result, a Securityholder might
be allocated a greater or lesser amount of Partnership Trust Fund income than
would be appropriate based on its own purchase price for Partnership
Securities.
Administrative Matters
The Trustee is required to keep or have kept complete and accurate books
of the Partnership Trust Fund. Such books will be maintained for financial
reporting and tax purposes on an accrual basis and the fiscal year of the
Partnership 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 Partnership Trust Fund and will report each Securityholder's
allocable share of items of Partnership Trust Fund income and expense to
holders and the IRS on Schedule K-1. The Trustee will provide the Schedule K-1
information to nominees that fail to provide the Partnership Trust Fund with
the information statement described below and such nominees will be required to
forward such information to the beneficial owners of the Partnership
Securities. Generally, holders must file tax returns that are consistent with
the information return filed by the Partnership Trust Fund or be subject to
penalties unless the holder notifies the IRS of all such inconsistencies.
Under Section 6031 of the Code, any person that holds Partnership
Securities as a nominee at any time during a calendar year is required to
furnish the Partnership Trust Fund with a statement containing certain
information on the nominee, the beneficial owners and the Partnership
Securities so held. Such information includes (i) the name, address and
taxpayer identification number of the nominee and (ii) as to each beneficial
owner (x) the name, address and identification number of such person, (y)
whether such person is a United States person, a tax-exempt entity or a foreign
government, an international organization, or any wholly-owned agency or
instrumentality of either of the foregoing, and (z) certain information on
Partnership Securities that were held, bought or sold on
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behalf of such person throughout the year. In addition, brokers and financial
institutions that hold Partnership Securities through a nominee are required to
furnish directly to the Trustee information as to themselves and their
ownership of Partnership Securities. A clearing agency registered under Section
17A of the Exchange Act is not required to furnish any such information
statement to the Partnership Trust Fund. The information referred to above for
any calendar year must be furnished to the Partnership Trust Fund on or before
the following January 31. Nominees, brokers and financial institutions that
fail to provide the Partnership Trust Fund with the information described above
may be subject to penalties.
The Depositor will be designated as the tax matters partner in the Pooling
and Servicing Agreement and, as such, will be responsible for representing the
Securityholders 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 until three years after the date on which the
partnership information return is filed. Any adverse determination following an
audit of the return of the Partnership Trust Fund by the appropriate taxing
authorities could result in an adjustment of the returns of the
Securityholders, and, under certain circumstances, a Securityholder may be
precluded from separately litigating a proposed adjustment to the items of the
Partnership Trust Fund. An adjustment could also result in an audit of a
Securityholder's returns and adjustments of items not related to the income and
losses of the Partnership Trust Fund.
Tax Consequences to Foreign Securityholders
It is not clear whether the Partnership Trust Fund would be considered to
be engaged in a trade or business in the United States for purposes of federal
withholding taxes with respect to Non-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 Partnership Trust Fund
would be engaged in a trade or business in the United States for such purposes,
if so specified in the applicable prospectus supplement, the Partnership Trust
Fund may withhold as if it were so engaged in order to protect the Partnership
Trust Fund from possible adverse consequences of a failure to withhold. The
Partnership Trust Fund may withhold on the portion of its taxable income that
is allocable to Securityholders who are Non-U.S. Persons pursuant to Section
1446 of the Code, as if such income were effectively connected to a U.S. trade
or business, at the maximum tax rate for corporations or individuals, as
applicable. Amounts withheld will be deemed distributed to the Non-U.S. Person
Securityholders. Subsequent adoption of Treasury regulations or the issuance of
other administrative pronouncements may require the Partnership Trust Fund to
change its withholding procedures. In determining a holder's withholding
status, the Partnership Trust Fund may rely on IRS Form W-8BEN, IRS Form W-9 or
the holder's certification of nonforeign status signed under penalties of
perjury.
To the extent specified in the applicable prospectus supplement,
o each Non-U.S. Person 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 Partnership
Trust Fund's income;
o each Non-U.S. Person holder must obtain a taxpayer identification
number from the IRS and submit that number to the Partnership Trust
Fund on Form W-8BEN in order to assure appropriate crediting of the
taxes withheld; and
o a Non-U.S. Person holder generally would be entitled to file with the
IRS a claim for refund with respect to taxes withheld by the
Partnership Trust Fund, taking the position that no taxes were due
because the Partnership Trust Fund was not engaged in a U.S. trade or
business.
Notwithstanding the foregoing, interest payments made (or accrued) to a
Securityholder who is a Non-U.S. Person may be considered guaranteed payments
to the extent such payments are determined without regard to the income of the
Partnership Trust Fund. If these interest payments are
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properly characterized as guaranteed payments, then the interest may not be
considered "portfolio interest." As a result, Securityholders who are Non-U.S.
Persons may be subject to United States federal income tax and withholding tax
at a rate of 30 percent, unless reduced or eliminated pursuant to an applicable
treaty. In such case, a Non-U.S. Person 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 Partnership Securities and proceeds from the
sale of the Partnership Securities will be subject to a "backup" withholding
tax of 30% (decreasing to 28% by 2006) if, in general, the Securityholder fails
to comply with certain identification procedures, unless the holder is an
exempt recipient under applicable provisions of the Code.
THE FEDERAL TAX DISCUSSIONS SET FORTH ABOVE ARE INCLUDED FOR GENERAL
INFORMATION ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON A SECURITYHOLDER'S
PARTICULAR TAX SITUATION. PROSPECTIVE PURCHASERS SHOULD CONSULT THEIR TAX
ADVISORS WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF THE PURCHASE,
OWNERSHIP AND DISPOSITION OF REMIC SECURITIES, GRANTOR TRUST SECURITIES,
PARTNERSHIP SECURITIES AND DEBT SECURITIES, INCLUDING THE TAX CONSEQUENCES
UNDER STATE, LOCAL, FOREIGN AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF
CHANGES IN FEDERAL OR OTHER TAX LAWS.
RECENT TAX LAW CHANGES
Under the Economic Growth and Tax Relief Reconciliation Act of 2001, among
other changes:
o the maximum tax rate on ordinary income and short-term capital gains
will be reduced to 35% over the period 2001 to 2006,
o the limitation on itemized deductions of individuals imposed by Code
Section 68 will be phased out starting in 2006 and will be eliminated
after 2009, and
o the rate of backup withholding tax under Code Section 3406 will be
reduced from 30.5% to 28% over the period 2001 to 2006.
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STATE AND OTHER TAX CONSEQUENCES
In addition to the federal income tax consequences described in "Federal
Income Tax Consequences," potential investors should consider the state and
local tax consequences of the acquisition, ownership, and disposition of the
Securities offered hereunder. State tax law may differ substantially from the
corresponding federal tax law, and the discussion above does not purport to
describe any aspect of the tax laws of any state or other jurisdiction.
Therefore, prospective investors should consult their own tax advisors with
respect to the various tax consequences of investments in the Securities
offered hereunder.
ERISA CONSIDERATIONS
ERISA and the Code impose certain 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 such plans, accounts or arrangements are
invested, that are subject to Title I of ERISA and Section 4975 of the Code
("PLANS") and on persons who are fiduciaries with respect to such Plans in
connection with the investment of Plan assets. Certain employee benefit plans,
such as governmental plans (as defined in ERISA Section 3(32)), and, if no
election has been made under Section 410(d) of the Code, church plans (as
defined in Section 3(33) of ERISA) are not subject to ERISA requirements.
Accordingly, assets of such plans may be invested in Securities without regard
to the ERISA considerations described below, subject to the provisions of other
applicable federal, state and local law. Any such plan which is qualified and
exempt from taxation under Sections 401(a) and 501(a) of the Code, however, is
subject to the prohibited transaction rules set forth in Section 503 of the
Code.
GENERAL ERISA STANDARDS
ERISA generally imposes on Plan fiduciaries certain general fiduciary
requirements, including those of investment prudence and diversification and
the requirement that a Plan's investments be made in accordance with the
documents governing the Plan. In addition, ERISA and Section 4975 of the Code
prohibit a broad range of transactions involving assets of a Plan and persons
("PARTIES IN INTEREST") who have certain specified relationships to the Plan
unless a statutory or administrative exemption is available. Certain Parties in
Interest that participate in a prohibited transaction may be subject to an
excise tax imposed pursuant to Section 4975 of the Code, unless a statutory or
administrative exemption is available. These prohibited transactions generally
are set forth in Sections 406 and 407 of ERISA and Section 4975 of the Code.
A Plan's investment in Securities may cause the Mortgage Loans, Contracts,
Unsecured Home Improvement Loans and other assets included in a related Trust
Fund to be deemed Plan assets. Section 2510.3-101 of the regulations of the
United States Department of Labor ("DOL") provides that when a Plan acquires an
equity interest in an entity, the Plan's assets include both such equity
interest and an undivided interest in each of the underlying assets of the
entity, unless certain exceptions not applicable here apply, or unless the
equity participation in the entity by "benefit plan investors" (i.e., Plans and
employee benefit plans not subject to ERISA) is not "significant", both as
defined therein. For this purpose, in general, equity participation by benefit
plan investors will be "significant" on any date if 25% or more of the value of
any Class of equity interests in the entity is held by benefit plan investors.
To the extent the Securities are treated as equity interests for purposes of
DOL regulations section 2510.3-101, equity participation in a Trust Fund will
be significant on any date if immediately after the most recent acquisition of
any Security, 25% or more of any Class of Securities is held by benefit plan
investors.
Any person who has discretionary authority or control respecting the
management or disposition of Plan assets, and any person who provides
investment advice with respect to such assets for a fee, is a fiduciary of the
investing Plan. If the Mortgage Loans, Contracts, Unsecured Home Improvement
Loans and other assets included in a Trust Fund constitute Plan assets, then
any party exercising management or discretionary control regarding those
assets, such as the Servicer or Master Servicer,
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may be deemed to be a Plan "fiduciary" and thus subject to the fiduciary
responsibility provisions and prohibited transaction provisions of ERISA and
Section 4975 of the Code with respect to the investing Plan. In addition, if
the Mortgage Loans, Contracts, Unsecured Home Improvement Loans and other
assets included in a Trust Fund constitute Plan assets, the purchase of
Securities by a Plan, as well as the operation of the Trust Fund, may
constitute or involve a prohibited transaction under ERISA and the Code.
The DOL has granted to Wachovia Securities (formerly First Union
Securities, Inc.), an individual administrative exemption, Prohibited
Transaction Exemption ("PTE") 96-22, 61 Fed. Reg. 14828 (April 3, 1996), as
most recently amended and restated by PTE 2002-41, 67 Fed. Reg. 54487 (August
22, 2002) (the "EXEMPTION"), which generally exempts from the application of
(i) the prohibited transaction provisions of Sections 406(a) and 407 of ERISA
and (ii) the excise taxes imposed on such prohibited transactions pursuant to
Sections 4975(a) and (b) of the Code, certain transactions, among others,
relating to the servicing and operation of mortgage pools and the purchase,
sale and holding of Securities underwritten by an Underwriter (as defined
below) that (a) represent a beneficial ownership interest in the assets of a
Trust Fund and entitle the holder the pass-through payments of principal,
interest and/or other payments made with respect to the assets of the Trust
Fund or (b) are denominated as a debt instrument and represent an interest in a
REMIC, provided that certain conditions set forth in the Exemption are
satisfied. For purposes of this "ERISA Considerations" Section, the term
"UNDERWRITER" includes (a) Wachovia Corporation, (b) any person directly or
indirectly, through one or more intermediaries, controlling, controlled by or
under common control with Wachovia Corporation, including Wachovia Securities,
Inc., and (c) any member of the underwriting syndicate or selling group of
which a person described in (a) or (b) is a manager or co-manager with respect
to a Class of Securities.
The Exemption sets forth five general conditions which must be satisfied
for a transaction involving the purchase, sale and holding of Securities to be
eligible for exemptive relief thereunder.
1. The acquisition of Securities by a Plan must be on terms that are at
least as favorable to the Plan as they would be in an arm's-length
transaction with an unrelated party.
2. The Securities at the time of acquisition by the Plan must be rated in
one of the four highest generic rating categories by Standard &
Poor's, a division of The McGraw-Hill Companies, Inc. ("S&P"), Moody's
Investors Service, Inc. ("MOODY'S") or Fitch Ratings ("FITCH").
3. The Trustee cannot be an affiliate of any member of the "RESTRICTED
GROUP" other than the Underwriter. The Restricted Group consists of
the Underwriters, the Depositor, the Trustee, the Master Servicer, any
Servicer, any insurer and any obligor with respect to Assets
constituting more than 5% of the aggregate unamortized principal
balance of the Assets in the related Trust Fund as of the date of
initial issuance of the Securities.
4. The sum of all payments made to and retained by the Underwriter(s)
must represent not more than reasonable compensation for underwriting
the Securities; the sum of all payments made to and retained by the
Depositor pursuant to the assignment of the Assets to the related
Trust Fund must represent not more than the fair market value of such
obligations; and the sum of all payments made to and retained by the
Servicer must represent not more than reasonable compensation for such
person's services under the applicable Agreement and reimbursement of
such person's reasonable expenses in connection therewith.
5. The investing Plan must be an accredited investor as defined in Rule
501(a)(1) of Regulation D of the SEC under the Securities Act of 1933,
as amended (the "SECURITIES ACT").
In addition, the Trust Fund must meet the following requirements:
o the assets of the Trust Fund must consist solely of assets of the type
that have been included in other investment pools;
o securities evidencing interests in such other investment pools must
have been rated in one of the four highest generic rating categories
by S&P, Moody's or Fitch for at least one year prior to the Plan's
acquisition of the securities; and
127
o securities evidencing interests in such other investment pools must
have been purchased by investors other than Plans for at least one
year prior to any Plan's acquisition of the Securities.
A fiduciary of a Plan contemplating purchasing a Security must make its
own determination that the general conditions set forth above will be satisfied
with respect to such Security. In addition, any Securities representing a
beneficial ownership interest in Unsecured Home Improvement Loans or Revolving
Credit Line Loans will not satisfy the general conditions of the Exemption.
If the general conditions of the Exemption are satisfied, the Exemption
may provide an exemption from the prohibited transaction provisions of Sections
406(a) and 407 of ERISA and Sections 4975(c)(1)(A) through (D) of the Code) in
connection with the direct or indirect sale, exchange, transfer, holding or the
direct or indirect acquisition or disposition in the secondary market of
Securities by Plans. However, no exemption is provided from the restrictions of
Sections 406(a)(1)(E), 406(a)(2) and 407 of ERISA for the acquisition or
holding of a Security on behalf of an "EXCLUDED PLAN" by any person who has
discretionary authority or renders investment advice with respect to the assets
of such Excluded Plan. For purposes of the Securities, an Excluded Plan is a
Plan sponsored by any member of the Restricted Group.
If certain specific conditions of the Exemption are also satisfied, the
Exemption may provide an exemption from the prohibited transaction provisions
of Sections 406(b)(1) and (b)(2) of ERISA and Section 4975(c)(1)(E) of the
Code, for transactions in connection with (1) the direct or indirect sale,
exchange or transfer of Securities in the initial issuance of Securities
between the Depositor or an Underwriter and a Plan when the person who has
discretionary authority or renders investment advice with respect to the
investment of Plan assets in the Securities is (a) an obligor with respect to
5% or less of the fair market value of the Assets or (b) an affiliate of such a
person, (2) the direct or indirect acquisition or disposition in the secondary
market of Securities by a Plan and (3) the holding of Securities by a Plan.
Further, if certain specific conditions of the Exemption are satisfied,
the Exemption may provide an exemption from the prohibited transaction
provisions of Sections 406(a), 406(b) and 407 of ERISA and Section 4975(c) of
the Code for transactions in connection with the servicing, management and
operation of the Trust Fund. The Depositor expects that the specific conditions
of the Exemption required for this purpose will be satisfied with respect to
the Securities so that the Exemption would provide an exemption from the
restrictions imposed by Sections 406(a) and (b) of ERISA (as well as the excise
taxes imposed by Sections 4975(a) and (b) of the Code by reason of Section
4975(c) of the Code) for transactions in connection with the servicing,
management and operation of the Assets, provided that the general conditions of
the Exemption are satisfied.
The Exemption also may provide an exemption from the prohibited
transaction provisions of Sections 406(a) and 407(a) of ERISA and Sections
4975(c)(1)(A) through (D) of the Code, for transactions that would otherwise be
prohibited merely because a person is deemed to be a Party in Interest (within
the meaning of Section 3(14) of ERISA) with respect to an investing Plan by
virtue of providing services to the Plan (or by virtue of having certain
specified relationships to such a person) solely as a result of the Plan's
ownership of Securities.
The Exemption also permits the inclusion of a Pre-Funding Account in a
Trust Fund, provided that the following conditions are met:
o the Pre-Funding Account may not exceed 25% of the total amount of
Securities being offered;
o additional obligations purchased generally must meet the same terms
and conditions as those of the original obligations used to create the
Trust Fund;
o the transfer of additional obligations to the Trust Fund during the
Pre-Funding Period must not result in the Securities receiving a lower
rating at the termination of the Pre-Funding Period than the rating
that was obtained at the time of the initial issuance of the
Securities;
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o the weighted average interest rate for all of the obligations in the
Trust Fund at the end of the Pre-Funding Period must not be more than
100 basis points less than the weighted average interest rate for the
obligations which were transferred to the Trust Fund on the closing
date;
o the characteristics of the additional obligations must be monitored to
confirm that they are substantially similar to those which were
acquired as of the closing date either by a credit support or
insurance provider independent of the Depositor or by an independent
accountant retained by the Depositor that confirms such conformance in
writing;
o the Pre-Funding Period must be described in the prospectus or private
placement memorandum provided to investing Plans; and
o the trustee of the Trust Fund must be a substantial financial
institution or trust company experienced in trust activities and
familiar with its duties, responsibilities and liabilities as a
fiduciary under ERISA.
Further, the Pre-Funding Period must be a period beginning on the closing
date and ending no later than the earliest to occur of (x) the date the amount
on deposit in the Pre-Funding Account is less than the minimum dollar amount
specified in the; (y) the date on which an event of default occurs under the
applicable Agreement; or (z) the date which is the later of three months or 90
days after the closing date. It is expected that the Pre-Funding Account will
meet all of these requirements.
PROHIBITED TRANSACTION RESTRICTIONS ON NON-EQUITY SECURITIES
To the extent the Securities are not treated as equity interests for
purposes of DOL regulations section 2510.3-101, a Plan's investment in such
Securities ("NON-EQUITY SECURITIES") would not cause the Assets included in a
related Trust Fund to be deemed Plan assets. However, the Depositor, the
Servicer, the Trustee or an Underwriter 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 Non-Equity Securities, the
purchase of Non-Equity Securities using Plan assets over which any such party
has investment authority might be deemed to constitute or result in a violation
of the prohibited transaction rules of ERISA and Section 4975 of the Code for
which no exemption may be available. Accordingly, Non-Equity Securities may not
be purchased using the assets of any Plan if any of the Depositor, the
Servicer, the Trustee or Underwriters has investment authority with respect to
such assets.
In addition, certain affiliates of the Depositor might be considered or
might become Parties in Interest with respect to a Plan. Also, any holder of
Securities, because of its activities or the activities of its respective
affiliates, may be deemed to be a Party in Interest (within the meaning of
Section 3(14) of ERISA) with respect to certain Plans, including but not
limited to Plans sponsored by such holder. In either case, the acquisition or
holding of Non-Equity Securities by or on behalf of such a Plan could be
considered to give rise to an indirect prohibited transaction under ERISA and
Section 4975 of the Code, unless it is subject to one or more statutory or
administrative exemptions such as Prohibited Transaction Class Exemption
("PTCE") 84-14, which exempts certain transactions effected on behalf of a Plan
by a "qualified professional asset manager"; PTCE 90-1, which exempts certain
transactions involving insurance company pooled separate accounts; PTCE 91-38,
which exempts certain transactions involving bank collective investment funds;
PTCE 95-60, which exempts certain transactions involving insurance company
general accounts; or PTCE 96-23, which exempts certain transactions effected on
behalf of a Plan by certain "in-house" asset managers. It should be noted,
however, that even if the conditions specified in one or more of these
exemptions are met, the scope of relief provided by these exemptions may not
necessarily cover all acts that might be construed as prohibited transactions.
CONSULTATION WITH COUNSEL
Any Plan fiduciary which proposes to cause a Plan to purchase Securities
should consult with its counsel with respect to the potential applicability of
ERISA and the Code to such investment, the
129
availability of the exemptive relief provided in the Exemption and the
potential applicability of any other prohibited transaction exemption in
connection therewith. In particular, a Plan fiduciary which proposes to cause a
Plan to purchase Securities representing a beneficial ownership interest in a
pool of single-family residential first mortgage loans, a Plan fiduciary should
consider the applicability of PTCE 83-1, which provides exemptive relief for
certain transactions involving mortgage pool investment trusts. The prospectus
supplement with respect to a Series of Securities may contain additional
information regarding the application of the Exemption, PTCE 83-1 or any other
exemption, with respect to the Securities offered thereby. In addition, any
Plan fiduciary that proposes to cause a Plan to purchase Strip Securities
should consider the federal income tax consequences of such investment.
Fiduciaries of plans not subject to ERISA or Section 4975 of the Code, such as
government plans, should consider the application of any applicable federal,
state or local law materially similar to the provisions of ERISA or Section
4975 of the Code, as well as the need for and the availability of exemptive
relief under such applicable law.
ANY PLAN FIDUCIARY CONSIDERING WHETHER TO PURCHASE A SECURITY ON BEHALF OF
A PLAN SHOULD CONSULT WITH ITS COUNSEL REGARDING THE APPLICABILITY OF THE
FIDUCIARY RESPONSIBILITY AND PROHIBITED TRANSACTION PROVISIONS OF ERISA AND
SECTION 4975 OF THE CODE TO SUCH INVESTMENT.
THE SALE OF SECURITIES TO A PLAN IS IN NO RESPECT A REPRESENTATION BY THE
DEPOSITOR OR ANY UNDERWRITER THAT THIS INVESTMENT MEETS ALL RELEVANT LEGAL
REQUIREMENTS WITH RESPECT TO INVESTMENTS BY PLANS GENERALLY OR ANY PARTICULAR
PLAN, OR THAT THIS INVESTMENT IS APPROPRIATE FOR PLANS GENERALLY OR ANY
PARTICULAR PLAN.
LEGAL INVESTMENT
As will be specified in the applicable prospectus supplement, certain
Classes of the Securities may constitute "mortgage related securities " for
purposes of the Secondary Mortgage Market Enhancement Act of 1984, as amended
("SMMEA"), so long as (i) they are rated in one of the two highest rating
categories by at least one Rating Agency and (ii) are part of a Series
representing interests in a Trust Fund consisting of Mortgage Loans originated
by certain types of originators specified in SMMEA and secured by first liens
on real estate. As "mortgage related securities," such Classes will constitute
legal investments for persons, trusts, corporations, partnerships,
associations, business trusts and business entities (including but not limited
to depository institutions, insurance companies and pension funds) created
pursuant to or existing under the laws of the United States or of any state
(including the District of Columbia and Puerto Rico) whose authorized
investments are subject to state regulation, to the same extent that, under
applicable law, obligations issued by or guaranteed as to principal and
interest by the United States or any agency or instrumentality thereof
constitute legal investments for such entities. Pursuant to SMMEA, a number of
states enacted legislation, on or before the October 3, 1991 cut-off for such
enactments, limiting to varying extents the ability of certain entities (in
particular, insurance companies) to invest in "mortgage related securities," in
most cases by requiring the affected investors to rely solely upon existing
state law, and not SMMEA. Accordingly, the investors affected by such
legislation will be authorized to invest in the Offered Securities only to the
extent provided in such legislation.
SMMEA also amended the legal investment authority of federally-chartered
depository institutions as follows: federal savings and loan associations and
federal savings banks may invest in, sell or otherwise deal in mortgage related
securities without limitation as to the percentage of their assets represented
thereby, federal credit unions may invest in such securities, and national
banks may purchase mortgage related securities for their own account without
regard to the limitations generally applicable to investment securities set
forth in 12 U. S. C. Section 24 (Seventh), subject in each case to such
regulations as the applicable federal regulatory authority may prescribe. In
this connection, the Office of the Comptroller of the Currency (the "OCC") has
amended 12 C. F. R. Part 1 to authorize national banks to purchase and sell for
their own account, without limitation as to a percentage of the bank's capital
and surplus (but subject to compliance with certain general standards in 12 C.
F. R. Section 1.5 concerning "safety and soundness" and retention of credit
information), certain "Type IV securities," defined in 12 C. F. R.
Section 1.2(m) to include certain "residential mortgage-related securities." As
so
130
defined, "residential mortgage-related security" means, in relevant part,
"mortgage related security" within the meaning of SMMEA. The National Credit
Union Administration ("NCUA") has adopted rules, codified at 12 C.F.R. Part
703, which permit federal credit unions to invest in "mortgage related
securities" under certain limited circumstances, other than stripped mortgage
related securities, residual interests in mortgage related securities and
commercial mortgage related securities, unless the credit union has obtained
written approval from the NCUA to participate in the "investment pilot program"
described in 12 C.F.R. Section 703.140. The OTS has issued Thrift Bulletin 13a
(December 1, 1998), "Management of Interest Rate Risk, Investment Securities,
and Derivative Activities," which thrift institutions subject to the
jurisdiction of the OTS should consider before investing in any of the Offered
Securities.
All depository institutions considering an investment in the Offered
Securities should review the "Supervisory Policy Statement on Investment
Securities and End-User Derivatives Activities" (the "1998 POLICY STATEMENT")
of the Federal Financial Institutions Examination Council ("FFIEC"), which has
been adopted by the Board of Governors of the Federal Reserve System, the
Federal Deposit Insurance Corporation, the OCC and the OTS, effective May 26,
1998, and by the NCUA, effective October 1, 1998. The 1998 Policy Statement
sets forth general guidelines which depository institutions must follow in
managing risks (including market, credit, liquidity, operational (transaction),
and legal risks) applicable to all securities (including mortgage pass-through
securities and mortgage-derivative products) used for investment purposes.
Institutions whose investment activities are subject to regulation by
federal or state authorities should review rules, policies, and guidelines
adopted from time to time by those authorities before purchasing any Class of
the Offered Securities, as certain Classes may be deemed unsuitable
investments, or may otherwise be restricted, under those rules, policies, or
guidelines (in certain instances irrespective of SMMEA).
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines, or agreements generally
governing investments made by a particular investor, including, but not limited
to, "prudent investor" provisions, percentage-of-assets limits, provisions
which may restrict or prohibit investment in securities which are not
"interest-bearing" or "income-paying," and, with regard to any Class of Offered
Securities issued in book-entry form, provisions which may restrict or prohibit
investments in securities which are issued in book-entry form.
Except as to the status of certain Classes of Offered Securities as
"mortgage related securities," no representations are made as to the proper
characterization of the Offered Securities for legal investment purposes,
financial institution regulatory purposes, or other purposes, or as to the
ability of particular investors to purchase any Offered Securities under
applicable legal investment restrictions. The uncertainties described above
(and any unfavorable future determinations concerning legal investment or
financial institution regulatory characteristics of the Offered Securities) may
adversely affect the liquidity of the Offered Securities.
Accordingly, all investors whose investment activities are subject to
legal investment laws and regulations, regulatory capital requirements or
review by regulatory authorities should consult with their legal advisors in
determining whether and to what extent the Offered Securities of any Class
constitute legal investments or are subject to investment, capital or other
restrictions and, if applicable, whether SMMEA has been overridden in any
jurisdiction relevant to such investor.
METHODS OF DISTRIBUTION
The Securities offered hereby and by the applicable prospectus supplement
to this prospectus will be offered in Series. The distribution of the
Securities may be effected from time to time in one or more transactions,
including negotiated transactions, at a fixed public offering price or at
varying prices to be determined at the time of sale or at the time of
commitment therefor. If so specified in the related prospectus supplement, the
Securities will be distributed in a firm commitment underwriting, subject to
the terms and conditions of the underwriting agreement, by Wachovia
131
Securities, Inc. ("WACHOVIA SECURITIES") acting as underwriter with other
underwriters, if any, named therein. In such event, the prospectus supplement
may also specify that the underwriters will not be obligated to pay for any
Securities agreed to be purchased by purchasers pursuant to purchase agreements
acceptable to the Depositor. In connection with the sale of the Securities,
underwriters may receive compensation from the Depositor or from purchasers of
the Securities in the form of discounts, concessions or commissions. The
prospectus supplement will describe any such compensation paid by the
Depositor.
Alternatively, the prospectus supplement may specify that the Securities
will be distributed by Wachovia Securities acting as agent or in some cases as
principal with respect to Securities which it has previously purchased or
agreed to purchase. If Wachovia Securities acts as agent in the sale of
Securities, Wachovia Securities will receive a selling commission with respect
to each Series of Securities, depending on market conditions, expressed as a
percentage of the aggregate principal balance of the related Mortgage Loans as
of the Cut-off Date. The exact percentage for each Series of Securities will be
disclosed in the related prospectus supplement. To the extent that Wachovia
Securities elects to purchase Securities as principal, Wachovia Securities may
realize losses or profits based upon the difference between its purchase price
and the sales price. The prospectus supplement with respect to any Series
offered other than through underwriters will contain information regarding the
nature of such offering and any agreements to be entered into between the
Depositor and purchasers of Securities of such Series.
Wachovia Securities is an affiliate of the Depositor. This prospectus may
be used by Wachovia Securities, to the extent required, in connection with
market making transactions in the Securities. Wachovia Securities may act as
principal or agent in such transactions.
The Depositor will indemnify Wachovia Securities and any underwriters
against certain civil liabilities, including liabilities under the Securities
Act, or will contribute to payments Wachovia Securities and any underwriters
may be required to make in respect thereof.
In the ordinary course of business, Wachovia Securities and the Depositor
may engage in various securities and financing transactions, including
repurchase agreements to provide interim financing of the Depositor's mortgage
loans pending the sale of such mortgage loans or interests therein, including
the Securities.
The Depositor anticipates that the Securities will be sold primarily to
institutional investors. Purchasers of Securities, including dealers, may,
depending on the facts and circumstances of such purchases, be deemed to be
"underwriters" within the meaning of the Securities Act in connection with
reoffers and sales by them of Securities. Securityholders should consult with
their legal advisors in this regard prior to any such reoffer or sale.
As to each Series of Securities, only those Classes rated in one of the
four highest rating categories by any Rating Agency will be offered hereby. Any
unrated Class may be initially retained by the Depositor, and may be sold by
the Depositor at any time to one or more institutional investors.
LEGAL MATTERS
Certain legal matters, including the federal income tax consequences to
Securityholders of an investment in the Securities of a Series, will be passed
upon for the Depositor by Cadwalader, Wickersham & Taft, New York, New York or
Orrick, Herrington & Sutcliffe LLP, Washington, D.C.
FINANCIAL INFORMATION
A new Trust Fund will be formed with respect to each Series of Securities
and no Trust Fund will engage in any business activities or have any assets or
obligations prior to the issuance of the related Series of Securities.
Accordingly, no financial statements with respect to any Trust Fund will be
included in this prospectus or in the related prospectus supplement.
132
RATINGS
It is a condition to the issuance of any Class of Offered Securities that
they shall have been rated not lower than investment grade, that is, in one of
the four highest rating categories, by at least one nationally recognized
statistical rating agency ("RATING AGENCY").
Ratings on mortgage pass-through certificates address the likelihood of
receipt by Securityholders of all distributions on the underlying mortgage
loans. These ratings address the structural, legal and issuer-related aspects
associated with such certificates, the nature of the underlying assets and the
credit quality of the guarantor, if any. Ratings on mortgage pass-through
certificates and other asset backed securities do not represent any assessment
of the likelihood of principal prepayments by borrowers or of the degree by
which such prepayments might differ from those originally anticipated. As a
result, securityholders might suffer a lower than anticipated yield, and, in
addition, holders of stripped interest certificates in extreme cases might fail
to recoup their initial investments.
A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning
rating organization. Each security rating should be evaluated independently of
any other security rating.
WHERE YOU CAN FIND MORE INFORMATION
The Depositor filed a registration statement (the "REGISTRATION
STATEMENT") relating to the Securities with the SEC. This prospectus is part of
the Registration Statement, but the Registration Statement includes additional
information.
Copies of the Registration Statement may be obtained from the Public
Reference Section of the SEC, Washington, D.C. 20549 upon payment of the
prescribed charges, or may be examined free of charge at the SEC's offices, 450
Fifth Street N.W., Washington, D.C. 20549 or at the regional offices of the SEC
located at 233 Broadway, New York, New York 10279 and Suite 1400, Citicorp
Center, 500 West Madison Street, Chicago, Illinois 60661-2511. The SEC also
maintains a site on the World Wide Web at "http://www.sec.gov" at which you can
view and download copies of reports, proxy and information statements and other
information filed electronically through the Electronic Data Gathering,
Analysis and Retrieval ("EDGAR") system. The Depositor has filed the
Registration Statement, including all exhibits, through the EDGAR system and
therefore such materials should be available by logging onto the SEC's Web
site. The SEC maintains computer terminals providing access to the EDGAR system
at each of the offices referred to above. Copies of any documents incorporated
to this prospectus by reference will be provided to each person to whom a
prospectus is delivered upon written or oral request directed to Wachovia Asset
Securitization, Inc., 8739 Research Drive, NC0121-Suite D, Charlotte, North
Carolina 28288-0121, telephone number (704) 596-7616.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The SEC allows the Depositor to "incorporate by reference" information it
files with the SEC, which means that the Depositor can disclose important
information to you by referring you to those documents. The information
incorporated by reference is considered to be part of this prospectus.
Information that the Depositor files later with the SEC will automatically
update the information in this prospectus. In all cases, you should rely on the
later information rather than on any different information included in this
prospectus or the accompanying prospectus supplement. The Depositor
incorporates by reference any future annual, monthly and special SEC reports
filed by or on behalf of the Trust until the termination of the offering of the
related Series of Securities offered hereby (including market making
transactions by Wachovia Securities, to the extent required, with respect to
such Series of Securities, unless such transactions are exempt from the
registration provisions of the Securities Act).
As a recipient of this prospectus, you may request a copy of any document
the Depositor incorporates by reference, except exhibits to the documents
(unless the exhibits are specifically incorporated by reference) at no cost, by
writing or calling the Treasurer at Wachovia Asset Securitization, Inc., 8739
Research Drive NC0121-Suite D, Charlotte, North Carolina 28288-0121, telephone
number (704) 596-7616.
133
INDEX OF SIGNIFICANT DEFINITIONS
1998 Policy Statement ................. 131
Accrual Period ........................ 25
Accrual Securities .................... 31
Accrued Security Interest ............. 33
Additional Collateral Assets .......... 18
Adjustable Rate Assets ................ 17
Agreement ............................. 47
ARM Contracts ......................... 23
ARM Loans ............................. 20
ARM Unsecured Home Improvement
Loans ................................. 22
Asset Conservation Act ................ 81
Asset Group ........................... 31
Asset Seller .......................... 17
Assets ................................ 17
Available Distribution Amount ......... 32
Balloon Payment Assets ................ 18
Bankruptcy Code ....................... 77
Bi-Weekly Assets ...................... 18
Book-entry Securities ................. 31
Buy Down Assets ....................... 17
Buydown Funds ......................... 92
Buydown Mortgage Loans ................ 28
Buydown Period ........................ 28
Capitalized Interest Account .......... 24
Cash Flow Agreement ................... 24
CEDE .................................. 44
CERCLA ................................ 80
Certificates .......................... 31
Class ................................. 31
Cleanup Costs ......................... 80
Clearstream ........................... 45
Clearstream Participants .............. 45
Code .................................. 89
Collection Account .................... 51
Component ............................. 35
Contract Borrower ..................... 72
Contract Lender ....................... 72
Contract Rate ......................... 23
Contracts ............................. 17
Convertible Assets .................... 18
Cooperative ........................... 45, 71
Cooperative Loans ..................... 71
Cooperatives .......................... 19
Covered Trust ......................... 67
CPR ................................... 27
Credit Support ........................ 24
Cut-off Date .......................... 19
Debt Securities ....................... 89
Definitive Securities ................. 31, 43
Deposit Trust Agreement ............... 47
Depositaries .......................... 46
Depositor ............................. 30
Determination Date .................... 32
Disqualified Organization ............. 105
Distribution Date ..................... 25
DOL ................................... 126
Due Period ............................ 32
Edgar ................................. 133
Electing Large Partnership ............ 105
Euroclear ............................. 45
Euroclear Operator .................... 45
Euroclear Participants ................ 45
Excess Servicing ...................... 115
Exchange Act .......................... 44
Excluded Plan ......................... 128
Exemption ............................. 127
FDIC .................................. 51
FFIEC ................................. 131
First Lien Mortgage Loans ............. 19
Fitch ................................. 127
Garn-St. Germain Act .................. 82
GEM Assets ............................ 18
GPM Assets ............................ 18
Grantor Trust Fund .................... 89
Grantor Trust Securities .............. 89
Home Equity Loans ..................... 19
Home Improvement Contracts ............ 19
HOPA .................................. 84
Increasing Payment Asset .............. 18
Increasing Payment Assets ............. 17
Indenture ............................. 47
Indenture Servicing Agreement ......... 47
Indenture Trustee ..................... 47
Indirect Participants ................. 44
Insurance Proceeds .................... 32
Interest Reduction Assets ............. 18
Interest-only Assets .................. 18
IRS ................................... 55
Land Sale Contract .................... 72
Land Sale Contracts ................... 19
Level Payment Assets .................. 17
Liquidation Proceeds .................. 32
Loan-to-Value Ratio ................... 19, 22
Lock-out Date ......................... 21
Lock-out Period ....................... 21
134
Manufactured Home ....................... 22
Mark to Market Regulations .............. 108
Master Servicer ......................... 47
MERS .................................... 48
Moody's ................................. 127
Mortgage Loans .......................... 17
Mortgage Notes .......................... 19
Mortgage Rate ........................... 20
Mortgages ............................... 19
Multifamily Mortgage Loan ............... 19
Multifamily Property .................... 19
National Housing Act .................... 20
NCUA .................................... 131
New Partnership ......................... 122
New Regulations ......................... 110
Non-Equity Securities ................... 129
Non-Pro Rata Security ................... 94
Non-U.S. Person ......................... 110
Nonrecoverable Advance .................. 40
Notes ................................... 31
OCC ..................................... 130
Offered Securities ...................... 31
OID Regulations ......................... 90, 93
Old Partnership ......................... 122
Originator .............................. 19
OTS ..................................... 82
PAC Certificates ........................ 36
PAC I ................................... 36
PAC II .................................. 36
PAC Notes ............................... 36
Participants ............................ 44
Parties in Interest ..................... 126
Partnership Securities .................. 89
Partnership Trust Fund .................. 89
Pass-Through Entity ..................... 105
Pass-Through Rate ....................... 33
PCBs .................................... 80
Permitted Investments ................... 51
Plans ................................... 126
PMI ..................................... 84
Pooling and Servicing Agreement ......... 47
Pre-Funded Amount ....................... 23
Pre-Funding Account ..................... 23
Pre-Funding Period ...................... 23
prepayment .............................. 27
Prepayment Assumption ................... 94
Prepayment Premium ...................... 21
PTCE .................................... 129
PTE ..................................... 127
Purchase Price .......................... 49
Rating Agency ........................... 133
RCRA .................................... 81
Record Date ............................. 32
Refinance Loans ......................... 19
Registration Statement .................. 133
Regular Securities ...................... 90
Regular Securityholder .................. 93
Related Proceeds ........................ 40
Relief Act .............................. 84
REMIC Provisions ........................ 89
REMIC Regulations ....................... 90
REMIC Securities ........................ 89
REO Property ............................ 41
Residual Holders ........................ 101
Residual Securities ..................... 90
Restricted Group ........................ 127
Retained Interest ....................... 58
Revolving Credit Line Loans ............. 21
S&P ..................................... 127
SBJPA of 1996 ........................... 92
Scheduled Certificates .................. 36
Scheduled Notes ......................... 36
SEC ..................................... 20
Securities .............................. 31
Securities Act .......................... 127
Security ................................ 47
Security Balance ........................ 27
Security Owners ......................... 44
Securityholder .......................... 25
Senior Certificates ..................... 31
Senior Notes ............................ 31
Senior Securities ....................... 31
Series .................................. 31
Servicers ............................... 47
Servicing Standard ...................... 54
Single Family Mortgage Loan ............. 19
Single Family Property .................. 19
SMMEA ................................... 130
SPA ..................................... 27
Special Servicer ........................ 60
Standard Securities ..................... 112
Step-up Rate Assets ..................... 18
Strip Securities ........................ 31
Stripped Securities ..................... 116
Stripped Securityholder ................. 117
Subordinate Certificates ................ 31
Subordinate Notes ....................... 31
Subordinate Securities .................. 31
Subsequent Assets ....................... 23
Super-Premium ........................... 94
Superliens .............................. 80
Support Certificates .................... 35
135
Support Notes ........................ 35
TAC Certificates ..................... 37
TAC Notes ............................ 37
Taxable Mortgage Pools ............... 90
Terms and Conditions ................. 45
Texas Home Equity Laws ............... 84
Thrift Institutions .................. 104
Tiered REMICs ........................ 93
TILA Amendment ....................... 79
Title V .............................. 83
Title VIII ........................... 83
Trust ................................ 31
Trust Fund ........................... 31
Trustee .............................. 47
U.S. Person .......................... 107
UCC .................................. 44
Underlying Servicing Agreement ....... 47
Underwriter .......................... 127
Unsecured Home Improvement Loans ..... 17
UST .................................. 81
Value ................................ 19
Wachovia Securities .................. 132
Warranting Party ..................... 50
136
WACHOVIA ASSET SECURITIZATION, INC.
DEPOSITOR
WACHOVIA BANK, NATIONAL ASSOCIATION
SELLER, SERVICER, MASTER SERVICER AND CERTIFICATE ADMINISTRATOR
$2,083,000,561
(APPROXIMATE)
MORTGAGE PASS-THROUGH
CERTIFICATES, SERIES 2002-1
PROSPECTUS SUPPLEMENT
You should rely only on the information contained or incorporated by reference
in this prospectus supplement and the accompanying prospectus. No one has been
authorized to provide you with different information.
The Offered Certificates are not being offered in any state where the offer is
not permitted.
The Depositor does not claim the accuracy of the information in this prospectus
supplement and the accompanying prospectus as of any date other than the dates
stated on their respective covers.
Dealers will deliver a prospectus supplement and prospectus when acting as
underwriters of any Offered Certificates and with respect to their unsold
allotments or subscriptions. In addition, all dealers selling any Offered
Certificates will deliver a prospectus supplement and prospectus until ninety
days following the date of this prospectus supplement.
WACHOVIA SECURITIES
September 25, 2002