Filed Pursuant to Rule 424(b)5
Registration File No.: 333-86750
Prospectus supplement to prospectus dated October 18, 2002
$606,752,000
(APPROXIMATE)
ASSET BACKED SECURITIES CORPORATION
Depositor
OCWEN FEDERAL BANK FSB
Servicer
ASSET BACKED SECURITIES CORPORATION
HOME EQUITY LOAN TRUST, SERIES 2003-HE3
Issuer
ASSET BACKED PASS-THROUGH CERTIFICATES, SERIES 2003-HE3
THE TRUST
The trust will consist primarily of a pool of subprime, fully amortizing,
fixed-rate and adjustable-rate mortgage loans secured by first and second liens
on residential properties.
OFFERED CERTIFICATES
The following classes of certificates are offered pursuant to this prospectus
supplement:
o 2 classes of Class A Certificates,
o 1 class of Class A-IO Certificates, and
o 5 classes of Mezzanine Certificates.
CREDIT ENHANCEMENT
Credit enhancement for all of these certificates will be provided by excess
interest, overcollateralization and subordination.
- --------------------------------------------------------------------------------
YOU SHOULD CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE S-15 IN THIS
PROSPECTUS SUPPLEMENT. THIS PROSPECTUS SUPPLEMENT MAY BE USED TO OFFER AND
SELL THE CERTIFICATES OFFERED HEREBY ONLY IF ACCOMPANIED BY THE PROSPECTUS.
- -------------------------------------------------------------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED 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 ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE
MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
Credit Suisse First Boston LLC will offer the Class A, Class A-IO and Mezzanine
Certificates at a price equal to approximately 99.75% of the aggregate
certificate principal balance of the offered certificates before deducting
expenses estimated to be approximately $550,000. The underwriter will sell the
offered certificates from time to time in negotiated transactions at varying
prices to be determined at the time of sale.
Delivery of the offered certificates will be made in book-entry form through
the facilities of The Depository Trust Company, Clearstream Luxembourg and the
Euroclear System on or about June 3, 2003.
CREDIT SUISSE FIRST BOSTON
May 28, 2003
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS PROSPECTUS SUPPLEMENT AND
THE ACCOMPANYING PROSPECTUS
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT. WE HAVE NOT
AUTHORIZED ANYONE TO PROVIDE YOU WITH DIFFERENT INFORMATION. YOU SHOULD NOT
ASSUME THAT THE INFORMATION IN THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS IS
ACCURATE AS OF ANY DATE OTHER THAN THE DATE ON THE FRONT OF THIS DOCUMENT.
We provide information to you about the offered certificates in two separate
documents that progressively provide more detail:
o the accompanying prospectus, which provides general information, some of
which may not apply to this series of certificates; and
o this prospectus supplement, which describes the specific terms of this
series of certificates.
This prospectus supplement and the accompanying prospectus include
cross-references to captions in these materials where you can find further
related discussions. The following table of contents provides pages on which
these captions are located. You can find an index of defined terms on page S-117
of this prospectus supplement.
We have filed preliminary information regarding the trust's assets and the
certificates with the Securities and Exchange Commission. The information
contained in this document supersedes all of that preliminary information, which
was prepared by the underwriter for prospective investors.
S-2
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
Page
----
SUMMARY.....................................................................S-4
RISK FACTORS...............................................................S-15
THE MORTGAGE POOL..........................................................S-24
ORIGINATOR AND SERVICER....................................................S-52
DESCRIPTION OF THE CERTIFICATES............................................S-61
THE POOLING AGREEMENT......................................................S-85
YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS..............................S-93
USE OF PROCEEDS...........................................................S-108
FEDERAL INCOME TAX CONSEQUENCES...........................................S-108
ERISA CONSIDERATIONS......................................................S-112
LEGAL INVESTMENT CONSIDERATIONS...........................................S-114
METHOD OF DISTRIBUTION....................................................S-114
LEGAL MATTERS.............................................................S-115
RATINGS...................................................................S-115
INDEX OF DEFINED TERMS....................................................S-117
ANNEX I.....................................................................I-1
ANNEX II...................................................................II-1
S-3
SUMMARY
o THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS DOCUMENT AND DOES
NOT CONTAIN ALL OF THE INFORMATION THAT YOU NEED TO CONSIDER IN MAKING YOUR
INVESTMENT DECISION. TO UNDERSTAND ALL OF THE TERMS OF THE OFFERING OF THE
CERTIFICATES, READ CAREFULLY THIS ENTIRE DOCUMENT AND THE ACCOMPANYING
PROSPECTUS.
o THIS SUMMARY PROVIDES AN OVERVIEW OF CERTAIN CALCULATIONS, CASH FLOW
PRIORITIES AND OTHER INFORMATION TO AID YOUR UNDERSTANDING AND IS QUALIFIED
BY THE FULL DESCRIPTION OF THESE CALCULATIONS, CASH FLOW PRIORITIES AND
OTHER INFORMATION IN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING
PROSPECTUS. SOME OF THE INFORMATION CONSISTS OF FORWARD-LOOKING STATEMENTS
RELATING TO FUTURE ECONOMIC PERFORMANCE OR PROJECTIONS AND OTHER FINANCIAL
ITEMS. FORWARD-LOOKING STATEMENTS ARE SUBJECT TO A VARIETY OF RISKS AND
UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER FROM THE PROJECTED
RESULTS. THOSE RISKS AND UNCERTAINTIES INCLUDE, AMONG OTHERS, GENERAL
ECONOMIC AND BUSINESS CONDITIONS, REGULATORY INITIATIVES AND COMPLIANCE
WITH GOVERNMENTAL REGULATIONS, AND VARIOUS OTHER MATTERS, ALL OF WHICH ARE
BEYOND OUR CONTROL. ACCORDINGLY, WHAT ACTUALLY HAPPENS MAY BE VERY
DIFFERENT FROM WHAT WE PREDICT IN OUR FORWARD-LOOKING STATEMENTS.
Issuer........................... Asset Backed Securities Corporation Home
Equity Loan Trust, Series 2003-HE3.
Securities....................... Asset Backed Pass-Through Certificates,
Series 2003-HE3.
Depositor........................ Asset Backed Securities Corporation.
Seller........................... DLJ Mortgage Capital, Inc.
Servicer......................... Ocwen Federal Bank FSB.
Originator....................... New Century Mortgage Corporation.
Trustee.......................... Wells Fargo Bank Minnesota, N.A.
Yield Maintenance Agreement
Counterparty................. Credit Suisse First Boston International.
Mortgage Pool.................... On the closing date the trust will acquire
3,862, fixed-rate and adjustable-rate
mortgage loans (which are referred to in
this prospectus supplement as the mortgage
loans) with an aggregate principal balance
of approximately $606,752,488 as of the
cut-off date, secured by first and second
liens on residential properties.
Cut-off Date..................... June 1, 2003.
Closing Date..................... On or about June 3, 2003.
S-4
Distribution Date................ Beginning on July 15, 2003, and thereafter
on the 15th day of each month, or if the
15th day is not a business day, on the next
business day.
Determination Date............... The fifth day of each calendar month, or if
such fifth day is not a business day, the
business day immediately preceding such
fifth day.
Servicer Remittance Date......... The second business day preceding each
distribution date.
Assumed final distribution date.. June 2033. The actual final distribution
date could be substantially earlier.
Form of offered certificates..... Book-entry.
Minimum denominations............ With respect to all classes of offered
certificates, other than the Class A-IO
Certificates, $25,000 and integral multiples
of $1 in excess thereof. With respect to the
Class A-IO Certificates, $100,000 and
integral multiples of $1 in excess thereof.
S-5
THE CERTIFICATES
PASS- THROUGH
INITIAL PRINCIPAL RATE INITIAL RATING
CLASS BALANCE(1) (S&P/FITCH/MOODY'S) DESIGNATION
- --------------------------------- ----------------- -------------- ------------------- -----------
OFFERED CERTIFICATES:
A1 $302,800,000 Floating(2) AAA/AAA/Aaa Senior
A2 $196,200,000 Floating(2) AAA/AAA/Aaa Senior
A-IO Notional(3) 4.00%(4) AAA/AAA/Aaa Senior
M1 $39,440,000 Floating(2) AA/AA/Aa2 Mezzanine
M2 $33,380,000 Floating(2) A/A/A2 Mezzanine
M3 $10,620,000 Floating(2) A-/A-/A3 Mezzanine
M4 $15,200,000 Floating(2) BBB/BBB/Baa2 Mezzanine
M5 $ 9,112,000 Floating(2) BBB-/BBB-/Baa3 Mezzanine
------------
Total Offered Certificates: $606,752,000
NON-OFFERED
CERTIFICATES:
Inverse
A-INV-IO Notional(5) Floating(6) AAA/AAA/Aaa Senior
B-IO Notional(7) 3.50%(4) Not Rated Subordinate
X N/A(8) N/A Not Rated Subordinate
P $100 N/A(9) Not Rated Prepayment
Premium Only
R N/A(10) N/A Not Rated Residual
------------
Total Non-Offered Certificates: $ 100
TOTAL CERTIFICATES: $606,752,100
(1) The certificates are subject to a variance of no more than 5% prior to
their issuance.
(2) The pass-through rate on this class of certificates may change from
distribution date to distribution date based on changes in the level of an
index, is subject to a cap and will increase on the first possible
distribution date after the servicer is permitted to exercise the optional
termination of the trust. See "Description of the
Certificates--Pass-Through Rates" in this prospectus supplement.
S-6
(3) The Class A-IO Certificates are notional amount certificates and will not
have a certificate principal balance but will bear interest on their
outstanding notional amount. On any distribution date on or prior to the
distribution date in June 2005, the notional amount will equal the lesser
of (a) the Class A-IO Notional Balance and (b) the outstanding principal
balance of the mortgage loans as of the first day of the month prior to the
month of such distribution date (after giving effect to scheduled payments
of principal due on such date). The Class A-IO Notional Balance will equal,
for any distribution date, the amount set forth below for that distribution
date:
Class A-IO Class A-IO
Notional Notional
Distribution Date Balance ($) Distribution Date Balance ($)
----------------- ----------- ----------------- -----------
July 2003.................... 47,500,000 July 2004.................... 35,800,000
August 2003.................. 46,400,000 August 2004.................. 34,900,000
September 2003............... 45,400,000 September 2004............... 34,000,000
October 2003................. 44,400,000 October 2004................. 33,200,000
November 2003................ 43,400,000 November 2004................ 32,400,000
December 2003................ 42,400,000 December 2004................ 31,600,000
January 2004................. 41,500,000 January 2005................. 30,800,000
February 2004................ 40,500,000 February 2005................ 30,000,000
March 2004................... 39,500,000 March 2005................... 29,300,000
April 2004................... 38,600,000 April 2005................... 28,500,000
May 2004..................... 37,600,000 May 2005..................... 27,800,000
June 2004.................... 36,700,000 June 2005.................... 27,100,000
On and after the distribution date in July 2005, the Class A-IO Notional
Balance will equal $0.
(4) Subject to a cap as described herein under "Description of the
Certificates--Pass-Through Rates."
(5) The Class A-INV-IO Certificates are notional amount certificates and will
not have a certificate principal balance but will bear interest on their
outstanding notional amount. On any distribution date on or prior to the
distribution date in June 2005, the notional amount will equal the lesser
of (a) the Class A-INV-IO Notional Balance and (b) the outstanding
principal balance of the mortgage loans as of the first day of the month
prior to the month of such distribution date (after giving effect to
scheduled payments of principal due on such date). The Class A-INV-IO
Notional Balance will equal, for any distribution date, the amount set
forth below for that distribution date:
Class A-INV-IO Class A-INV-IO
Notional Notional
Distribution Date Balance ($) Distribution Date Balance ($)
----------------- ----------- ----------------- -----------
July 2003.................... 600,000,000 July 2004.................... 356,700,000
August 2003.................. 574,600,000 August 2004.................. 341,500,000
September 2003............... 550,200,000 September 2004............... 327,000,000
October 2003................. 526,900,000 October 2004................. 313,100,000
November 2003................ 504,500,000 November 2004................ 299,800,000
December 2003................ 483,100,000 December 2004................ 287,100,000
January 2004................. 462,600,000 January 2005................. 274,900,000
February 2004................ 443,000,000 February 2005................ 263,200,000
March 2004................... 424,200,000 March 2005................... 252,000,000
April 2004................... 406,200,000 April 2005................... 241,300,000
May 2004..................... 389,000,000 May 2005..................... 231,100,000
June 2004.................... 372,500,000 June 2005.................... 221,200,000
On and after the distribution date in July 2005, the Class A-INV-IO
Notional Balance will equal $0.
S-7
(6) The pass-through rate on this class of certificates may change from
distribution date to distribution date based on changes in the level of an
index and may equal 0% per annum and is subject to a cap, as described
herein under "Description of the Certificates--Pass-Through Rates."
(7) The Class B-IO Certificates are notional amount certificates and will not
have a certificate principal balance but will bear interest on their
outstanding notional amount. The notional amount of the Class B-IO
Certificates as of any distribution date on or prior to the distribution
date in June 2005 is the lesser of (a) $52,000,000 and (b) the outstanding
principal balance of the mortgage loans as of the first day of the month
prior to the month of such distribution date (after giving effect to
scheduled payments of principal due on such date). On and after the
distribution date in July 2005, the notional amount of the Class B-IO
Certificates will be $0.
(8) These certificates will not have a certificate principal balance.
(9) The Class P Certificates will not be entitled to distributions in respect
of interest. The Class P Certificates will be entitled to all prepayment
premiums or charges received in respect of the mortgage loans.
(10) The Class R Certificates will not have a certificate principal balance and
are the class of certificates representing the residual interests in the
trust.
S-8
DESIGNATIONS
Each class of certificates will have different characteristics, some of
which are reflected in the following general designations.
o Offered Certificates
Class A Certificates, Class A-IO Certificates and Mezzanine
Certificates.
o Class A Certificates
Class A1 Certificates and Class A2 Certificates.
o Senior Certificates
Class A Certificates, Class A-IO Certificates and Class A-INV-IO
Certificates.
o Mezzanine Certificates
Class M1 Certificates, Class M2 Certificates, Class M3 Certificates,
Class M4 Certificates and Class M5 Certificates.
o Offered Subordinate Certificates
Mezzanine Certificates.
o LIBOR Certificates
Class A Certificates and Offered Subordinate Certificates.
o Subordinate Certificates
Offered Subordinate Certificates, Class B-IO Certificates, Class X
Certificates and Class R Certificates.
o Residual Certificates
Class R Certificates.
o Book-Entry Certificates
Class A Certificates, Class A-IO Certificates and Mezzanine
Certificates.
o Physical Certificates
Class X Certificates, Class B-IO Certificates, Class P Certificates,
Class A-INV-IO Certificates and Class R Certificates.
MORTGAGE LOANS
On the closing date the trust will acquire a mortgage pool that
generally consists of first and second lien, fully amortizing, fixed-rate and
adjustable-rate mortgage loans, referred to in this prospectus supplement as the
mortgage loans.
All of the mortgage loans will be divided into two subgroups: subgroup
1, which will consist of mortgage loans that have original principal balances
that conform to Fannie Mae and Freddie Mac guidelines; and subgroup 2, which
will consist of mortgage loans that have original principal balances that may or
may not conform to Fannie Mae and Freddie Mac guidelines.
The mortgage loans in the aggregate have the following characteristics
(with all figures being approximate):
Mortgage Loans with Prepayment Premiums
(by principal balance): 83.98%
Range of Original Term 120 months
to Stated Maturity: to
360 months
Weighted Average Remaining
Term to Stated Maturity: 353 months
Range of Original $20,400
Principal Balances: to
$699,500
Average Original
Principal Balance: $157,389
Range of Outstanding $20,273
Principal Balances: to
$698,232
S-9
Average Outstanding
Principal Balance: $157,108
Current Range of 4.420%
Loan Rates: to
12.350%
Current Weighted Average
Loan Rate: 7.705%
Current Weighted Average
Net Loan Rate: 7.205%
Weighted Average Gross
Margin of the
Adjustable-Rate Mortgage
Loans: 5.893%
Weighted Average
Maximum Loan Rate
of the Adjustable-Rate
Mortgage Loans: 14.609%
Weighted Average Initial
Periodic Rate Adjustment Cap
of the Adjustable-Rate
Mortgage Loans: 1.500%
Weighted Average Time
Until Next Adjustment Date
of the Adjustable-Rate
Mortgage Loans: 22 months
First Lien Mortgage Loans: 98.60%
Geographic Concentrations
in Excess of 5%:
California 37.33%
Florida 6.05%
Illinois 5.60%
New York 5.28%
Fixed-rate Mortgage
Loans: 20.35%
PAYMENTS ON THE OFFERED CERTIFICATES
Interest Payments
The initial pass-through rates for the Class A and Mezzanine
Certificates will be calculated at the per annum rate of one-month LIBOR plus
the related margin indicated below, subject to the limitations described in this
prospectus supplement.
In addition, if the servicer fails to exercise the option to terminate
the trust on the earliest permitted date as described below under "--Optional
Termination", the pass-through rates on the Class A and Mezzanine Certificates
will then increase to the per annum rate of one-month LIBOR plus the related
"post-call" margin indicated below, subject to the limitations described in this
prospectus supplement.
Initial Post-Call
Class of Certificates Margin Margin
- --------------------- ------ ------
Class A1 0.330% 0.660%
Class A2 0.350% 0.700%
Class M1 0.830% 1.245%
Class M2 2.000% 3.000%
Class M3 2.350% 3.525%
Class M4 4.000% 6.000%
Class M5 4.000% 6.000%
The pass-through rate for the Class A-IO Certificates for any
distribution date will be as described in the table beginning on page S-6 of
this prospectus supplement.
We refer you to "Description of the Certificates --Pass-Through Rates" in this
prospectus supplement for additional information.
Interest payable on the certificates accrues during an accrual period.
The accrual period for the LIBOR Certificates for any distribution date is the
period from the previous distribution date or, in the case of the first accrual
period, from the closing date, to the day prior to the current distribution
date. The accrual period for the Class A-IO Certificates for any distribution
date is the calendar month preceding the month of that distribution date.
Interest will be calculated for the LIBOR
S-10
Certificates on the basis of the actual number of days in the accrual period,
based on a 360-day year. Interest will be calculated on the Class A-IO
Certificates on the basis of a 360-day year divided into twelve 30-day months.
On each distribution date, you will be entitled to (i) interest at the
applicable pass-through rate on your outstanding certificate principal balance
or applicable notional amount immediately prior to that distribution date and
(ii) any interest due on a prior distribution date that was not paid plus
(except with respect to the Class A-IO, Class A-INV-IO and Class B-IO
Certificates) interest on such amount of unpaid interest.
Yield Maintenance Agreement
The trust will include a yield maintenance agreement between the
trustee and the counterparty described in this prospectus supplement on the
closing date. On any distribution date on or prior to the distribution date in
June 2005, payments may be made under the yield maintenance agreement. Any
payments made under the yield maintenance agreement will be deposited into a
reserve fund account (which is referred to in this prospectus supplement as the
Net WAC Reserve Fund). Amounts on deposit in the Net WAC Reserve Fund will be
available to make distributions on the LIBOR Certificates in respect of basis
risk shortfall amounts, to the limited extent described in this prospectus
supplement.
We refer you to "Descriptions of the Certificates--Distributions of
Interest--The Yield Maintenance Agreement" in this prospectus supplement for
more detail.
Principal Payments
Principal will be distributed to holders of the LIBOR Certificates on
each distribution date in the amounts described in this prospectus supplement
under "Description of the Certificates--Allocation of Available Funds."
The amount of principal distributable on the LIBOR Certificates on any
distribution date will be determined by:
o funds actually received or advanced on the mortgage loans that are
available to make principal distributions on the certificates; and
o the amount of excess interest available to pay principal on the LIBOR
Certificates as described below.
Funds actually received or advanced on the mortgage loans will consist
of expected monthly scheduled payments, unexpected payments resulting from
prepayments by mortgagors or liquidations of defaulted mortgage loans (including
any mortgage insurance proceeds on that mortgage loan), and advances made by the
servicer.
The manner of distributing principal among the classes of LIBOR
Certificates will differ, as described in this prospectus supplement, depending
generally upon whether a distribution date occurs before the distribution date
in July 2006 or on or after that date, and depending upon the loss and
delinquency performance of the mortgage loans.
The Class A-IO Certificates are notional amount certificates and are
not entitled to receive distributions of principal.
We refer you to "Description of the Certificates" in this prospectus supplement
for additional information.
ADVANCES
The servicer will make cash advances to cover delinquent payments of
principal and interest on the mortgage loans to the extent the servicer
reasonably believes that the cash advances are recoverable from future payments
on those mortgage loans. Advances are intended to maintain a regular flow of
scheduled interest and principal payments on the certificates and are not
intended to guarantee or insure against losses.
S-11
We refer you to "The Pooling Agreement--Advances" in this prospectus supplement
for additional information.
OPTIONAL TERMINATION
The servicer may purchase all of the mortgage loans and retire the
certificates when the current principal balance of the mortgage loans is equal
to or less than 10% of the aggregate principal balance of the mortgage loans as
of the cut-off date.
We refer you to "The Pooling Agreement--Termination" and "Description of the
Certificates--Pass-Through Rates" in this prospectus supplement for additional
information.
CREDIT ENHANCEMENT
1. SUBORDINATION
The rights of the holders of the subordinate certificates to receive
distributions will be subordinated, to the extent described in this prospectus
supplement, to the rights of the holders of the Class A, Class A-IO and Class
A-INV-IO Certificates.
In addition, the rights of the holders of the offered subordinate
certificates with a lower payment priority will be subordinated to the rights of
holders of the offered subordinate certificates with a higher payment priority
in each case to the extent described in this prospectus supplement.
Subordination is intended to enhance the likelihood of regular
distributions of interest and principal on the more senior certificates and to
afford those certificates protection against realized losses on the mortgage
loans.
We refer you to "Description of the Certificates--Credit Enhancement" in this
prospectus supplement for additional information.
2. OVERCOLLATERALIZATION
The mortgage loans owned by the trust bear interest each month in an
amount that in the aggregate is expected to exceed the amount needed to pay
monthly interest on the certificates and to pay the fees and expenses of the
trust. A portion of this excess interest will be applied after the first
distribution date to pay principal on the offered certificates until the
required level of overcollateralization is reached. This will reduce the
principal balances of the offered certificates faster than the principal
balances on the mortgage loans. As a result, the aggregate principal balance of
the mortgage loans is expected to exceed the aggregate principal balance of the
offered certificates. This feature is referred to as "overcollateralization."
The required level of overcollateralization may increase or decrease over time.
We cannot assure you that sufficient excess interest will be generated by the
mortgage loans to create or maintain the required level of
overcollateralization.
We refer you to "Description of the Certificates--Overcollateralization
Provisions" in this prospectus supplement for additional information.
3. EXCESS INTEREST
The mortgage loans bear interest each month that in the aggregate is
expected to exceed the amount needed to pay monthly interest on the certificates
and to pay the fees and expenses of the trust. The excess interest from the
mortgage loans each month will be available to absorb realized losses on the
mortgage loans and to create or maintain overcollateralization at required
levels as described in the pooling agreement.
We refer you to "Description of the Certificates--Allocation of Available Funds"
and "--Overcollateralization Provisions" in this prospectus supplement for
additional information.
S-12
4. ALLOCATION OF LOSSES
If on any distribution date there is not sufficient excess interest or
overcollateralization to absorb realized losses on the mortgage loans as
described under "Description of the Certificates--Overcollateralization
Provisions" in this prospectus supplement, then realized losses on the mortgage
loans will be allocated to the offered subordinate certificates as described
below. If realized losses on the mortgage loans are allocated to the offered
subordinate certificates, they will be allocated first, to the Class M5
Certificates, second, to the Class M4 Certificates, third, to the Class M3
Certificates, fourth, to the Class M2 Certificates and fifth, to the Class M1
Certificates. The pooling and servicing agreement does not permit the allocation
of realized losses on the mortgage loans to the Class A, Class A-IO, Class
A-INV-IO or Class P Certificates; however, investors in the Class A and Class
A-IO Certificates should realize that under certain loss scenarios there will
not be enough principal and interest on the mortgage loans on a distribution
date to pay the Class A and Class A-IO Certificates all interest and principal
amounts to which those certificates are then entitled.
Realized losses allocated to the offered subordinate certificates will
cause a permanent reduction to their certificate principal balances. However,
the amount of any realized losses allocated to the offered subordinate
certificates may be paid to the holders of these certificates according to the
priorities set forth under "Description of the
Certificates--Overcollateralization Provisions" in this prospectus supplement.
We refer you to "Description of the Certificates --Allocation of Losses;
Subordination" in this prospectus supplement for additional information.
TAX STATUS
For federal income tax purposes, the trust (other than the Yield
Maintenance Agreement and the Net WAC Reserve Fund) will be treated as multiple
real estate mortgage investment conduits ("REMICs"). The offered certificates
(other than the Residual Certificates) will represent regular interests in the
master REMIC. The offered certificates will generally be treated as representing
ownership of debt for federal income tax purposes. Holders of these certificates
will be required to include as income all interest and original issue discount,
if any, on such certificates in accordance with the accrual method of accounting
regardless of the certificateholders' usual methods of accounting. The offered
certificates may be treated as having an ownership interest in the Yield
Maintenance Agreement and the Net WAC Reserve Fund. For federal income tax
purposes, the Class R Certificates will represent ownership of residual
interests in the REMICs.
We refer you to "Federal Income Tax Consequences" in this prospectus supplement
and "Material Federal Income Tax Considerations" in the prospectus for
additional information.
ERISA CONSIDERATIONS
We expect that the offered certificates may be purchased by or with
plan assets of a pension or other employee benefit plan subject to the Employee
Retirement Income Security Act of 1974 or similar plans subject to Section 4975
of the Internal Revenue Code of 1986, as amended. A fiduciary of a benefit plan
must determine that the purchase of a certificate is consistent with its
fiduciary duties under applicable law and does not result in a nonexempt
prohibited transaction under applicable law.
We refer you to "ERISA Considerations" in this prospectus supplement and "ERISA
Considerations" in the prospectus for additional information.
S-13
LEGAL INVESTMENT
The offered certificates will not constitute "mortgage related
securities" for purposes of the Secondary Mortgage Market Enhancement Act of
1984 ("SMMEA"), as amended.
We refer you to "Legal Investment Considerations" in this prospectus supplement
and "Legal Investment" in the prospectus for additional information.
S-14
RISK FACTORS
THE FOLLOWING INFORMATION, WHICH YOU SHOULD CAREFULLY CONSIDER, IDENTIFIES
CERTAIN SIGNIFICANT SOURCES OF RISK ASSOCIATED WITH AN INVESTMENT IN THE
CERTIFICATES. YOU SHOULD ALSO CAREFULLY CONSIDER THE INFORMATION SET FORTH UNDER
"RISK FACTORS" IN THE PROSPECTUS.
THE UNDERWRITING STANDARDS OF THE ORIGINATOR ARE NOT AS STRINGENT AS THOSE OF
FANNIE MAE AND FREDDIE MAC, WHICH MAY RESULT IN LOSSES
The originator's underwriting standards are primarily intended to
assess the value of the mortgaged property and to evaluate the adequacy of that
property as collateral for the mortgage loan and the applicant's credit standing
and ability to repay. The originator provides loans primarily to borrowers who
do not qualify for loans conforming to Fannie Mae and Freddie Mac guidelines but
who generally have equity in their property. While the primary consideration in
underwriting a mortgage loan is the value and adequacy of the mortgaged property
as collateral, the originator also considers, among other things, a mortgagor's
credit history, repayment ability and debt service-to-income ratio, as well as
the type and use of the mortgaged property. The originator's underwriting
standards do not prohibit a mortgagor from obtaining secondary financing at the
time of origination of the first lien, which secondary financing would reduce
the equity the mortgagor would otherwise have in the related mortgaged property
as indicated in the originator's loan-to-value ratio determination.
The mortgage loans may have been made to mortgagors with imperfect
credit histories, ranging from minor delinquencies to bankruptcy or mortgagors
with relatively high ratios of monthly mortgage payments to income or relatively
high ratios of total monthly credit payments to income.
As a result of these underwriting standards, the mortgage loans in the
mortgage pool are likely to experience rates of delinquency, foreclosure and
bankruptcy that are higher, and that may be substantially higher, than those
experienced by mortgage loans underwritten in a more traditional manner.
Furthermore, changes in the values of mortgaged properties may have a
greater effect on the delinquency, foreclosure, bankruptcy and loss experience
of the mortgage loans in the mortgage pool than on mortgage loans originated in
a more traditional manner. We cannot assure you that the values of the related
mortgaged properties have remained or will remain at the levels in effect on the
dates of origination of the related mortgage loans.
UNPREDICTABILITY OF PREPAYMENTS MAY ADVERSELY AFFECT YOUR YIELD
Borrowers may prepay their mortgage loans in whole or in part at any
time. We cannot predict the rate at which borrowers will repay their mortgage
loans. A prepayment of a mortgage loan will result in increased payments on the
certificates.
o If you purchase your certificates at a discount and principal is
repaid slower than you anticipate, then your yield may be lower
than you anticipate.
o If you purchase your certificates at a premium and principal is
repaid faster than you anticipate, then your yield may be lower
than you anticipate.
o The rate of prepayments on the mortgage loans will be sensitive to
prevailing interest rates. Generally, if interest rates decline,
mortgage loan prepayments may increase due to the availability of
fixed-rate mortgage loans or other adjustable-rate mortgage loans
at lower
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interest rates. Conversely, if prevailing interest rates rise
significantly, the prepayments on the mortgage loans may decrease.
o Approximately 83.01% of the subgroup 1 mortgage loans and
approximately 85.48% of the subgroup 2 mortgage loans (in each
case, by aggregate principal balance of the related subgroup as of
the cut-off date) require the mortgagor to pay a charge in certain
instances if the mortgagor prepays the mortgage loan during a
stated period, which may be from six to thirty-six months after
the mortgage loan was originated. A prepayment charge may or may
not discourage a mortgagor from prepaying the mortgage loan during
the applicable period.
o The originator or the seller, as applicable, may be required to
purchase mortgage loans from the trust in the event certain
breaches of representations and warranties occur and have not been
cured. In addition, the servicer has the option to purchase
mortgage loans that become 90 days or more delinquent, subject to
certain limitations and conditions described in this prospectus
supplement. These purchases will have the same effect on the
holders of the offered certificates as a prepayment of the
mortgage loans.
o If the rate of default and the amount of losses on the mortgage
loans is higher than you expect, then your yield may be lower than
you expect.
o The overcollateralization provisions may result in an accelerated
rate of principal distributions to holders of the more senior
classes of offered certificates.
o The Class A-IO Certificates only receive payments of interest and
are sensitive to variations in the rate of prepayments to the
extent the aggregate principal balance of the mortgage loans on
any distribution date is less than the Class A-IO Notional Balance
for such distribution date. If you purchase a Class A-IO
Certificate and the rate of prepayments is faster than you
expected, your yield may be lower than expected and under certain
prepayment scenarios you may not fully recoup your initial
investment.
See "Yield, Prepayment and Maturity Considerations" in this prospectus
supplement for a description of factors that may influence the rate and timing
of prepayments on the mortgage loans.
CREDIT ENHANCEMENT FOR THE OFFERED CERTIFICATES MAY BE INADEQUATE
The credit enhancement features described in this prospectus supplement
are intended to enhance the likelihood that holders of the Class A and Class
A-IO Certificates, and to a limited extent, the holders of the offered
subordinate certificates, will receive regular payments of interest and
principal, as applicable. However, we cannot assure you that the applicable
credit enhancement will adequately cover any shortfalls in cash available to pay
your certificates as a result of delinquencies or defaults on the mortgage
loans. If delinquencies or defaults occur on the mortgage loans, neither the
servicer nor any other entity will advance scheduled monthly payments of
interest and principal on delinquent or defaulted mortgage loans if such
advances are not likely to be recovered.
If substantial losses occur as a result of defaults and delinquent
payments on the mortgage loans, you may suffer losses.
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EXCESS INTEREST GENERATED BY THE MORTGAGE LOANS MAY BE INSUFFICIENT TO CREATE OR
MAINTAIN OVERCOLLATERALIZATION
We expect the mortgage loans to generate more interest than is needed
to pay interest owed on the offered certificates, the Class A-INV-IO
Certificates and the Class B-IO Certificates and to pay certain fees and
expenses of the trust. Any remaining interest generated by the mortgage loans
will then be used to absorb losses that occur on the mortgage loans. Except on
the first distribution date, after these financial obligations of the trust are
covered, the available excess interest generated by the mortgage loans will be
used to create or maintain overcollateralization. We cannot assure you, however,
that enough excess interest will be generated to create or maintain the required
level of overcollateralization. The factors described below will affect the
amount of excess interest that the mortgage loans will generate.
o Every time a mortgage loan is prepaid in full or in part, excess
interest may be reduced because the mortgage loan will no longer
be outstanding and generating interest or, in the case of a
partial prepayment, will be generating less interest.
o Every time a mortgage loan is liquidated or written off, excess
interest may be reduced because such mortgage loan will no longer
be outstanding and generating interest.
o If the rates of delinquencies, defaults or losses on the mortgage
loans turn out to be higher than expected, excess interest will be
reduced by the amount necessary to compensate for any shortfalls
in cash available on the applicable date to make required
distributions on the certificates.
o Approximately 79.65% of the mortgage loans, by aggregate principal
balance of the mortgage loans as of the cut-off date, are
adjustable-rate mortgage loans. The first adjustment of the loan
rates for approximately 76.02% and 3.44% of the mortgage loans, by
aggregate principal balance of the mortgage loans as of the
cut-off date, will not occur for two or three years, respectively,
after the date of origination. As a result, the pass-through rates
on the LIBOR Certificates may increase relative to the interest
rates on the mortgage loans, or may remain constant as the
interest rates on the mortgage loans decline. In either case, this
would require that more of the interest generated by the mortgage
loans be applied to cover interest on the offered certificates.
MORTGAGE LOAN RATES MAY ADVERSELY AFFECT THE YIELD ON THE LIBOR CERTIFICATES
The LIBOR Certificates accrue interest at pass-through rates based on
the one-month LIBOR index plus specified margins, but are subject to a limit.
The limit on the pass-through rates on the LIBOR Certificates is based on the
weighted average of the interest rates on the mortgage loans in the mortgage
pool net of the amount of interest payable on the Class A-IO, Class A-INV-IO and
Class B-IO Certificates and certain fees and expenses of the trust. The loan
rates on the mortgage loans are either fixed-rate or adjust based on a one-month
or six-month LIBOR index. All of the adjustable-rate mortgage loans have
periodic and maximum limitations on adjustments to their interest rates. As a
result, the LIBOR Certificates may accrue less interest than they would accrue
if their pass-through rates were based solely on the one-month LIBOR index plus
the specified margins.
A variety of factors could limit the pass-through rates on the LIBOR
Certificates and may adversely affect the yields to maturity on the LIBOR
Certificates. Some of these factors are described below.
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o The pass-through rates for the LIBOR Certificates adjust monthly
while the loan rates on the mortgage loans either do not adjust or
may adjust less frequently. Consequently, the cap on the LIBOR
Certificates may limit increases in the pass-through rates for
extended periods in a rising interest rate environment.
o Six-month LIBOR may change at different times and in different
amounts than one-month LIBOR. As a result, it is possible that the
interest rates on certain of the adjustable-rate mortgage loans
may decline while the pass-through rates on the LIBOR Certificates
are stable or rising. It is also possible that the interest rates
on certain of the adjustable-rate mortgage loans and the
pass-through rates on the LIBOR Certificates may decline or
increase during the same period, but that the pass-through rates
on these classes of certificates may decline more slowly or
increase more rapidly.
If the pass-through rates on the LIBOR Certificates are limited for any
distribution date, the resulting basis risk shortfalls may be recovered by the
holders of these classes of certificates on such distribution date or on future
distribution dates to the extent that there is sufficient cashflow generated
under the yield maintenance agreement and if there are available funds remaining
after distributions on the offered certificates, the Class A-INV-IO Certificates
and the Class B-IO Certificates and the payment of certain fees and expenses of
the trust. No assurances can be given that such additional funds will be
available.
THE OFFERED SUBORDINATE CERTIFICATES INVOLVE ADDITIONAL RISKS
The weighted average lives of, and the yields to maturity on, the Class
M1, Class M2, Class M3, Class M4 and Class M5 Certificates will be progressively
more sensitive in that order to the rate and timing of mortgagor defaults and
the severity of ensuing losses on the mortgage loans. If the actual rate and
severity of losses on the mortgage loans is higher than those assumed by an
investor in such certificates, the actual yield to maturity of those
certificates may be lower than the yield anticipated by such investor. The
timing of losses on the mortgage loans will also affect an investor's actual
yield to maturity, even if the rate of defaults and severity of losses over the
life of the mortgage pool are consistent with an investor's expectations. In
general, the earlier a loss occurs, the greater the effect on an investor's
yield to maturity. Realized losses on the mortgage loans, to the extent they
exceed the amount of overcollateralization following distributions of principal
on the related distribution date, will reduce the certificate principal balance
of the class of offered subordinate certificates then outstanding with the
lowest payment priority. As a result of these reductions, less interest will
accrue on that class of offered subordinate certificates than would otherwise be
the case. Once a realized loss is allocated to an offered subordinate
certificate, no amounts will be distributable with respect to the written down
amount. However, the amount of any realized losses allocated to the offered
subordinate certificates may be paid to the holders of the offered subordinate
certificates according to the priorities set forth under "Description of the
Certificates--Overcollateralization Provisions" in this prospectus supplement.
Unless the certificate principal balance of the Class A Certificates has been
reduced to zero, the offered subordinate certificates will not be entitled to
any principal distributions until at least July 2006 or a later date as provided
in this prospectus supplement or during any period in which delinquencies on the
mortgage loans exceed certain levels. As a result, the weighted average lives of
those certificates will be longer than would otherwise be the case if
distributions of principal were allocated among all of the certificates at the
same time. As a result of the longer weighted average lives of such
certificates, the holders of those certificates have a greater risk of suffering
a loss on their investments. Further, because such certificates might not
receive any principal if certain delinquency levels occur, it is possible for
those certificates to receive no principal distributions even if no losses have
occurred on the mortgage pool.
S-18
YIELDS ON THE OFFERED SUBORDINATE CERTIFICATES ARE SENSITIVE TO PREPAYMENTS AND
LOSSES
The multiple class structure of the Mezzanine Certificates causes the
yield of such classes to be particularly sensitive to changes in the rates of
prepayment of the mortgage loans. Because distributions of principal will be
made to such certificates according to the priorities described in this
prospectus supplement, the yield to maturity on such certificates will be
sensitive to the rates of prepayment on the mortgage loans experienced both
before and after the commencement of principal distributions on those classes.
The yield to maturity on those certificates will also be extremely sensitive to
losses due to defaults on the mortgage loans (and the timing thereof), to the
extent the losses are not covered by excess interest, overcollateralization or a
class of offered subordinate certificates with a lower payment priority.
Furthermore, as described in this prospectus supplement, the timing of receipt
of principal and interest by the offered subordinate certificates may be
adversely affected by losses even if such classes of certificates are
subsequently reimbursed for such losses.
PREPAYMENT INTEREST SHORTFALLS AND RELIEF ACT SHORTFALLS MAY REDUCE YOUR YIELD
When a mortgage loan is prepaid, the borrower is charged interest on
the amount prepaid only up to the date on which the prepayment is made, rather
than for an entire month. This may result in a shortfall in interest collections
available for payment on the next distribution date. The servicer is required to
cover a portion of the shortfall in interest collections that are attributable
to prepayments on the mortgage loans, but only up to the amount of the
servicer's servicing fee for the related calendar month.
In addition, certain shortfalls in interest collections arising from
the application of the Soldiers' and Sailors' Civil Relief Act of 1940, as
amended, or comparable state laws (together, for purposes of this prospectus
supplement, the "Relief Act") may occur (the "Relief Act Interest Shortfalls").
The Relief Act provides relief to borrowers who enter active military service
and to borrowers in reserve status who are called to active duty after the
origination of their mortgage loan. These borrowers may not be charged interest
on a mortgage loan in excess of 6% per annum during the period of the borrower's
active duty. These shortfalls are not required to be paid by the borrower at any
future time, will not be advanced by the servicer, and, to the extent excess
interest is insufficient, will reduce accrued interest on each class of
certificates on a pro rata basis. In addition, the Relief Act imposes certain
limitations that would impair the servicer's ability to foreclose on an affected
mortgage loan during the borrower's period of active service and, under some
circumstances, during an additional period thereafter.
In response to the terrorist attacks in the United States on September
11, 2001 and the current situation in Iraq, the United States has initiated
military operations and has placed a substantial number of military reservists
and members of the National Guard on active duty status. It is possible that the
number of reservists and members of the National Guard placed on active duty
status in the near future may increase. These operations will increase the
likelihood that Relief Act Interest Shortfalls may occur.
On any distribution date, any Relief Act Interest Shortfalls and any
prepayment interest shortfalls to the extent not covered by compensating
interest paid by the servicer will be allocated, first, to the excess interest,
and thereafter, to the interest otherwise due with respect to the offered
certificates on a pro rata basis based on the respective amounts of interest
accrued on those certificates for the distribution date. If Relief Act Interest
Shortfalls or prepayment interest shortfalls are allocated to the offered
certificates, the amount of interest paid on those certificates will be reduced,
adversely affecting the yield on these certificates.
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CASH FLOW CONSIDERATIONS AND RISKS COULD CAUSE PAYMENT DELAYS AND LOSSES
Substantial delays could be encountered in connection with the
liquidation of delinquent mortgage loans. Furthermore, an action to obtain a
deficiency judgment is regulated by statutes and rules, and the amount or
availability of a deficiency judgment may be limited by law. In the event of a
default by a borrower, these restrictions may impede the ability of the servicer
to foreclose on or to sell the mortgaged property or to obtain a deficiency
judgment. In addition, reimbursement of advances made on a mortgage loan and
liquidation expenses such as legal fees, real estate taxes, hazard insurance,
inspection fees and maintenance and preservation expenses, may reduce the
portion of liquidation proceeds payable to you.
In the event that
o a mortgaged property fails to provide adequate security for the
mortgage loan,
o any overcollateralization and excess interest is insufficient to
cover such shortfalls, and
o the subordination of certain classes are insufficient to cover
such shortfalls,
you may incur a loss on your investment in the certificates.
HIGH LOAN-TO-VALUE RATIOS INCREASE RISK OF LOSS
Mortgage loans with high loan-to-value ratios may present a greater
risk of loss than mortgage loans with lower loan-to-value ratios. Approximately
44.40% of the mortgage loans, based on the aggregate scheduled principal balance
of the mortgage loans as of the cut-off date, had loan-to-value ratios at
origination in excess of 80%, but no more than 100%. Additionally, the
originator's determination of the value of a mortgaged property used in the
calculation of the loan-to-values ratios of the mortgage loans may differ from
the actual value of such mortgaged properties. None of the mortgage loans in the
mortgage pool were covered by a primary mortgage insurance policy at
origination.
THERE ARE RISKS RELATING TO MORTGAGE LOANS SECURED BY SECOND LIENS
Approximately 3.56% of the subgroup 2 mortgage loans (by aggregate
principal balance of the subgroup 2 mortgage loans as of the cut-off date) are
secured by a second lien that is subordinate to the rights of the mortgagee
under a first mortgage loan on the related mortgaged property. The proceeds from
any liquidation, insurance or condemnation proceeding will be available to
satisfy the outstanding principal balance of such subordinate mortgage loans
only to the extent that the claims of the senior mortgage loans have been
satisfied in full, including any foreclosure costs. In certain circumstances
where the servicer determines that it would be uneconomical to foreclose on the
mortgaged property, the servicer may modify or waive any term of the mortgage
loan, including accepting a lesser amount than stated in the mortgage note in
satisfaction of the mortgage note. The foregoing consideration will be
particularly applicable to subordinate mortgage loans that have high combined
loan-to-value ratios because the servicer is more likely to determine that
foreclosure would be uneconomical. You should consider the risk that to the
extent losses on second lien mortgage loans are not covered by available credit
enhancement, such losses will be borne by the holders of the certificates.
A DECREASE IN THE VALUE OF MORTGAGED PROPERTY MAY INCREASE THE RISK OF LOSS
There are several factors that could adversely affect the value of a
mortgaged property and cause the outstanding balance of the related mortgage
loan, together with any senior financing, to equal or
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exceed the value of that mortgaged property. Among the factors that could
adversely affect the value of a mortgaged property are:
o an overall decline in the residential real estate market in the
areas in which the mortgaged properties are located;
o a decline in the general condition of the mortgaged properties as
a result of failure of borrowers to maintain adequately the
mortgaged properties; or
o natural disasters that are not necessarily covered by insurance,
including earthquakes and floods.
If a decline in the value of the mortgaged properties occurs, the actual rates
of delinquencies, foreclosure and losses on the mortgage loans could be higher
than those currently experienced in the mortgage lending industry in general and
you could suffer a loss.
GEOGRAPHIC CONCENTRATION MAY INCREASE THE RISK OF LOSS
The following chart lists the states with the highest concentrations of
mortgage loans in excess of 5% of the mortgage pool, based on the aggregate
principal balance of the mortgage loans in the mortgage pool as of the cut-off
date:
California........................ 37.33%
Florida........................... 6.05%
Illinois.......................... 5.60%
New York.......................... 5.28%
Property in California may be particularly susceptible to certain types
of uninsurable hazards, such as earthquakes, floods, mudslides and other natural
disasters.
In addition, the conditions below will have a disproportionate impact
on the mortgage loans in general:
o Economic conditions in the states listed above which may or may
not affect real property values may affect the ability of
borrowers to repay their loans on time.
o Declines in the residential real estate markets in the states
listed above may reduce the values of properties located in those
states, which would result in an increase in the loan-to-value
ratios.
o Any increase in the market value of properties located in the
states listed above would reduce the loan-to-value ratios and
could, therefore, make alternative sources of financing available
to the borrowers at lower interest rates, which could result in an
increased rate of prepayment of the mortgage loans.
VIOLATION OF VARIOUS FEDERAL AND STATE LAWS MAY RESULT IN LOSSES ON THE MORTGAGE
LOANS
Applicable state laws generally regulate interest rates and other
charges, require certain disclosures, and require licensing of mortgage loan
originators. In addition, other state laws, public policy and general principles
of equity relating to the protection of consumers, unfair and deceptive
S-21
practices and debt collection practices may apply to the origination, servicing
and collection of the mortgage loans.
The mortgage loans are also subject to federal laws, including:
o the Federal Truth-in-Lending Act and Regulation Z promulgated
thereunder, which require certain disclosures to the borrowers
regarding the terms of the mortgage loans;
o the Equal Credit Opportunity Act and Regulation B promulgated
thereunder, which prohibit discrimination on the basis of age,
race, color, sex, religion, marital status, national origin,
receipt of public assistance or the exercise of any right under
the Consumer Credit Protection Act, in the extension of credit;
and
o the Fair Credit Reporting Act, which regulates the use and
reporting of information related to the borrower's credit
experience.
Violations of certain provisions of these state and federal laws may
limit the ability of the servicer to collect all or part of the principal of or
interest on the mortgage loans and in addition could subject the trust to
damages and administrative enforcement. In particular, the originator's failure
to comply with certain requirements of the Federal Truth-in-Lending Act, as
implemented by Regulation Z, could subject the trust and other assignees of the
mortgage loans to monetary penalties, and result in the obligors' rescinding the
mortgage loans against the trust.
The seller will represent in the pooling agreement that any and all
requirements of any federal, state or local law (including the Georgia Fair
Lending Act) applicable to the origination of each mortgage loan have been
complied with. In the event of a breach of that representation, the seller will
be obligated to cure such breach or repurchase or replace the affected mortgage
loan in the manner described in this prospectus supplement.
THE CERTIFICATES ARE OBLIGATIONS OF THE TRUST ONLY
The certificates will not represent an interest in or obligation of the
depositor, the servicer, the originator, the seller, the trustee, the yield
maintenance agreement counterparty or any of their respective affiliates.
Neither the offered certificates nor the mortgage loans will be guaranteed or
insured by any governmental agency or instrumentality, or by the depositor, the
servicer, the originator, the seller, the trustee, the yield maintenance
agreement counterparty or any of their respective affiliates. Proceeds of the
assets included in the trust will be the sole source of payments on the offered
certificates, and there will be no recourse to any entity in the event that
those proceeds are insufficient or otherwise unavailable to make all payments
provided for under the offered certificates.
LACK OF LIQUIDITY
The underwriter intends to make a secondary market in the offered
certificates, but the underwriter has no obligation to do so. There is no
assurance that a secondary market will develop or, if it develops, that it will
continue. Consequently, you may not be able to sell your certificates readily or
at prices that will enable you to realize your desired yield. The market values
of the certificates are likely to fluctuate; these fluctuations may be
significant and could result in significant losses to you.
The secondary markets for asset-backed securities have experienced
periods of illiquidity and can be expected to do so in the future. Illiquidity
can have a severely adverse effect on the prices of securities
S-22
that are especially sensitive to prepayment, credit, or interest rate risk, or
that have been structured to meet the investment requirements of limited
categories of investors.
THE OFFERED CERTIFICATES ARE NOT SUITABLE INVESTMENTS FOR ALL INVESTORS
The offered certificates are not suitable investments for any investor
that requires a regular or predictable schedule of payments or payment on any
specific date. The offered certificates are complex investments that should be
considered only by investors who, either alone or with their financial, tax and
legal advisors, have the expertise to analyze the prepayment, reinvestment,
default and market risk, the tax consequences of an investment, and the
interaction of these factors.
THE LACK OF PHYSICAL CERTIFICATES MAY CAUSE DELAYS IN PAYMENTS AND CAUSE
DIFFICULTY IN PLEDGING OR SELLING THE OFFERED CERTIFICATES
The offered certificates will not be issued in physical form.
Certificateholders will be able to transfer certificates only through DTC,
participating organizations, indirect participants and certain banks. The
ability to pledge a certificate to a person that does not participate in DTC may
be limited because of the lack of a physical certificate. In addition,
certificateholders may experience some delay in receiving distributions on these
certificates because the trustee will not send distributions directly to them.
Instead, the trustee will send all distributions to DTC, which will then credit
those distributions to the participating organizations. Those organizations will
in turn credit accounts certificateholders have either directly or indirectly
through indirect participants.
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THE MORTGAGE POOL
Certain information with respect to the mortgage loans is set forth in
this prospectus supplement. Prior to the closing date, mortgage loans may be
substituted therefor. Certain of the mortgage loans may prepay in full, or may
be determined not to meet the eligibility requirements for the final pool of the
mortgage loans acquired by the trust on the closing date. The Depositor believes
that the information set forth in this prospectus supplement is representative
of the characteristics of the mortgage pool as it will be constituted at the
closing date, although certain characteristics of the mortgage loans may vary.
GENERAL
Asset Backed Securities Corporation Home Equity Loan Trust, Series
2003-HE3 (the "Trust") will generally consist of a pool (the "Mortgage Pool") of
closed-end, first and second lien, fully amortizing, fixed-rate and
adjustable-rate mortgage loans (the "Mortgage Loans"). The Mortgage Loans will
be divided into two subgroups: subgroup 1, which will consist of Mortgage Loans
with original principal balances that conform to the guidelines of Fannie Mae
and Freddie Mac ("Subgroup 1"); and subgroup 2, which will consist of Mortgage
Loans with original principal balances that may or may not conform to those
guidelines ("Subgroup 2"). The Mortgage Loans have original terms to maturity of
not greater than 30 years and an aggregate principal balance as of June 1, 2003
(the "Cut-off Date") of approximately $606,752,488.
All mortgage loan statistics set forth in this prospectus supplement
are based on Cut-off Date Principal Balances, interest rates, terms to stated
maturity, mortgage loan counts and similar statistics as of the Cut-off Date of
the mortgage loans expected to be deposited into the Trust on June 3, 2003 (the
"Closing Date"). The "Principal Balance" of a Mortgage Loan as of any date is
equal to the principal balance of the Mortgage Loan at its origination, less the
sum of scheduled and unscheduled payments received or advanced in respect of
principal made on the Mortgage Loan. All weighted averages specified in this
prospectus supplement are based on the Principal Balances of the Mortgage Loans
as of the Cut-off Date, as adjusted for the scheduled principal payments due on
or before that date, whether or not received, but only giving effect to
prepayments on or prior to May 1, 2003 (each, a "Cut-off Date Principal
Balance"). References to percentages of the Mortgage Loans mean percentages
based on the Cut-off Date Pool Principal Balance, unless otherwise specified.
The "Cut-off Date Pool Principal Balance" is equal to the aggregate Cut-off Date
Principal Balance of the Mortgage Loans, plus or minus a permitted variance of
five percent. The "Pool Balance" is equal to the aggregate Principal Balances of
the Mortgage Loans as of any date of determination.
The Mortgage Loans are subject to the "due-on-sale" provisions included
therein which, among other things, may provide that the Mortgage Loan is
assumable by a creditworthy purchaser of the related Mortgaged Property (as
defined herein).
Generally all of the Mortgage Loans in the Mortgage Pool have scheduled
monthly payments due on the first day of the month (with respect to each
Mortgage Loan, a "Due Date").
The Mortgage Loans were originated or acquired by New Century Mortgage
Corporation (the "Originator") in the ordinary course of business and were
transferred to its affiliate, NC Capital Corporation ("NC Capital").
The Mortgage Loans in the Mortgage Pool were previously acquired by the
Seller directly from NC Capital pursuant to a mortgage loan purchase and interim
servicing agreement among NC Capital, the Originator and the Seller (the
"Mortgage Loan Purchase Agreement"). Under a reconstitution agreement, dated as
of the Closing Date, among the Originator, NC Capital, the Seller and the
Depositor (the
S-24
"Reconstitution Agreement"), NC Capital will make, as of the Closing Date,
certain representations and warranties to the Trust relating to, among other
things, the due execution and enforceability of the Mortgage Loan Purchase
Agreement and the Reconstitution Agreement and certain characteristics of the
Mortgage Loans. The Seller will assign the Mortgage Loans and all of its rights
under the Mortgage Loan Purchase Agreement to the Depositor pursuant to one or
more assignment and assumption agreements. Pursuant to a pooling and servicing
agreement, dated as of June 1, 2003, among the Seller, the Depositor, the
Servicer and the Trustee (the "Pooling Agreement"), the Depositor will cause the
Mortgage Loans to be assigned to the Trust for the benefit of the
certificateholders. Subject to certain limitations, NC Capital will be obligated
to repurchase, or substitute a similar mortgage loan for, any Mortgage Loan as
to which there exists deficient documentation or an uncured breach of any such
representation or warranty, if such breach of any such representation or
warranty materially and adversely affects the interests of the
certificateholders in such Mortgage Loan. Subject to certain limitations, the
Seller will be obligated to repurchase, or substitute a similar loan for, any
Mortgage Loan as to which there exists an uncured breach of certain
representations and warranties made by the Seller in the Pooling Agreement, as
described in "The Pooling Agreement--Assignment of Mortgage Loans" in this
prospectus supplement. The Seller is selling the Mortgage Loans to the Depositor
without recourse and will have no obligation with respect to the certificates in
its capacity as Seller other than the repurchase or substitution obligations
described in this prospectus supplement. The Depositor is also selling the
Mortgage Loans without recourse and will have no obligation with respect to the
certificates in its capacity as Depositor. The Originator will have no
obligation with respect to the certificates in its capacity as Originator other
than the repurchase or substitution obligations described in this prospectus
supplement.
MORTGAGE POOL STATISTICS
The Mortgage Loans consist of adjustable-rate Mortgage Loans with an
aggregate Cut-off Date Principal Balance of approximately $483,297,158 and
fixed-rate Mortgage Loans with an aggregate Cut-off Date Principal Balance of
approximately $123,455,330.
Approximately 83.98% of the Mortgage Loans provide for payment by the
borrower of a prepayment charge in limited circumstances on certain prepayments.
Each such Mortgage Loan provides for the payment of a prepayment premium on
partial prepayments and prepayments in full made within a stated number of
months that is between six and thirty-six months from the date of origination of
that Mortgage Loan. The amount of the prepayment premium is provided in the
related mortgage note and is generally equal to up to six months' interest on
any amounts prepaid in excess of 20% of the original Principal Balance of the
related Mortgage Loan in any 12-month period. The holders of the Class P
Certificates will be entitled to all prepayment premiums received on the
Mortgage Loans, and those amounts will not be available for distribution on the
other classes of certificates. Under certain circumstances, as described in the
Pooling Agreement, the Servicer may waive the payment of any otherwise
applicable prepayment premium. Investors should conduct their own analysis of
the effect, if any, that the prepayment premiums, and decisions by the Servicer
with respect to the waiver thereof, may have on the prepayment performance of
the Mortgage Loans. The Depositor makes no representations as to the effect that
the prepayment premiums, and decisions by the Servicer with respect to the
waiver thereof, may have on the prepayment performance of the Mortgage Loans.
The Mortgage Loans are secured by mortgages or deeds of trust or other
similar security instruments (each, a "Mortgage") creating first or second liens
on residential properties consisting of attached or detached, one- to
four-family dwelling units, individual condominium units and manufactured
housing (each, a "Mortgaged Property").
S-25
Approximately 98.60% of the Mortgage Loans are secured by first liens
on the related Mortgaged Property. Approximately 1.40% of the Mortgage Loans are
secured by a mortgage that is subordinate to a senior mortgage loan on the
related Mortgaged Property.
Generally, the adjustable-rate Mortgage Loans provide for semi-annual
adjustment to the loan rate (the "Loan Rate") thereon and for corresponding
adjustments to the monthly payment amount due thereon, in each case on each
adjustment date applicable thereto (each such date, an "Adjustment Date"). The
first Adjustment Date for 76.02% and 3.44% of the Mortgage Loans will not occur
until two and three years, respectively, after the date of origination. On each
Adjustment Date for each adjustable-rate Mortgage Loan, the Loan Rate thereon
generally will be adjusted to equal the sum, rounded to the nearest or next
highest multiple of 0.125%, of six-month LIBOR and a fixed percentage amount
(the "Gross Margin"). The Loan Rate on each adjustable-rate Mortgage Loan will
not increase or decrease on the first related Adjustment Date by more than a
stated percentage specified in the related mortgage note (the "Initial Periodic
Rate Cap") and will not increase or decrease by more than a stated percentage
specified in the related mortgage note on any Adjustment Date thereafter (the
"Periodic Rate Cap"). The adjustable-rate Mortgage Loans have a weighted average
Initial Periodic Rate Cap of approximately 1.50% per annum and a weighted
average Periodic Rate Cap of approximately 1.50% per annum. The Loan Rate on
each adjustable-rate Mortgage Loan will not exceed a specified maximum Loan Rate
over the life of such Mortgage Loan (the "Maximum Loan Rate") or decrease to
less than a specified minimum Loan Rate over the life of such Mortgage Loan (the
"Minimum Loan Rate"). Effective with the first monthly payment due on each
adjustable-rate Mortgage Loan after each related Adjustment Date, the monthly
payment amount will be adjusted to an amount that will amortize fully the
outstanding Principal Balance of the related Mortgage Loan over its remaining
term, and to pay interest at the Loan Rate as so adjusted. Due to the
application of the Periodic Rate Caps and the Maximum Loan Rates, the Loan Rate
on each such adjustable-rate Mortgage Loan, as adjusted on any related
Adjustment Date, may be less than the sum of the Index and the related Gross
Margin, rounded as described in this prospectus supplement. None of the Mortgage
Loans permits the related mortgagor to convert the adjustable Loan Rate thereon
to a fixed Loan Rate. See "--The Index" in this prospectus supplement.
Approximately 0.12% of the Mortgage Loans (the "Interest Only Mortgage
Loans") do not provide for any payments of principal for a period of 120 months
after the date of origination. During that period, the Adjustment Date for the
Interest Only Mortgage Loans shall occur monthly. Thereafter, the Adjustment
Date for the Interest Only Mortgage Loans shall occur semi-annually and such
Mortgage Loan will be fully amortized over the related remaining term of 180
months.
The weighted average remaining term to stated maturity of the Mortgage
Loans will be approximately 353 months as of the Cut-off Date. None of the
Mortgage Loans had a first Due Date prior to January 2003 or after June 2003 or
will have a remaining term to stated maturity of less than 117 months or greater
than 359 months as of the Cut-off Date. The latest maturity date of any Mortgage
Loan is May 2033.
Approximately 44.40% of the Mortgage Loans had a loan-to-value ratio
("LTV") at origination in excess of 80%. No Mortgage Loan had an LTV at
origination in excess of 100%, and the weighted average LTV of the first lien
Mortgage Loans at origination was approximately 78.92%. The weighted average LTV
of the second lien Mortgage Loans at origination was approximately 79.22%. None
of the Mortgage Loans in the Mortgage Pool will be covered by a primary mortgage
insurance policy.
The LTV of a first lien mortgage loan at any given time is a fraction,
expressed as a percentage, the numerator of which is the principal balance of
the mortgage loan at the date of origination and the denominator of which is (a)
in the case of a purchase money mortgage loan, the lesser of the sales price of
the related mortgaged property and its appraised value determined in an
appraisal obtained by the
S-26
originator at origination of the mortgage loan or (b) in the case of a
refinancing mortgage loan, the appraised value of the mortgaged property at the
time of such refinance.
The LTV of a second lien mortgage loan at any given time is a fraction,
expressed as a percentage of (i) the sum of (a) the principal balance of such
mortgage loan at the date of origination plus (b) the outstanding balance of the
senior mortgage loan at the date of origination of such mortgage loan over
(ii)(a) in the case of a purchase money mortgage loan, the lesser of the sales
price of the related Mortgaged Property and its appraised value determined in an
appraisal obtained by the originator at origination of such mortgage loan or (b)
in the case of a refinancing mortgage loan, the appraised value of the Mortgaged
Property at the time of such refinance.
No assurance can be given that the value of any Mortgaged Property has
remained or will remain at the level that existed on the appraisal or sales
date. If residential real estate values overall or in a particular geographic
area decline, the LTVs might not be a reliable indicator of the rates of
delinquencies, foreclosures and losses that could occur on the Mortgage Loans.
S-27
THE MORTGAGE POOL
ORIGINAL PRINCIPAL BALANCES OF THE MORTGAGE LOANS*
% OF AGGREGATE ORIGINAL
ORIGINAL NUMBER OF ORIGINAL PRINCIPAL BALANCE OF
PRINCIPAL BALANCE ($) MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE LOANS
--------------------- -------------- ----------------- --------------
<= 25,000.00................. 16 $ 391,280.00 0.06%
25,000.01 - 50,000.00........ 299 11,778,271.00 1.94
50,000.01 - 75,000.00........ 513 32,354,027.00 5.32
75,000.01 - 100,000.00....... 500 43,867,414.00 7.22
100,000.01 - 125,000.00...... 431 48,518,351.00 7.98
125,000.01 - 150,000.00...... 419 57,731,007.00 9.50
150,000.01 - 175,000.00...... 350 56,854,920.00 9.35
175,000.01 - 200,000.00...... 292 55,066,264.00 9.06
200,000.01 - 250,000.00...... 451 100,874,902.00 16.60
250,000.01 - 300,000.00...... 257 70,305,985.00 11.57
300,000.01 - 400,000.00...... 219 74,977,229.00 12.34
400,000.01 - 500,000.00...... 98 45,078,296.00 7.42
500,000.01 - 600,000.00...... 14 8,001,950.00 1.32
600,000.01 - 700,000.00...... 3 2,037,000.00 0.34
----- --------------- ------
TOTAL........................ 3,862 $607,836,896.00 100.00%
===== =============== ======
- --------------------
* The average Principal Balance of the Mortgage Loans at origination was
approximately $157,389.
CUT-OFF DATE PRINCIPAL BALANCES OF THE MORTGAGE LOANS*
% OF AGGREGATE PRINCIPAL
BALANCE OF MORTGAGE LOANS
CUT-OFF DATE NUMBER OF CUT-OFF DATE OUTSTANDING
PRINCIPAL BALANCE ($) MORTGAGE LOANS PRINCIPAL BALANCE AS OF CUT-OFF DATE
--------------------- -------------- ----------------- --------------
<= 25,000.00................. 16 $ 390,113.88 0.06%
25,000.01 - 50,000.00........ 305 12,053,064.51 1.99
50,000.01 - 75,000.00........ 507 31,996,768.13 5.27
75,000.01 - 100,000.00....... 502 43,973,293.53 7.25
100,000.01 - 125,000.00...... 429 48,229,185.48 7.95
125,000.01 - 150,000.00...... 421 57,934,959.39 9.55
150,000.01 - 175,000.00...... 348 56,463,891.30 9.31
175,000.01 - 200,000.00...... 295 55,568,469.99 9.16
200,000.01 - 250,000.00...... 448 100,097,735.13 16.50
250,000.01 - 300,000.00...... 257 70,182,551.16 11.57
300,000.01 - 400,000.00...... 219 74,843,814.22 12.34
400,000.01 - 500,000.00...... 98 44,998,099.53 7.42
500,000.01 - 600,000.00...... 14 7,987,586.63 1.32
600,000.01 - 700,000.00...... 3 2,032,954.70 0.34
----- --------------- ------
TOTAL........................ 3,862 $606,752,487.58 100.00%
===== =============== ======
- --------------------
* The average Cut-off Date Principal Balance of the Mortgage Loans was
approximately $157,108.
S-28
FICO SCORES FOR THE MORTGAGE LOANS*
% OF AGGREGATE PRINCIPAL
BALANCE OF MORTGAGE LOANS
NUMBER OF CUT-OFF DATE OUTSTANDING
FICO SCORE MORTGAGE LOANS PRINCIPAL BALANCE AS OF CUT-OFF DATE
---------- -------------- ----------------- ------------------
500.......................... 21 $ 2,879,111.90 0.47%
501 - 525.................... 441 61,218,190.41 10.09
526 - 550.................... 557 82,734,878.27 13.64
551 - 575.................... 552 86,009,854.14 14.18
576 - 600.................... 469 77,088,909.78 12.71
601 - 625.................... 638 104,604,540.49 17.24
626 - 650.................... 543 86,697,073.89 14.29
651 - 675.................... 352 57,178,372.42 9.42
676 - 700.................... 149 24,165,070.48 3.98
701 - 725.................... 73 11,601,030.77 1.91
726 - 750.................... 37 6,610,865.41 1.09
751 - 775.................... 22 4,640,329.74 0.76
776 - 800.................... 6 1,149,152.78 0.19
801 - 825.................... 2 175,107.10 0.03
----- --------------- ------
TOTAL........................ 3,862 $606,752,487.58 100.00%
===== =============== ======
- --------------------
* The weighted average FICO score of the Mortgagors of the Mortgage Loans as
of the Cut-off Date was approximately 598.
ORIGINAL TERMS TO STATED MATURITY OF THE MORTGAGE LOANS*
% OF AGGREGATE PRINCIPAL
BALANCE OF MORTGAGE LOANS
NUMBER OF CUT-OFF DATE OUTSTANDING
ORIGINAL TERM (MONTHS) MORTGAGE LOANS PRINCIPAL BALANCE AS OF CUT-OFF DATE
---------------------- -------------- ----------------- ------------------
<= 120....................... 9 $ 496,772.11 0.08%
121 - 180.................... 95 7,850,926.32 1.29
181 - 240.................... 213 11,571,835.67 1.91
241 - 300.................... 6 995,310.45 0.16
301 - 360.................... 3,539 585,837,643.03 96.55
----- --------------- ------
TOTAL........................ 3,862 $606,752,487.58 100.00%
===== =============== ======
- --------------------
* The weighted average original term of the Mortgage Loans was approximately
355 months.
REMAINING TERMS TO STATED MATURITY OF THE MORTGAGE LOANS*
% OF AGGREGATE PRINCIPAL
BALANCE OF MORTGAGE LOANS
NUMBER OF CUT-OFF DATE OUTSTANDING
REMAINING TERM (MONTHS) MORTGAGE LOANS PRINCIPAL BALANCE AS OF CUT-OFF DATE
----------------------- -------------- ----------------- ------------------
<= 180....................... 104 $ 8,347,698.43 1.38%
181 - 348.................... 219 12,567,146.12 2.07
349 - 360.................... 3,539 585,837,643.03 96.55
----- --------------- ------
TOTAL........................ 3,862 $606,752,487.58 100.00%
===== =============== ======
- --------------------
* The weighted average remaining term of the Mortgage Loans was approximately
353 months.
S-29
PROPERTY TYPES OF THE MORTGAGE LOANS
% OF AGGREGATE PRINCIPAL
BALANCE OF MORTGAGE LOANS
NUMBER OF CUT-OFF DATE OUTSTANDING
PROPERTY TYPE MORTGAGE LOANS PRINCIPAL BALANCE AS OF CUT-OFF DATE
------------- -------------- ----------------- ------------------
Single Family Residence...... 3,027 $466,603,945.13 76.90%
PUD*......................... 329 57,508,330.97 9.48
2 - 4 Family................. 264 52,282,866.95 8.62
Condo........................ 189 25,409,973.51 4.19
Manufactured Housing......... 53 4,947,371.02 0.82
----- --------------- ------
TOTAL........................ 3,862 $606,752,487.58 100.00%
===== =============== ======
- --------------------
* PUD refers to a home or "unit" in a Planned Unit Development.
OCCUPANCY STATUS OF THE MORTGAGE LOANS*
% OF AGGREGATE PRINCIPAL
BALANCE OF MORTGAGE LOANS
NUMBER OF CUT-OFF DATE OUTSTANDING
OCCUPANCY STATUS MORTGAGE LOANS PRINCIPAL BALANCE AS OF CUT-OFF DATE
---------------- -------------- ----------------- ------------------
Primary...................... 3,591 $570,720,903.66 94.06%
Investment................... 262 34,142,984.45 5.63
Second Home.................. 9 1,888,599.47 0.31
----- --------------- ------
TOTAL........................ 3,862 $606,752,487.58 100.00%
===== =============== ======
- --------------------
* Occupancy as represented by the Mortgagor at the time of origination.
PURPOSE OF THE MORTGAGE LOANS
% OF AGGREGATE PRINCIPAL
BALANCE OF MORTGAGE LOANS
NUMBER OF CUT-OFF DATE OUTSTANDING
PURPOSE MORTGAGE LOANS PRINCIPAL BALANCE AS OF CUT-OFF DATE
------- -------------- ----------------- ------------------
Refinance - Cashout.......... 2,403 $391,943,652.05 64.60%
Purchase..................... 778 113,227,384.27 18.66
Refinance - Rate Term........ 681 101,581,451.26 16.74
----- --------------- ------
TOTAL........................ 3,862 $606,752,487.58 100.00%
===== =============== ======
S-30
ORIGINAL LOAN-TO-VALUE RATIOS OF THE MORTGAGE LOANS*
% OF AGGREGATE PRINCIPAL
BALANCE OF MORTGAGE LOANS
ORIGINAL LOAN-TO-VALUE NUMBER OF CUT-OFF DATE OUTSTANDING
RATIO (%) MORTGAGE LOANS PRINCIPAL BALANCE AS OF CUT-OFF DATE
--------- -------------- ----------------- ------------------
<= 50.000.................... 125 $ 14,309,061.68 2.36%
50.001 - 60.000.............. 193 29,132,943.42 4.80
60.001 - 70.000.............. 426 68,998,283.87 11.37
70.001 - 75.000.............. 418 67,862,114.85 11.18
75.001 - 80.000.............. 978 157,042,733.64 25.88
80.001 - 85.000.............. 755 121,662,048.02 20.05
85.001 - 90.000.............. 627 112,853,292.19 18.60
90.001 - 95.000.............. 160 26,686,362.16 4.40
95.001 - 100.000............. 180 8,205,647.75 1.35
----- --------------- ------
TOTAL........................ 3,862 $606,752,487.58 100.00%
===== =============== ======
- --------------------
* The weighted average original loan-to-value ratio of the first lien
Mortgage Loans as of the Cut-off Date was approximately 78.92%. The
weighted average original loan-to-value ratio of the second lien Mortgage
Loans as of the Cut-off Date was approximately 79.22%.
GEOGRAPHIC DISTRIBUTION OF THE MORTGAGED PROPERTIES(1)
% OF AGGREGATE PRINCIPAL
BALANCE OF MORTGAGE LOANS
NUMBER OF CUT-OFF DATE OUTSTANDING
LOCATION MORTGAGE LOANS PRINCIPAL BALANCE AS OF CUT-OFF DATE
-------- -------------- ----------------- ------------------
California................... 1,064 $226,491,067.55 37.33%
Florida...................... 302 36,696,599.53 6.05
Illinois..................... 196 34,006,140.94 5.60
New York..................... 150 32,036,266.87 5.28
Michigan..................... 252 26,835,550.62 4.42
Texas........................ 268 24,558,046.26 4.05
Massachusetts................ 102 22,394,993.40 3.69
New Jersey................... 107 21,587,271.64 3.56
Virginia..................... 87 16,658,551.69 2.75
Washington................... 102 15,695,087.45 2.59
Colorado..................... 103 14,951,344.13 2.46
Other ....................... 1,129 134,841,567.50 22.22
----- -------------- -----
TOTAL........................ 3,862 $606,752,487.58 100.00%
===== =============== ======
- --------------------
(1) The greatest ZIP Code geographic concentration of Mortgage Loans, by
Cut-off Date Principal Balance, was approximately 0.43% in the 94565 ZIP
Code.
(2) The Other row in the preceding table includes 36 other states and the
District of Columbia with under 2% concentrations individually.
DOCUMENTATION LEVEL OF THE MORTGAGE LOANS
% OF AGGREGATE PRINCIPAL
BALANCE OF MORTGAGE LOANS
NUMBER OF CUT-OFF DATE OUTSTANDING
DOCUMENTATION LEVEL MORTGAGE LOANS PRINCIPAL BALANCE AS OF CUT-OFF DATE
------------------- -------------- ----------------- ------------------
Full Doc - Asset and Income.. 2,454 $353,460,665.18 58.25%
Stated Documentation......... 1,210 217,155,503.21 35.79
Limited Documentation........ 198 36,136,319.19 5.96
----- --------------- ------
TOTAL........................ 3,862 $606,752,487.58 100.00%
===== =============== ======
S-31
CURRENT LOAN RATES OF THE MORTGAGE LOANS*
% OF AGGREGATE PRINCIPAL
BALANCE OF MORTGAGE LOANS
NUMBER OF CUT-OFF DATE OUTSTANDING
CURRENT LOAN RATE (%) MORTGAGE LOANS PRINCIPAL BALANCE AS OF CUT-OFF DATE
--------------------- -------------- ----------------- ------------------
<= 5.000..................... 1 $ 552,500.00 0.09%
5.001 - 5.500................ 3 499,725.46 0.08
5.501 - 6.000................ 49 10,786,089.06 1.78
6.001 - 6.500................ 270 57,638,274.56 9.50
6.501 - 7.000................ 570 120,129,078.59 19.80
7.001 - 7.500................ 668 120,988,797.33 19.94
7.501 - 8.000................ 764 121,582,698.36 20.04
8.001 - 8.500................ 443 60,645,515.17 10.00
8.501 - 9.000................ 412 52,196,499.79 8.60
9.001 - 9.500................ 202 21,959,886.65 3.62
9.501 - 10.000............... 174 18,157,528.69 2.99
10.001 - 10.500.............. 63 6,535,658.34 1.08
10.501 - 11.000.............. 174 10,634,401.17 1.75
11.001 - 11.500.............. 26 1,957,795.29 0.32
11.501 - 12.000.............. 39 2,180,300.19 0.36
12.001 - 12.500.............. 4 307,738.93 0.05
----- --------------- ------
TOTAL........................ 3,862 $606,752,487.58 100.00%
===== =============== ======
- --------------------
* The weighted average Loan Rate of the Mortgage Loans as of the Cut-off Date
was approximately 7.705% per annum.
MAXIMUM LOAN RATES OF THE MORTGAGE LOANS*
% OF AGGREGATE PRINCIPAL
BALANCE OF MORTGAGE LOANS
NUMBER OF CUT-OFF DATE OUTSTANDING
MAXIMUM LOAN RATE (%) MORTGAGE LOANS PRINCIPAL BALANCE AS OF CUT-OFF DATE
--------------------- -------------- ----------------- ------------------
Not Applicable............... 1,041 $123,455,329.67 20.35%
11.501 - 12.000.............. 2 727,504.38 0.12
12.001 - 12.500.............. 2 324,721.08 0.05
12.501 - 13.000.............. 49 10,786,089.06 1.78
13.001 - 13.500.............. 228 50,006,442.65 8.24
13.501 - 14.000.............. 460 97,173,814.13 16.02
14.001 - 14.500.............. 560 103,732,653.48 17.10
14.501 - 15.000.............. 582 96,054,512.11 15.83
15.001 - 15.500.............. 306 44,536,305.80 7.34
15.501 - 16.000.............. 288 39,573,986.01 6.52
16.001 - 16.500.............. 141 16,641,035.92 2.74
16.501 - 17.000.............. 106 13,065,642.58 2.15
17.001 - 17.500.............. 38 4,665,761.66 0.77
17.501 - 18.000.............. 37 3,856,685.08 0.64
18.001 - 18.500.............. 14 1,345,715.38 0.22
18.501 - 19.000.............. 7 702,345.18 0.12
19.001 - 19.500.............. 1 103,943.41 0.02
----- --------------- ------
TOTAL........................ 3,862 $606,752,487.58 100.00%
===== =============== ======
- --------------------
* The weighted average Maximum Loan Rate of the Mortgage Loans that are
adjustable-rate mortgage loans as of the Cut-off Date was approximately
14.609% per annum.
S-32
GROSS MARGINS OF THE MORTGAGE LOANS*
% OF AGGREGATE PRINCIPAL
BALANCE OF MORTGAGE LOANS
NUMBER OF CUT-OFF DATE OUTSTANDING
GROSS MARGINS (%) MORTGAGE LOANS PRINCIPAL BALANCE AS OF CUT-OFF DATE
----------------- -------------- ----------------- ------------------
Not Applicable............... 1,041 $123,455,329.67 20.35%
1.501 - 2.000................ 1 116,273.11 0.02
2.001 - 2.500................ 1 266,921.47 0.04
2.501 - 3.000................ 2 632,619.34 0.10
3.501 - 4.000................ 1 175,004.38 0.03
4.001 - 4.500................ 2 358,045.96 0.06
4.501 - 5.000................ 3 407,341.59 0.07
5.001 - 5.500................ 970 174,349,095.22 28.73
5.501 - 6.000................ 678 118,893,626.56 19.60
6.001 - 6.500................ 742 122,385,710.87 20.17
6.501 - 7.000................ 263 40,742,490.22 6.71
7.001 - 7.500................ 153 24,413,519.50 4.02
7.501 - 8.000................ 3 364,601.30 0.06
8.001 - 8.500................ 2 191,908.39 0.03
----- --------------- ------
TOTAL........................ 3,862 $606,752,487.58 100.00%
===== =============== ======
- --------------------
* The weighted average Gross Margin of the Mortgage Loans that are
adjustable-rate mortgage loans as of the Cut-off Date was approximately
5.893%.
NEXT ADJUSTMENT DATE FOR THE MORTGAGE LOANS
% OF AGGREGATE PRINCIPAL
BALANCE OF MORTGAGE LOANS
NUMBER OF CUT-OFF DATE OUTSTANDING
RATE CHANGE DATE MORTGAGE LOANS PRINCIPAL BALANCE AS OF CUT-OFF DATE
---------------- -------------- ----------------- ------------------
Not Applicable............... 1,041 $123,455,329.67 20.35%
July 1, 2003*................ 2 727,504.38 0.12
December 1, 2004............. 1 59,300.84 0.01
January 1, 2005.............. 1 278,867.07 0.05
February 1, 2005............. 21 3,928,175.10 0.65
March 1, 2005................ 554 102,116,892.92 16.83
April 1, 2005................ 2,100 354,119,113.28 58.36
May 1, 2005.................. 5 781,023.48 0.13
March 1, 2006................ 2 226,615.33 0.04
April 1, 2006................ 134 20,660,561.67 3.41
March 1, 2008................ 1 399,103.84 0.07
----- --------------- ------
TOTAL........................ 3,862 $606,752,487.58 100.00%
===== =============== ======
- --------------------
* The July 1, 2003 row refers to the Interest Only Mortgage Loans.
S-33
PRODUCT TYPE
% OF AGGREGATE PRINCIPAL
BALANCE OF MORTGAGE LOANS
NUMBER OF CUT-OFF DATE OUTSTANDING
PRODUCT TYPE MORTGAGE LOANS PRINCIPAL BALANCE AS OF CUT-OFF DATE
------------ -------------- ----------------- ------------------
1MO - Interest Only(1)....... 2 $ 727,504.38 0.12%
ARM2/28(2)................... 2,682 461,283,372.69 76.02
ARM3/27(3)................... 136 20,887,177.00 3.44
ARM5/25(4)................... 1 399,103.84 0.07
Fixed - 10 Year.............. 9 496,772.11 0.08
Fixed - 15 Year.............. 95 7,850,926.32 1.29
Fixed - 20 Year.............. 213 11,571,835.67 1.91
Fixed - 25 Year.............. 4 267,806.07 0.04
Fixed - 30 Year.............. 720 103,267,989.50 17.02
----- --------------- ------
TOTAL........................ 3,862 $606,752,487.58 100.00%
===== =============== ======
- --------------------
(1) 1MO - Interest Only refers to a Mortgage Loan that does not provide for
payments of principal for a period of 120 months after the date of
origination. During that period, the Loan Rate for such Mortgage Loan
adjusts monthly based upon the one-month LIBOR index. Thereafter, the Loan
Rate for such Mortgage Loan will adjust semi-annually based upon the
six-month LIBOR index and will be fully amortized.
(2) ARM2/28 refers to a Mortgage Loan for which the Loan Rate is fixed for two
years after the origination of that Mortgage Loan. Thereafter, the Loan
Rate on that Mortgage Loan adjusts semi-annually based upon the six-month
LIBOR index.
(3) ARM3/27 refers to a Mortgage Loan for which the Loan Rate is fixed for
three years after the origination of that Mortgage Loan. Thereafter, the
Loan Rate on that Mortgage Loan adjusts semi-annually based upon the
six-month LIBOR index.
(4) ARM5/25 refers to a Mortgage Loan for which the Loan Rate is fixed for five
years after the origination of that Mortgage Loan. Thereafter, the Loan
Rate on that Mortgage Loan adjusts semi-annually based upon the six-month
LIBOR index.
ORIGINAL TERM TO EXPIRATION OF PREPAYMENT PENALTY
% OF AGGREGATE PRINCIPAL
BALANCE OF MORTGAGE LOANS
ORIGINAL NUMBER OF MONTHS TO NUMBER OF CUT-OFF DATE OUTSTANDING
EXPIRATION MORTGAGE LOANS PRINCIPAL BALANCE AS OF CUT-OFF DATE
---------- -------------- ----------------- ------------------
No penalty or expired........ 719 $ 97,188,135.98 16.02%
1 - 6........................ 2 94,993.70 0.02
7 - 12....................... 256 52,372,058.91 8.63
13 - 24...................... 2,240 370,622,524.12 61.08
25 - 36...................... 645 86,474,774.87 14.25
----- --------------- ------
TOTAL........................ 3,862 $606,752,487.58 100.00%
===== =============== ======
S-34
CREDIT GRADE OF THE MORTGAGE LOANS*
% OF AGGREGATE PRINCIPAL
BALANCE OF MORTGAGE
NUMBER OF CUT-OFF DATE LOANS OUTSTANDING
CREDIT GRADE MORTGAGE LOANS PRINCIPAL BALANCE AS OF CUT-OFF DATE
------------ -------------- ----------------- ------------------
AA............................... 1,662 $264,866,881.27 43.65%
A-............................... 396 63,640,258.25 10.49
A-MO............................. 5 394,129.77 0.06
A+............................... 1,228 201,518,567.12 33.21
A+MO............................. 30 4,051,938.39 0.67
B................................ 352 47,646,231.92 7.85
C................................ 85 12,392,578.52 2.04
C-............................... 19 3,104,560.43 0.51
Home Saver Program............... 28 3,599,099.22 0.59
Credit Score Program............. 57 5,538,242.69 0.91
----- --------------- ------
TOTAL............................ 3,862 $606,752,487.58 100.00%
===== =============== ======
- --------------------
* For a description of each credit grade, see "Originator and Servicer--New
Century Mortgage Corporation" in this prospectus supplement.
LIEN POSITION OF THE MORTGAGE LOANS
% OF AGGREGATE PRINCIPAL
BALANCE OF MORTGAGE
NUMBER OF CUT-OFF DATE LOANS OUTSTANDING
LIEN POSITION MORTGAGE LOANS PRINCIPAL BALANCE AS OF CUT-OFF DATE
------------- -------------- ----------------- ------------------
1st Lien......................... 3,676 $598,255,004.58 98.60%
2nd Lien......................... 186 8,497,483.00 1.40
----- --------------- ------
TOTAL............................ 3,862 $606,752,487.58 100.00%
===== =============== ======
S-35
SUBGROUP 1 MORTGAGE LOANS
ORIGINAL PRINCIPAL BALANCES OF THE SUBGROUP 1 MORTGAGE LOANS*
ORIGINAL PRINCIPAL % OF AGGREGATE ORIGINAL
ORIGINAL NUMBER OF SUBGROUP 1 BALANCE OF SUBGROUP 1 PRINCIPAL BALANCE OF
PRINCIPAL BALANCE ($) MORTGAGE LOANS MORTGAGE LOANS SUBGROUP 1 MORTGAGE LOANS
--------------------- -------------- -------------- -------------------------
25,000.01 - 50,000.00........ 127 $ 5,388,453.00 1.46%
50,000.01 - 75,000.00........ 322 20,215,139.00 5.48
75,000.01 - 100,000.00....... 327 28,831,843.00 7.82
100,000.01 - 125,000.00...... 328 36,905,108.00 10.01
125,000.01 - 150,000.00...... 300 41,351,577.00 11.21
150,000.01 - 175,000.00...... 271 43,967,732.00 11.92
175,000.01 - 200,000.00...... 218 41,075,644.00 11.14
200,000.01 - 250,000.00...... 338 75,647,233.00 20.51
250,000.01 - 300,000.00...... 194 53,053,578.00 14.38
300,000.01 - 400,000.00...... 64 20,514,762.00 5.56
400,000.01 - 500,000.00...... 4 1,867,500.00 0.51
----- --------------- ------
TOTAL........................ 2,493 $368,818,569.00 100.00%
===== =============== ======
- --------------------
* The average Principal Balance of the Subgroup 1 Mortgage Loans at
origination was approximately $147,942.
CUT-OFF DATE PRINCIPAL BALANCES OF THE SUBGROUP 1 MORTGAGE LOANS*
% OF AGGREGATE
PRINCIPAL BALANCE OF
CUT-OFF DATE PRINCIPAL SUBGROUP 1 MORTGAGE LOANS
CUT-OFF DATE NUMBER OF SUBGROUP 1 BALANCE OF SUBGROUP 1 OUTSTANDING
PRINCIPAL BALANCE ($) MORTGAGE LOANS MORTGAGE LOANS AS OF CUT-OFF DATE
--------------------- -------------- -------------- ------------------
25,000.01 - 50,000.00........ 132 $ 5,628,191.90 1.53%
50,000.01 - 75,000.00........ 317 19,931,155.38 5.41
75,000.01 - 100,000.00....... 329 28,964,859.85 7.87
100,000.01 - 125,000.00...... 326 36,638,458.24 9.95
125,000.01 - 150,000.00...... 301 41,433,553.08 11.25
150,000.01 - 175,000.00...... 270 43,747,729.76 11.88
175,000.01 - 200,000.00...... 220 41,404,775.54 11.25
200,000.01 - 250,000.00...... 336 75,114,800.39 20.40
250,000.01 - 300,000.00...... 194 52,960,584.43 14.38
300,000.01 - 400,000.00...... 64 20,480,002.73 5.56
400,000.01 - 500,000.00...... 4 1,863,554.22 0.51
----- --------------- ------
TOTAL........................ 2,493 $368,167,665.52 100.00%
===== =============== ======
- --------------------
* The average Cut-off Date Principal Balance of the Subgroup 1 Mortgage Loans
was approximately $147,681.
S-36
FICO SCORES FOR THE SUBGROUP 1 MORTGAGE LOANS*
% OF AGGREGATE
PRINCIPAL BALANCE OF
CUT-OFF DATE PRINCIPAL SUBGROUP 1 MORTGAGE LOANS
NUMBER OF SUBGROUP 1 BALANCE OF SUBGROUP 1 OUTSTANDING
FICO SCORE MORTGAGE LOANS MORTGAGE LOANS AS OF CUT-OFF DATE
---------- -------------- -------------- ------------------
500.......................... 12 $ 1,409,482.55 0.38%
501 - 525.................... 314 42,442,954.90 11.53
526 - 550.................... 393 54,636,223.75 14.84
551 - 575.................... 374 53,025,079.16 14.40
576 - 600.................... 309 47,944,750.95 13.02
601 - 625.................... 389 58,494,087.33 15.89
626 - 650.................... 333 51,250,028.83 13.92
651 - 675.................... 198 32,753,505.17 8.90
676 - 700.................... 86 12,916,210.63 3.51
701 - 725.................... 44 6,298,516.94 1.71
726 - 750.................... 29 5,244,617.63 1.42
751 - 775.................... 6 1,156,929.34 0.31
776 - 800.................... 4 420,171.24 0.11
801 - 825.................... 2 175,107.10 0.05
----- --------------- ------
TOTAL........................ 2,493 $368,167,665.52 100.00%
===== =============== ======
- --------------------
* The weighted average FICO score of the Mortgagors of the Subgroup 1
Mortgage Loans as of the Cut-off Date was approximately 594.
ORIGINAL TERMS TO STATED MATURITY OF THE SUBGROUP 1 MORTGAGE LOANS*
% OF AGGREGATE
PRINCIPAL BALANCE OF
CUT-OFF DATE PRINCIPAL SUBGROUP 1 MORTGAGE LOANS
NUMBER OF SUBGROUP 1 BALANCE OF SUBGROUP 1 OUTSTANDING
ORIGINAL TERM (MONTHS) MORTGAGE LOANS MORTGAGE LOANS AS OF CUT-OFF DATE
---------------------- -------------- -------------- ------------------
<= 120....................... 7 $ 406,098.40 0.11%
121 - 180.................... 46 4,221,637.57 1.15
181 - 240.................... 22 2,090,389.24 0.57
241 - 300.................... 3 223,870.44 0.06
301 - 360.................... 2,415 361,225,669.87 98.11
----- --------------- ------
TOTAL........................ 2,493 $368,167,665.52 100.00%
===== =============== ======
- --------------------
* The weighted average original term of the Subgroup 1 Mortgage Loans was
approximately 357 months.
REMAINING TERMS TO STATED MATURITY OF THE SUBGROUP 1 MORTGAGE LOANS*
% OF AGGREGATE
PRINCIPAL BALANCE OF
CUT-OFF DATE PRINCIPAL SUBGROUP 1 MORTGAGE LOANS
NUMBER OF SUBGROUP 1 BALANCE OF SUBGROUP 1 OUTSTANDING
REMAINING TERM (MONTHS) MORTGAGE LOANS MORTGAGE LOANS AS OF CUT-OFF DATE
----------------------- -------------- -------------- ------------------
<= 180....................... 53 $ 4,627,735.97 1.26%
181 - 348.................... 25 2,314,259.68 0.63
349 - 360.................... 2,415 361,225,669.87 98.11
----- --------------- ------
TOTAL........................ 2,493 $368,167,665.52 100.00%
===== =============== ======
- --------------------
* The weighted average remaining term of the Subgroup 1 Mortgage Loans was
approximately 355 months.
S-37
PROPERTY TYPES OF THE SUBGROUP 1 MORTGAGE LOANS
% OF AGGREGATE
PRINCIPAL BALANCE OF
CUT-OFF DATE PRINCIPAL SUBGROUP 1 MORTGAGE LOANS
NUMBER OF SUBGROUP 1 BALANCE OF SUBGROUP 1 OUTSTANDING
PROPERTY TYPE MORTGAGE LOANS MORTGAGE LOANS AS OF CUT-OFF DATE
------------- -------------- -------------- ------------------
Single Family Residence...... 1,948 $279,480,752.74 75.91%
2 - 4 Family................. 182 35,170,463.42 9.55
PUD*......................... 194 31,279,009.48 8.50
Condo........................ 129 18,408,094.86 5.00
Manufactured Housing......... 40 3,829,345.02 1.04
----- --------------- ------
TOTAL........................ 2,493 $368,167,665.52 100.00%
===== =============== ======
- --------------------
* PUD refers to a home or "unit" in a Planned Unit Development.
OCCUPANCY STATUS OF THE SUBGROUP 1 MORTGAGE LOANS*
% OF AGGREGATE
PRINCIPAL BALANCE OF
CUT-OFF DATE PRINCIPAL SUBGROUP 1 MORTGAGE LOANS
NUMBER OF SUBGROUP 1 BALANCE OF SUBGROUP 1 OUTSTANDING
OCCUPANCY STATUS MORTGAGE LOANS MORTGAGE LOANS AS OF CUT-OFF DATE
---------------- -------------- -------------- ------------------
Primary...................... 2,301 $345,820,338.26 93.93%
Investment................... 187 21,551,009.29 5.85
Second Home.................. 5 796,317.97 0.22
----- --------------- ------
TOTAL........................ 2,493 $368,167,665.52 100.00%
===== =============== ======
- --------------------
* Occupancy as represented by the Mortgagor at the time of origination.
PURPOSE OF THE SUBGROUP 1 MORTGAGE LOANS
% OF AGGREGATE
PRINCIPAL BALANCE OF
CUT-OFF DATE PRINCIPAL SUBGROUP 1 MORTGAGE LOANS
NUMBER OF SUBGROUP 1 BALANCE OF SUBGROUP 1 OUTSTANDING
PURPOSE MORTGAGE LOANS MORTGAGE LOANS AS OF CUT-OFF DATE
------- -------------- -------------- ------------------
Refinance - Cashout.......... 1,608 $241,451,050.75 65.58%
Refinance - Rate Term........ 458 63,372,338.56 17.21
Purchase..................... 427 63,344,276.21 17.21
----- --------------- ------
TOTAL........................ 2,493 $368,167,665.52 100.00%
===== =============== ======
S-38
ORIGINAL LOAN-TO-VALUE RATIOS OF THE SUBGROUP 1 MORTGAGE LOANS*
% OF AGGREGATE
PRINCIPAL BALANCE OF
CUT-OFF DATE PRINCIPAL SUBGROUP 1 MORTGAGE LOANS
ORIGINAL LOAN-TO-VALUE NUMBER OF SUBGROUP 1 BALANCE OF SUBGROUP 1 OUTSTANDING
RATIO (%) MORTGAGE LOANS MORTGAGE LOANS AS OF CUT-OFF DATE
--------- -------------- -------------- ------------------
<= 50.000.................... 81 $ 8,666,996.39 2.35%
50.001 - 60.000.............. 126 17,133,500.45 4.65
60.001 - 70.000.............. 284 40,628,325.88 11.04
70.001 - 75.000.............. 292 42,995,147.50 11.68
75.001 - 80.000.............. 643 93,888,440.32 25.50
80.001 - 85.000.............. 539 80,728,730.80 21.93
85.001 - 90.000.............. 419 67,811,947.84 18.42
90.001 - 95.000.............. 109 16,314,576.34 4.43
----- --------------- ------
TOTAL........................ 2,493 $368,167,665.52 100.00%
===== =============== ======
- --------------------
* The weighted average original loan-to-value ratio of the Subgroup 1
Mortgage Loans as of the Cut-off Date was approximately 79.11%.
GEOGRAPHIC DISTRIBUTION OF THE SUBGROUP 1 MORTGAGED PROPERTIES(1)
% OF AGGREGATE
PRINCIPAL BALANCE OF
CUT-OFF DATE PRINCIPAL SUBGROUP 1 MORTGAGE LOANS
NUMBER OF SUBGROUP 1 BALANCE OF SUBGROUP 1 OUTSTANDING
LOCATION MORTGAGE LOANS MORTGAGE LOANS AS OF CUT-OFF DATE
-------- -------------- -------------- ------------------
California................... 624 $121,995,039.83 33.14%
Florida...................... 206 24,926,145.80 6.77
Illinois..................... 134 22,637,582.21 6.15
New York..................... 99 20,401,722.03 5.54
Michigan..................... 191 19,745,064.07 5.36
Texas........................ 160 14,654,208.79 3.98
Massachusetts................ 67 13,154,005.98 3.57
New Jersey................... 67 12,529,471.99 3.40
Colorado..................... 72 10,372,586.97 2.82
Washington................... 57 8,820,244.76 2.40
Virginia..................... 52 8,200,350.26 2.23
Other........................ 764 90,731,242.83 24.64
----- --------------- ------
TOTAL........................ 2,493 $368,167,665.52 100.00%
===== =============== ======
- --------------------
(1) The greatest ZIP Code geographic concentration of Subgroup 1 Mortgage
Loans, by Cut-off Date Principal Balance, was approximately 0.51% in the
94565 ZIP Code.
(2) The Other row in the preceding table includes 33 other states and the
District of Columbia with under 2% concentrations individually.
DOCUMENTATION LEVEL OF THE SUBGROUP 1 MORTGAGE LOANS
% OF AGGREGATE
PRINCIPAL BALANCE OF
CUT-OFF DATE PRINCIPAL SUBGROUP 1 MORTGAGE LOANS
NUMBER OF SUBGROUP 1 BALANCE OF SUBGROUP 1 OUTSTANDING
DOCUMENTATION LEVEL MORTGAGE LOANS MORTGAGE LOANS AS OF CUT-OFF DATE
------------------- -------------- -------------- ------------------
Full Doc - Asset and Income.. 1,595 $218,207,467.66 59.27%
Stated Documentation......... 770 129,770,936.17 35.25
Limited Documentation........ 128 20,189,261.69 5.48
----- --------------- ------
TOTAL........................ 2,493 $368,167,665.52 100.00%
===== =============== ======
S-39
CURRENT LOAN RATES OF THE SUBGROUP 1 MORTGAGE LOANS*
% OF AGGREGATE
PRINCIPAL BALANCE OF
CUT-OFF DATE PRINCIPAL SUBGROUP 1 MORTGAGE LOANS
NUMBER OF SUBGROUP 1 BALANCE OF SUBGROUP 1 OUTSTANDING
CURRENT LOAN RATE (%) MORTGAGE LOANS MORTGAGE LOANS AS OF CUT-OFF DATE
--------------------- -------------- -------------- ------------------
5.001 - 5.500................ 2 $ 324,721.08 0.09%
5.501 - 6.000................ 30 5,788,321.17 1.57
6.001 - 6.500................ 178 32,457,652.06 8.82
6.501 - 7.000................ 370 67,534,480.00 18.34
7.001 - 7.500................ 452 73,040,699.17 19.84
7.501 - 8.000................ 523 75,750,802.63 20.58
8.001 - 8.500................ 302 40,081,187.30 10.89
8.501 - 9.000................ 289 35,872,143.85 9.74
9.001 - 9.500................ 136 15,223,689.51 4.13
9.501 - 10.000............... 112 12,489,461.29 3.39
10.001 - 10.500.............. 45 4,646,499.23 1.26
10.501 - 11.000.............. 36 3,407,857.67 0.93
11.001 - 11.500.............. 11 839,172.77 0.23
11.501 - 12.000.............. 5 542,943.51 0.15
12.001 - 12.500.............. 2 168,034.28 0.05
----- --------------- ------
TOTAL........................ 2,493 $368,167,665.52 100.00%
===== =============== ======
- --------------------
* The weighted average Loan Rate of the Subgroup 1 Mortgage Loans as of the
Cut-off Date was approximately 7.727% per annum.
MAXIMUM LOAN RATES OF THE SUBGROUP 1 MORTGAGE LOANS*
% OF AGGREGATE
PRINCIPAL BALANCE OF
CUT-OFF DATE PRINCIPAL SUBGROUP 1 MORTGAGE LOANS
NUMBER OF SUBGROUP 1 BALANCE OF SUBGROUP 1 OUTSTANDING
MAXIMUM LOAN RATE (%) MORTGAGE LOANS MORTGAGE LOANS AS OF CUT-OFF DATE
--------------------- -------------- -------------- ------------------
Not Applicable............... 473 $ 58,600,462.93 15.92%
12.001 - 12.500.............. 2 324,721.08 0.09
12.501 - 13.000.............. 30 5,788,321.17 1.57
13.001 - 13.500.............. 160 29,837,633.63 8.10
13.501 - 14.000.............. 313 56,968,603.16 15.47
14.001 - 14.500.............. 396 65,038,849.53 17.67
14.501 - 15.000.............. 416 61,904,720.33 16.81
15.001 - 15.500.............. 226 31,583,194.61 8.58
15.501 - 16.000.............. 212 27,729,544.83 7.53
16.001 - 16.500.............. 110 12,738,403.51 3.46
16.501 - 17.000.............. 82 9,791,040.41 2.66
17.001 - 17.500.............. 32 3,693,220.32 1.00
17.501 - 18.000.............. 27 2,846,931.32 0.77
18.001 - 18.500.............. 8 675,131.77 0.18
18.501 - 19.000.............. 5 542,943.51 0.15
19.001 - 19.500.............. 1 103,943.41 0.03
----- --------------- ------
TOTAL........................ 2,493 $368,167,665.52 100.00%
===== =============== ======
- --------------------
* The weighted average Maximum Loan Rate of the Subgroup 1 Mortgage Loans
that are adjustable-rate mortgage loans as of the Cut-off Date was
approximately 14.682% per annum.
S-40
GROSS MARGINS OF THE SUBGROUP 1 MORTGAGE LOANS*
% OF AGGREGATE
PRINCIPAL BALANCE OF
CUT-OFF DATE PRINCIPAL SUBGROUP 1 MORTGAGE LOANS
NUMBER OF SUBGROUP 1 BALANCE OF SUBGROUP 1 OUTSTANDING AS
GROSS MARGINS (%) MORTGAGE LOANS MORTGAGE LOANS OF CUT-OFF DATE
----------------- -------------- -------------- ---------------
Not Applicable............... 473 $ 58,600,462.93 15.92%
2.001 - 2.500................ 1 266,921.47 0.07
2.501 - 3.000................ 1 80,119.34 0.02
4.001 - 4.500................ 1 218,798.87 0.06
4.501 - 5.000................ 2 297,468.65 0.08
5.001 - 5.500................ 686 108,434,392.39 29.45
5.501 - 6.000................ 510 81,401,423.82 22.11
6.001 - 6.500................ 517 75,827,908.78 20.60
6.501 - 7.000................ 183 25,262,165.92 6.86
7.001 - 7.500................ 116 17,536,162.02 4.76
7.501 - 8.000................ 1 49,932.94 0.01
8.001 - 8.500................ 2 191,908.39 0.05
----- --------------- ------
TOTAL........................ 2,493 $368,167,665.52 100.00%
===== =============== ======
- --------------------
* The weighted average Gross Margin of the Subgroup 1 Mortgage Loans that are
adjustable-rate mortgage loans as of the Cut-off Date was approximately
5.903%.
NEXT ADJUSTMENT DATE FOR THE SUBGROUP 1 MORTGAGE LOANS
% OF AGGREGATE
PRINCIPAL BALANCE OF
CUT-OFF DATE PRINCIPAL SUBGROUP 1 MORTGAGE LOANS
NUMBER OF SUBGROUP 1 BALANCE OF SUBGROUP 1 OUTSTANDING
RATE CHANGE DATE MORTGAGE LOANS MORTGAGE LOANS AS OF CUT-OFF DATE
---------------- -------------- -------------- ------------------
Not Applicable............... 473 $ 58,600,462.93 15.92%
February 1, 2005............. 15 2,796,638.21 0.76
March 1, 2005................ 391 61,726,649.46 16.77
April 1, 2005................ 1,509 229,806,295.67 62.42
May 1, 2005.................. 2 315,701.79 0.09
March 1, 2006................ 1 82,921.37 0.02
April 1, 2006................ 102 14,838,996.09 4.03
----- --------------- ------
TOTAL........................ 2,493 $368,167,665.52 100.00%
===== =============== ======
S-41
PRODUCT TYPE OF THE SUBGROUP 1 MORTGAGE LOANS
% OF AGGREGATE
PRINCIPAL BALANCE OF
CUT-OFF DATE PRINCIPAL SUBGROUP 1 MORTGAGE LOANS
NUMBER OF SUBGROUP 1 BALANCE OF SUBGROUP 1 OUTSTANDING
PRODUCT TYPE MORTGAGE LOANS MORTGAGE LOANS AS OF CUT-OFF DATE
------------ -------------- -------------- ------------------
ARM2/28(1)................... 1,917 $294,645,285.13 80.03%
ARM3/27(2)................... 103 14,921,917.46 4.05
Fixed - 10 Year.............. 7 406,098.40 0.11
Fixed - 15 Year.............. 46 4,221,637.57 1.15
Fixed - 20 Year.............. 22 2,090,389.24 0.57
Fixed - 25 Year.............. 3 223,870.44 0.06
Fixed - 30 Year.............. 395 51,658,467.28 14.03
----- --------------- ------
TOTAL........................ 2,493 $368,167,665.52 100.00%
===== =============== ======
- --------------------
(1) ARM2/28 refers to a Mortgage Loan for which the Loan Rate is fixed for two
years after the origination of that Mortgage Loan. Thereafter, the Loan
Rate on that Mortgage Loan adjusts semi-annually based upon the six-month
LIBOR index.
(2) ARM3/27 refers to a Mortgage Loan for which the Loan Rate is fixed for
three years after the origination of that Mortgage Loan. Thereafter, the
Loan Rate on that Mortgage Loan adjusts semi-annually based upon the
six-month LIBOR index.
ORIGINAL TERM TO EXPIRATION OF PREPAYMENT PENALTY OF THE SUBGROUP 1
MORTGAGE LOANS
% OF AGGREGATE
PRINCIPAL BALANCE OF
CUT-OFF DATE PRINCIPAL SUBGROUP 1 MORTGAGE LOANS
ORIGINAL NUMBER OF MONTHS TO NUMBER OF SUBGROUP 1 BALANCE OF SUBGROUP 1 OUTSTANDING
EXPIRATION MORTGAGE LOANS MORTGAGE LOANS AS OF CUT-OFF DATE
---------- -------------- -------------- ------------------
No penalty or expired........ 446 $ 62,537,700.48 16.99%
1 - 6........................ 1 55,035.35 0.01
7 - 12....................... 157 28,586,489.01 7.76
13 - 24...................... 1,532 231,812,821.88 62.96
25 - 36...................... 357 45,175,618.80 12.27
----- --------------- ------
TOTAL........................ 2,493 $368,167,665.52 100.00%
===== =============== ======
S-42
CREDIT GRADE OF THE SUBGROUP 1 MORTGAGE LOANS*
% OF AGGREGATE
PRINCIPAL BALANCE OF
CUT-OFF DATE PRINCIPAL SUBGROUP 1 MORTGAGE
NUMBER OF BALANCE OF SUBGROUP 1 LOANS OUTSTANDING
CREDIT GRADE MORTGAGE LOANS MORTGAGE LOANS AS OF CUT-OFF DATE
------------ -------------- -------------- ------------------
AA............................... 1,031 $158,285,187.18 42.99%
A-............................... 266 38,684,357.49 10.51
A-MO............................. 3 210,264.79 0.06
A+............................... 800 121,293,302.21 32.95
A+MO............................. 20 2,753,961.27 0.75
B................................ 249 32,088,463.33 8.72
C................................ 58 7,191,550.44 1.95
C-............................... 15 2,432,744.16 0.66
Home Saver Program............... 19 2,417,871.72 0.66
Credit Score Program............. 32 2,809,962.93 0.76
----- --------------- ------
TOTAL............................ 2,493 $368,167,665.52 100.00%
===== =============== ======
- --------------------
* For a description of each credit grade, see "Originator and Servicer--New
Century Mortgage Corporation" in this prospectus supplement.
LIEN POSITION OF THE SUBGROUP 1 MORTGAGE LOANS
% OF AGGREGATE PRINCIPAL
BALANCE OF SUBGROUP 1
CUT-OFF DATE MORTGAGE LOANS
NUMBER OF PRINCIPAL BALANCE OF OUTSTANDING
LIEN POSITION SUBGROUP 1 MORTGAGE LOANS SUBGROUP 1 MORTGAGE LOANS AS OF CUT-OFF DATE
------------- ------------------------- ------------------------- ------------------
1st Lien......................... 2,493 $368,167,665.52 100.00%
----- --------------- ------
TOTAL............................ 2,493 $368,167,665.52 100.00%
===== =============== ======
S-43
SUBGROUP 2 MORTGAGE LOANS
ORIGINAL PRINCIPAL BALANCES OF THE SUBGROUP 2 MORTGAGE LOANS*
% OF AGGREGATE ORIGINAL
ORIGINAL PRINCIPAL PRINCIPAL BALANCE
ORIGINAL NUMBER OF SUBGROUP 2 BALANCE OF SUBGROUP 2 OF SUBGROUP 2
PRINCIPAL BALANCE ($) MORTGAGE LOANS MORTGAGE LOANS MORTGAGE LOANS
--------------------- -------------- -------------- --------------
<= 25,000.00................. 16 $ 391,280.00 0.16%
25,000.01 - 50,000.00........ 172 6,389,818.00 2.67
50,000.01 - 75,000.00........ 191 12,138,888.00 5.08
75,000.01 - 100,000.00....... 173 15,035,571.00 6.29
100,000.01 - 125,000.00...... 103 11,613,243.00 4.86
125,000.01 - 150,000.00...... 119 16,379,430.00 6.85
150,000.01 - 175,000.00...... 79 12,887,188.00 5.39
175,000.01 - 200,000.00...... 74 13,990,620.00 5.85
200,000.01 - 250,000.00...... 113 25,227,669.00 10.55
250,000.01 - 300,000.00...... 63 17,252,407.00 7.22
300,000.01 - 400,000.00...... 155 54,462,467.00 22.79
400,000.01 - 500,000.00...... 94 43,210,796.00 18.08
500,000.01 - 600,000.00...... 14 8,001,950.00 3.35
600,000.01 - 700,000.00...... 3 2,037,000.00 0.85
----- --------------- ------
TOTAL........................ 1,369 $239,018,327.00 100.00%
===== =============== ======
- --------------------
* The average Principal Balance of the Subgroup 2 Mortgage Loans at
origination was approximately $174,593.
CUT-OFF DATE PRINCIPAL BALANCES OF THE SUBGROUP 2 MORTGAGE LOANS*
% OF AGGREGATE
PRINCIPAL BALANCE OF
CUT-OFF DATE PRINCIPAL SUBGROUP 2 MORTGAGE LOANS
CUT-OFF DATE NUMBER OF SUBGROUP 2 BALANCE OF SUBGROUP 2 OUTSTANDING
PRINCIPAL BALANCE ($) MORTGAGE LOANS MORTGAGE LOANS AS OF CUT-OFF DATE
--------------------- -------------- -------------- ------------------
<= 25,000.00................. 16 $ 390,113.88 0.16%
25,000.01 - 50,000.00........ 173 6,424,872.61 2.69
50,000.01 - 75,000.00........ 190 12,065,612.75 5.06
75,000.01 - 100,000.00....... 173 15,008,433.68 6.29
100,000.01 - 125,000.00...... 103 11,590,727.24 4.86
125,000.01 - 150,000.00...... 120 16,501,406.31 6.92
150,000.01 - 175,000.00...... 78 12,716,161.54 5.33
175,000.01 - 200,000.00...... 75 14,163,694.45 5.94
200,000.01 - 250,000.00...... 112 24,982,934.74 10.47
250,000.01 - 300,000.00...... 63 17,221,966.73 7.22
300,000.01 - 400,000.00...... 155 54,363,811.49 22.79
400,000.01 - 500,000.00...... 94 43,134,545.31 18.08
500,000.01 - 600,000.00...... 14 7,987,586.63 3.35
600,000.01 - 700,000.00...... 3 2,032,954.70 0.85
----- --------------- ------
TOTAL........................ 1,369 $238,584,822.06 100.00%
===== =============== ======
- --------------------
* The average Cut-off Date Principal Balance of the Subgroup 2 Mortgage Loans
was approximately $174,277.
S-44
FICO SCORES FOR THE SUBGROUP 2 MORTGAGE LOANS*
% OF AGGREGATE
PRINCIPAL BALANCE OF
CUT-OFF DATE PRINCIPAL SUBGROUP 2 MORTGAGE LOANS
NUMBER OF SUBGROUP 2 BALANCE OF SUBGROUP 2 OUTSTANDING
FICO SCORE MORTGAGE LOANS MORTGAGE LOANS AS OF CUT-OFF DATE
---------- -------------- -------------- ------------------
500.......................... 9 $ 1,469,629.35 0.62%
501 - 525.................... 127 18,775,235.51 7.87
526 - 550.................... 164 28,098,654.52 11.78
551 - 575.................... 178 32,984,774.98 13.83
576 - 600.................... 160 29,144,158.83 12.22
601 - 625.................... 249 46,110,453.16 19.33
626 - 650.................... 210 35,447,045.06 14.86
651 - 675.................... 154 24,424,867.25 10.24
676 - 700.................... 63 11,248,859.85 4.71
701 - 725.................... 29 5,302,513.83 2.22
726 - 750.................... 8 1,366,247.78 0.57
751 - 775.................... 16 3,483,400.40 1.46
776 - 800.................... 2 728,981.54 0.31
----- --------------- ------
TOTAL........................ 1,369 $238,584,822.06 100.00%
===== =============== ======
- --------------------
* The weighted average FICO score of the Mortgagors of the Subgroup 2
Mortgage Loans as of the Cut-off Date was approximately 603.
ORIGINAL TERMS TO STATED MATURITY OF THE SUBGROUP 2 MORTGAGE LOANS*
% OF AGGREGATE
PRINCIPAL BALANCE OF
CUT-OFF DATE PRINCIPAL SUBGROUP 2 MORTGAGE LOANS
NUMBER OF SUBGROUP 2 BALANCE OF SUBGROUP 2 OUTSTANDING
ORIGINAL TERM (MONTHS) MORTGAGE LOANS MORTGAGE LOANS AS OF CUT-OFF DATE
---------------------- -------------- -------------- ------------------
<= 120....................... 2 $ 90,673.71 0.04%
121 - 180.................... 49 3,629,288.75 1.52
181 - 240.................... 191 9,481,446.43 3.97
241 - 300.................... 3 771,440.01 0.32
301 - 360.................... 1,124 224,611,973.16 94.14
----- --------------- ------
TOTAL........................ 1,369 $238,584,822.06 100.00%
===== =============== ======
- --------------------
* The weighted average original term of the Subgroup 2 Mortgage Loans was
approximately 352 months.
REMAINING TERMS TO STATED MATURITY OF THE SUBGROUP 2 MORTGAGE LOANS*
% OF AGGREGATE
PRINCIPAL BALANCE OF
CUT-OFF DATE PRINCIPAL SUBGROUP 2 MORTGAGE LOANS
NUMBER OF SUBGROUP 2 BALANCE OF SUBGROUP 2 OUTSTANDING
REMAINING TERM (MONTHS) MORTGAGE LOANS MORTGAGE LOANS AS OF CUT-OFF DATE
----------------------- -------------- -------------- ------------------
<= 180....................... 51 $ 3,719,962.46 1.56%
181 - 348.................... 194 10,252,886.44 4.30
349 - 360.................... 1,124 224,611,973.16 94.14
----- --------------- ------
TOTAL........................ 1,369 $238,584,822.06 100.00%
===== =============== ======
- --------------------
* The weighted average remaining term of the Subgroup 2 Mortgage Loans was
approximately 350 months.
S-45
PROPERTY TYPES OF THE SUBGROUP 2 MORTGAGE LOANS
% OF AGGREGATE
PRINCIPAL BALANCE OF
CUT-OFF DATE PRINCIPAL SUBGROUP 2 MORTGAGE LOANS
NUMBER OF SUBGROUP 2 BALANCE OF SUBGROUP 2 OUTSTANDING
PROPERTY TYPE MORTGAGE LOANS MORTGAGE LOANS AS OF CUT-OFF DATE
------------- -------------- -------------- ------------------
Single Family Residence...... 1,079 $187,123,192.39 78.43%
PUD*......................... 135 26,229,321.49 10.99
2 - 4 Family................. 82 17,112,403.53 7.17
Condo........................ 60 7,001,878.65 2.93
Manufactured Housing......... 13 1,118,026.00 0.47
----- --------------- ------
TOTAL........................ 1,369 $238,584,822.06 100.00%
===== =============== ======
- --------------------
* PUD refers to a home or "unit" in a Planned Unit Development.
OCCUPANCY STATUS OF THE SUBGROUP 2 MORTGAGE LOANS*
% OF AGGREGATE
PRINCIPAL BALANCE OF
CUT-OFF DATE PRINCIPAL SUBGROUP 2 MORTGAGE LOANS
NUMBER OF SUBGROUP 2 BALANCE OF SUBGROUP 2 OUTSTANDING
OCCUPANCY STATUS MORTGAGE LOANS MORTGAGE LOANS AS OF CUT-OFF DATE
---------------- -------------- -------------- ------------------
Primary...................... 1,290 $224,900,565.40 94.26%
Investment................... 75 12,591,975.16 5.28
Second Home.................. 4 1,092,281.50 0.46
----- --------------- ------
TOTAL........................ 1,369 $238,584,822.06 100.00%
===== =============== ======
- --------------------
* Occupancy as represented by the Mortgagor at the time of origination.
PURPOSE OF THE SUBGROUP 2 MORTGAGE LOANS
% OF AGGREGATE
PRINCIPAL BALANCE OF
CUT-OFF DATE PRINCIPAL SUBGROUP 2 MORTGAGE LOANS
NUMBER OF SUBGROUP 2 BALANCE OF SUBGROUP 2 OUTSTANDING
PURPOSE MORTGAGE LOANS MORTGAGE LOANS AS OF CUT-OFF DATE
------- -------------- -------------- ------------------
Refinance - Cashout.......... 795 $150,492,601.30 63.08%
Purchase..................... 351 49,883,108.06 20.91
Refinance - Rate Term........ 223 38,209,112.70 16.01
----- --------------- ------
TOTAL........................ 1,369 $238,584,822.06 100.00%
===== =============== ======
S-46
ORIGINAL LOAN-TO-VALUE RATIOS OF THE SUBGROUP 2 MORTGAGE LOANS*
% OF AGGREGATE
PRINCIPAL BALANCE OF
CUT-OFF DATE PRINCIPAL SUBGROUP 2 MORTGAGE LOANS
ORIGINAL LOAN-TO-VALUE NUMBER OF SUBGROUP 2 BALANCE OF SUBGROUP 2 OUTSTANDING
RATIO (%) MORTGAGE LOANS MORTGAGE LOANS AS OF CUT-OFF DATE
--------- -------------- -------------- ------------------
<= 50.000.................... 44 $ 5,642,065.29 2.36%
50.001 - 60.000.............. 67 11,999,442.97 5.03
60.001 - 70.000.............. 142 28,369,957.99 11.89
70.001 - 75.000.............. 126 24,866,967.35 10.42
75.001 - 80.000.............. 335 63,154,293.32 26.47
80.001 - 85.000.............. 216 40,933,317.22 17.16
85.001 - 90.000.............. 208 45,041,344.35 18.88
90.001 - 95.000.............. 51 10,371,785.82 4.35
95.001 - 100.000............. 180 8,205,647.75 3.44
----- --------------- ------
TOTAL........................ 1,369 $238,584,822.06 100.00%
===== =============== ======
- --------------------
* The weighted average original loan-to-value ratio of the first lien
Subgroup 2 Mortgage Loans as of the Cut-off Date was approximately 78.63%.
The weighted average original loan-to-value ratio of the second lien
Subgroup 2 Mortgage Loans as of the Cut-off Date was approximately 79.38%.
GEOGRAPHIC DISTRIBUTION OF THE SUBGROUP 2 MORTGAGED PROPERTIES(1)
% OF AGGREGATE
PRINCIPAL BALANCE OF
CUT-OFF DATE PRINCIPAL SUBGROUP 2 MORTGAGE LOANS
NUMBER OF SUBGROUP 2 BALANCE OF SUBGROUP 2 OUTSTANDING
LOCATION MORTGAGE LOANS MORTGAGE LOANS AS OF CUT-OFF DATE
-------- -------------- -------------- ------------------
California................... 440 $104,496,027.72 43.80%
Florida...................... 96 11,770,453.73 4.93
New York..................... 51 11,634,544.84 4.88
Illinois..................... 62 11,368,558.73 4.76
Texas........................ 108 9,903,837.47 4.15
Massachusetts................ 35 9,240,987.42 3.87
New Jersey................... 40 9,057,799.65 3.80
Virginia..................... 35 8,458,201.43 3.55
Michigan..................... 61 7,090,486.55 2.97
Washington................... 45 6,874,842.69 2.88
Other........................ 396 48,689,081.83 20.41
----- --------------- ------
TOTAL........................ 1,369 $238,584,822.06 100.00%
===== =============== ======
- --------------------
(1) The greatest ZIP Code geographic concentration of Subgroup 2 Mortgage
Loans, by Cut-off Date Principal Balance, was approximately 0.63% in the
94014 ZIP Code.
(2) The Other row in the preceding table includes 36 other states and the
District of Columbia with under 2% concentrations individually.
DOCUMENTATION LEVEL OF THE SUBGROUP 2 MORTGAGE LOANS
% OF AGGREGATE
PRINCIPAL BALANCE OF
CUT-OFF DATE PRINCIPAL SUBGROUP 2 MORTGAGE LOANS
NUMBER OF SUBGROUP 2 BALANCE OF SUBGROUP 2 OUTSTANDING
DOCUMENTATION LEVEL MORTGAGE LOANS MORTGAGE LOANS AS OF CUT-OFF DATE
------------------- -------------- -------------- ------------------
Full Doc - Asset and Income.. 859 $135,253,197.52 56.69%
Stated Documentation......... 440 87,384,567.04 36.63
Limited Documentation........ 70 15,947,057.50 6.68
----- --------------- ------
TOTAL........................ 1,369 $238,584,822.06 100.00%
===== =============== ======
S-47
CURRENT LOAN RATES OF THE SUBGROUP 2 MORTGAGE LOANS*
% OF AGGREGATE
PRINCIPAL BALANCE OF
CUT-OFF DATE PRINCIPAL SUBGROUP 2 MORTGAGE LOANS
NUMBER OF SUBGROUP 2 BALANCE OF SUBGROUP 2 OUTSTANDING
CURRENT LOAN RATE (%) MORTGAGE LOANS MORTGAGE LOANS AS OF CUT-OFF DATE
--------------------- -------------- -------------- ------------------
<= 5.000..................... 1 $ 552,500.00 0.23%
5.001 - 5.500................ 1 175,004.38 0.07
5.501 - 6.000................ 19 4,997,767.89 2.09
6.001 - 6.500................ 92 25,180,622.50 10.55
6.501 - 7.000................ 200 52,594,598.59 22.04
7.001 - 7.500................ 216 47,948,098.16 20.10
7.501 - 8.000................ 241 45,831,895.73 19.21
8.001 - 8.500................ 141 20,564,327.87 8.62
8.501 - 9.000................ 123 16,324,355.94 6.84
9.001 - 9.500................ 66 6,736,197.14 2.82
9.501 - 10.000............... 62 5,668,067.40 2.38
10.001 - 10.500.............. 18 1,889,159.11 0.79
10.501 - 11.000.............. 138 7,226,543.50 3.03
11.001 - 11.500.............. 15 1,118,622.52 0.47
11.501 - 12.000.............. 34 1,637,356.68 0.69
12.001 - 12.500.............. 2 139,704.65 0.06
----- --------------- ------
TOTAL........................ 1,369 $238,584,822.06 100.00%
===== =============== ======
- --------------------
* The weighted average Loan Rate of the Subgroup 2 Mortgage Loans as of the
Cut-off Date was approximately 7.672% per annum.
MAXIMUM LOAN RATES OF THE SUBGROUP 2 MORTGAGE LOANS*
% OF AGGREGATE
PRINCIPAL BALANCE OF
CUT-OFF DATE PRINCIPAL SUBGROUP 2 MORTGAGE LOANS
NUMBER OF SUBGROUP 2 BALANCE OF SUBGROUP 2 OUTSTANDING
MAXIMUM LOAN RATE (%) MORTGAGE LOANS MORTGAGE LOANS AS OF CUT-OFF DATE
--------------------- -------------- -------------- ------------------
Not Applicable............... 568 $ 64,854,866.74 27.18%
11.501 - 12.000.............. 2 727,504.38 0.30
12.501 - 13.000.............. 19 4,997,767.89 2.09
13.001 - 13.500.............. 68 20,168,809.02 8.45
13.501 - 14.000.............. 147 40,205,210.97 16.85
14.001 - 14.500.............. 164 38,693,803.95 16.22
14.501 - 15.000.............. 166 34,149,791.78 14.31
15.001 - 15.500.............. 80 12,953,111.19 5.43
15.501 - 16.000.............. 76 11,844,441.18 4.96
16.001 - 16.500.............. 31 3,902,632.41 1.64
16.501 - 17.000.............. 24 3,274,602.17 1.37
17.001 - 17.500.............. 6 972,541.34 0.41
17.501 - 18.000.............. 10 1,009,753.76 0.42
18.001 - 18.500.............. 6 670,583.61 0.28
18.501 - 19.000.............. 2 159,401.67 0.07
----- --------------- ------
TOTAL........................ 1,369 $238,584,822.06 100.00%
===== =============== ======
- --------------------
* The weighted average Maximum Loan Rate of the Subgroup 2 Mortgage Loans
that are adjustable-rate mortgage loans as of the Cut-off Date was
approximately 14.481% per annum.
S-48
GROSS MARGINS OF THE SUBGROUP 2 MORTGAGE LOANS*
% OF AGGREGATE
PRINCIPAL BALANCE OF
CUT-OFF DATE PRINCIPAL SUBGROUP 2 MORTGAGE LOANS
NUMBER OF SUBGROUP 2 BALANCE OF SUBGROUP 2 OUTSTANDING
GROSS MARGINS (%) MORTGAGE LOANS MORTGAGE LOANS AS OF CUT-OFF DATE
----------------- -------------- -------------- ------------------
Not Applicable............... 568 $ 64,854,866.74 27.18%
1.501 - 2.000................ 1 116,273.11 0.05
2.501 - 3.000................ 1 552,500.00 0.23
3.501 - 4.000................ 1 175,004.38 0.07
4.001 - 4.500................ 1 139,247.09 0.06
4.501 - 5.000................ 1 109,872.94 0.05
5.001 - 5.500................ 284 65,914,702.83 27.63
5.501 - 6.000................ 168 37,492,202.74 15.71
6.001 - 6.500................ 225 46,557,802.09 19.51
6.501 - 7.000................ 80 15,480,324.30 6.49
7.001 - 7.500................ 37 6,877,357.48 2.88
7.501 - 8.000................ 2 314,668.36 0.13
----- --------------- ------
TOTAL........................ 1,369 $238,584,822.06 100.00%
===== =============== ======
- --------------------
* The weighted average Gross Margin of the Subgroup 2 Mortgage Loans that are
adjustable-rate mortgage loans as of the Cut-off Date was approximately
5.876%.
NEXT ADJUSTMENT DATE FOR THE SUBGROUP 2 MORTGAGE LOANS
% OF AGGREGATE
PRINCIPAL BALANCE OF
CUT-OFF DATE PRINCIPAL SUBGROUP 2 MORTGAGE LOANS
NUMBER OF SUBGROUP 2 BALANCE OF SUBGROUP 2 OUTSTANDING
RATE CHANGE DATE MORTGAGE LOANS MORTGAGE LOANS AS OF CUT-OFF DATE
---------------- -------------- -------------- ------------------
Not Applicable............... 568 $ 64,854,866.74 27.18%
July 1, 2003*................ 2 727,504.38 0.30
December 1, 2004............. 1 59,300.84 0.02
January 1, 2005.............. 1 278,867.07 0.12
February 1, 2005............. 6 1,131,536.89 0.47
March 1, 2005................ 163 40,390,243.46 16.93
April 1, 2005................ 591 124,312,817.61 52.10
May 1, 2005.................. 3 465,321.69 0.20
March 1, 2006................ 1 143,693.96 0.06
April 1, 2006................ 32 5,821,565.58 2.44
March 1, 2008................ 1 399,103.84 0.17
----- --------------- ------
TOTAL........................ 1,369 $238,584,822.06 100.00%
===== =============== ======
- --------------------
* The July 1, 2003 row refers to the Subgroup 2 Interest Only Mortgage Loans.
S-49
PRODUCT TYPE OF THE SUBGROUP 2 MORTGAGE LOANS
% OF AGGREGATE
PRINCIPAL BALANCE OF
CUT-OFF DATE PRINCIPAL SUBGROUP 2 MORTGAGE LOANS
NUMBER OF SUBGROUP 2 BALANCE OF SUBGROUP 2 OUTSTANDING
PRODUCT TYPE MORTGAGE LOANS MORTGAGE LOANS AS OF CUT-OFF DATE
------------ -------------- -------------- ------------------
1MO - Interest Only(1)....... 2 $ 727,504.38 0.30%
ARM2/28(2)................... 765 166,638,087.56 69.84
ARM3/27(3)................... 33 5,965,259.54 2.50
ARM5/25(4)................... 1 399,103.84 0.17
Fixed - 10 Year.............. 2 90,673.71 0.04
Fixed - 15 Year.............. 49 3,629,288.75 1.52
Fixed - 20 Year.............. 191 9,481,446.43 3.97
Fixed - 25 Year.............. 1 43,935.63 0.02
Fixed - 30 Year.............. 325 51,609,522.22 21.63
----- --------------- ------
TOTAL........................ 1,369 $238,584,822.06 100.00%
===== =============== ======
- --------------------
(1) 1MO - Interest Only refers to a Mortgage Loan that does not provide for
payments of principal for a period of 120 months after the date of
origination. During that period, the Loan Rate for such Mortgage Loan
adjusts monthly based upon the one-month LIBOR index. Thereafter, the Loan
Rate for such Mortgage Loan will adjust semi-annually based upon the
six-month LIBOR index and will be fully amortized.
(2) ARM2/28 refers to a Mortgage Loan for which the Loan Rate is fixed for two
years after the origination of that Mortgage Loan. Thereafter, the Loan
Rate on that Mortgage Loan adjusts semi-annually based upon the six-month
LIBOR index.
(3) ARM3/27 refers to a Mortgage Loan for which the Loan Rate is fixed for
three years after the origination of that Mortgage Loan. Thereafter, the
Loan Rate on that Mortgage Loan adjusts semi-annually based upon the
six-month LIBOR index.
(4) ARM5/25 refers to a Mortgage Loan for which the Loan Rate is fixed for five
years after the origination of that Mortgage Loan. Thereafter, the Loan
Rate on that Mortgage Loan adjusts semi-annually based upon the six-month
LIBOR index.
ORIGINAL TERM TO EXPIRATION OF PREPAYMENT PENALTY OF THE SUBGROUP 2
MORTGAGE LOANS
% OF AGGREGATE
PRINCIPAL BALANCE OF
CUT-OFF DATE PRINCIPAL SUBGROUP 2 MORTGAGE LOANS
ORIGINAL NUMBER OF MONTHS TO NUMBER OF SUBGROUP 2 BALANCE OF SUBGROUP 2 OUTSTANDING
EXPIRATION MORTGAGE LOANS MORTGAGE LOANS AS OF CUT-OFF DATE
---------- -------------- -------------- ------------------
No penalty or expired........ 273 $ 34,650,435.50 14.52%
1 - 6........................ 1 39,958.35 0.02
7 - 12....................... 99 23,785,569.90 9.97
13 - 24...................... 708 138,809,702.24 58.18
25 - 36...................... 288 41,299,156.07 17.31
----- --------------- ------
TOTAL........................ 1,369 $238,584,822.06 100.00%
===== =============== ======
S-50
CREDIT GRADE OF THE SUBGROUP 2 MORTGAGE LOANS*
% OF AGGREGATE
PRINCIPAL BALANCE OF
CUT-OFF DATE PRINCIPAL SUBGROUP 2 MORTGAGE
NUMBER OF BALANCE OF SUBGROUP 2 LOANS OUTSTANDING
CREDIT GRADE MORTGAGE LOANS MORTGAGE LOANS AS OF CUT-OFF DATE
------------ -------------- -------------- ------------------
AA............................... 631 $106,581,694.09 44.67%
A-............................... 130 24,955,900.76 10.46
A-MO............................. 2 183,864.98 0.08
A+............................... 428 80,225,264.91 33.63
A+MO............................. 10 1,297,977.12 0.54
B................................ 103 15,557,768.59 6.52
C................................ 27 5,201,028.08 2.18
C-............................... 4 671,816.27 0.28
Home Saver Program............... 9 1,181,227.50 0.50
Credit Score Program............. 25 2,728,279.76 1.14
----- --------------- ------
TOTAL............................ 1,369 $238,584,822.06 100.00%
===== =============== ======
- --------------------
* For a description of each credit grade, see "Originator and Servicer--New
Century Mortgage Corporation" in this prospectus supplement.
LIEN POSITION OF THE SUBGROUP 2 MORTGAGE LOANS
% OF AGGREGATE PRINCIPAL
BALANCE OF SUBGROUP 2
CUT-OFF DATE MORTGAGE LOANS
NUMBER OF PRINCIPAL BALANCE OF OUTSTANDING
LIEN POSITION SUBGROUP 2 MORTGAGE LOANS SUBGROUP 2 MORTGAGE LOANS AS OF CUT-OFF DATE
------------- ------------------------- ------------------------- ------------------
1st Lien......................... 1,183 $230,087,339.06 96.44%
2nd Lien......................... 186 8,497,483.00 3.56
----- --------------- ------
TOTAL............................ 1,369 $238,584,822.06 100.00%
===== =============== ======
S-51
THE INDEX
The index with respect to the adjustable-rate Mortgage Loans is the
average of interbank offered rates for six-month U.S. dollar deposits in the
London market based on quotations of major banks, and most recently available as
of a day specified in the related note as published by the Western Edition of
The Wall Street Journal (the "Index"). If the Index becomes unpublished or is
otherwise unavailable, the Servicer will select an alternative index that is
based upon comparable information.
ORIGINATOR AND SERVICER
GENERAL
The Mortgage Loans were previously purchased by the Seller from NC
Capital, which acquired the Mortgage Loans from the Originator, New Century
Mortgage Corporation ("New Century"). The Mortgage Loans will be serviced by
Ocwen Federal Bank FSB ("Ocwen").
NEW CENTURY MORTGAGE CORPORATION
The information set forth in this section of the prospectus supplement
has been provided by New Century. None of the Depositor, the Seller, the
Trustee, the Servicer or any of their affiliates has made or will make any
representation as to the accuracy or completeness of the information provided by
New Century.
General. The Mortgage Loans were originated or acquired by New Century
and were transferred to its affiliate, NC Capital Corporation, which, in turn,
sold the Mortgage Loans to an affiliate of the Depositor. New Century is a
wholly-owned subsidiary of New Century Financial Corporation, a public company.
New Century is a consumer finance and mortgage banking company that originates,
sells and services first and second mortgage loans and other consumer loans. New
Century emphasizes the origination of mortgage loans that are commonly referred
to as non-conforming "B&C" loans. New Century commenced lending operations on
February 26, 1996. It is headquartered in Irvine, California.
As of March 31, 2003, New Century Mortgage Corporation's wholesale
division operated through 14 regional processing centers located in 10 states.
The wholesale division originated $4.1 billion in loans during the three months
ended March 31, 2003. As of March 31, 2003, New Century Mortgage Corporation's
retail division operated through 66 sales offices and 5 regional processing
centers located in 26 states. The retail division originated $610 million in
loans during the three months ended March 31, 2003. As of March 31, 2003, New
Century employed 2,703 Associates.
Underwriting Standards. The Mortgage Loans were originated in
accordance with the underwriting guidelines established by New Century
(collectively, the "New Century Underwriting Guidelines"). The following is a
general summary of the New Century Underwriting Guidelines believed by the
Depositor to have been generally applied, with some variation, by New Century.
This summary does not purport to be a complete description of the underwriting
standards of New Century.
New Century's underwriting standards are primarily intended to assess
the value of the mortgaged property and to evaluate the adequacy of the property
as collateral for the Mortgage Loan. All of the Mortgage Loans were also
underwritten with a view toward the resale of the Mortgage Loans in the
secondary mortgage market. While New Century's primary consideration in
underwriting a mortgage loan is the value of the mortgaged property, New Century
also considers, among other things, a mortgagor's credit history, repayment
ability and debt service-to-income ratio, as well as the type and use of the
mortgaged property. The Mortgage Loans, in most cases, bear higher rates of
interest than
S-52
mortgage loans that are originated in accordance with Fannie Mae and Freddie Mac
standards, which is likely to result in rates of delinquencies and foreclosures
that are higher, and that may be substantially higher, than those experienced by
portfolios of mortgage loans underwritten in a more traditional manner. As a
result of New Century's underwriting criteria, changes in the values of
Mortgaged Properties may have a greater effect on the delinquency, foreclosure
and loss experience on the Mortgage Loans than these changes would be expected
to have on mortgage loans that are originated in a more traditional manner. No
assurance can be given that the values of the related Mortgaged Properties have
remained or will remain at the levels in effect on the dates of origination of
the related Mortgage Loans. In addition, there can be no assurance that the
value of a Mortgaged Property estimated in any appraisal or review is equal to
the actual value of that Mortgaged Property at the time of that appraisal or
review.
On a case-by-case basis, exceptions to the underwriting guidelines are
made where compensating factors exist. It is expected that a substantial portion
of the Mortgage Loans will represent these exceptions.
Each applicant completes an application which includes information with
respect to the applicant's liabilities, income, credit history, employment
history and personal information. The New Century Underwriting Guidelines
require a credit report on each applicant from a credit reporting company. The
report typically contains information relating to matters such as credit history
with local and national merchants and lenders, installment debt payments and any
record of defaults, bankruptcies, repossessions or judgments. Mortgaged
properties that are to secure mortgage loans generally are appraised by
qualified independent appraisers. These appraisers inspect and appraise the
subject property and verify that the property is in acceptable condition.
Following each appraisal, the appraiser prepares a report which includes a
market value analysis based on recent sales of comparable homes in the area and,
when deemed appropriate, replacement cost analysis based on the current cost of
constructing a similar home. All appraisals are required to conform to the
Uniform Standards of Professional Appraisal Practice adopted by the Appraisal
Standards Board of the Appraisal Foundation and are generally on forms
acceptable to Fannie Mae and Freddie Mac. The New Century Underwriting
Guidelines require a review of the appraisal by a qualified employee of New
Century or by an appraiser retained by New Century. If the appraised value of a
mortgaged property as determined by a review is more than 7% but less than 25%
lower than the value as determined by the appraisal, then New Century uses the
value as determined by the review in computing the loan-to-value ratio of the
related mortgage loan. If the appraised value of a mortgaged property as
determined by a review is 25% or more lower than the value as determined by the
appraisal, then New Century obtains a new appraisal and repeats the review
process.
The Mortgage Loans were originated consistent with and generally
conform to the New Century Underwriting Guidelines' full documentation, limited
documentation and stated income documentation residential loan programs. Under
each of the programs, New Century reviews the applicant's source of income,
calculates the amount of income from sources indicated on the loan application
or similar documentation, reviews the credit history of the applicant,
calculates the debt service-to-income ratio to determine the applicant's ability
to repay the loan, reviews the type and use of the property being financed, and
reviews the property. In determining the ability of the applicant to repay the
loan, a qualifying rate is created under the New Century Underwriting Guidelines
that generally is equal to the interest rate on that loan. The New Century
Underwriting Guidelines require that mortgage loans be underwritten in a
standardized procedure which complies with applicable federal and state laws and
regulations and requires New Century's underwriters to be satisfied that the
value of the property being financed, as indicated by an appraisal and a review
of the appraisal, currently supports the outstanding loan balance. In general,
the maximum loan amount for mortgage loans originated under the programs is
$500,000. The New Century Underwriting Guidelines generally permit loans on one-
to four-family residential properties to have a loan-to-value ratio at
origination of up to 90% with respect to first liens loans. The maximum
loan-to-value ratio depends on, among other things, the purpose of the mortgage
S-53
loan, a mortgagor's credit history, repayment ability and debt service-to-income
ratio, as well as the type and use of the property. With respect to mortgage
loans secured by mortgaged properties acquired by a mortgagor under a "lease
option purchase," the loan-to-value ratio of the related mortgage loan is based
on the lower of the appraised value at the time of origination of the mortgage
loan or the sale price of the related mortgaged property if the "lease option
purchase price" was set less than 12 months prior to origination and is based on
the appraised value at the time of origination if the "lease option purchase
price" was set 12 months or more prior to origination.
The New Century Underwriting Guidelines require that the income of each
applicant for a mortgage loan under the full documentation program be verified.
The specific income documentation required for New Century's various programs is
as follows: under the full documentation program, applicants usually are
required to submit one written form of verification of stable income for at
least 12 months; under the limited documentation program, applicants usually are
required to submit verification of stable income for at least 12 months, such as
12 consecutive months of complete personal checking account bank statements, and
under the stated income documentation program, an applicant may be qualified
based upon monthly income as stated on the mortgage loan application if the
applicant meets certain criteria. All the foregoing programs require that, with
respect to salaried employees, there be a telephone verification of the
applicant's employment. Verification of the source of funds, if any, required to
be deposited by the applicant into escrow in the case of a purchase money loan
is required.
In evaluating the credit quality of borrowers, New Century utilizes
credit bureau risk scores, or a FICO score, a statistical ranking of likely
future credit performance developed by Fair, Isaac & Company and the three
national credit data repositories--Equifax, TransUnion and Experian.
The New Century Underwriting Guidelines have the following categories
and criteria for grading the potential likelihood that an applicant will satisfy
the repayment obligations of a mortgage loan:
"AA" Risk. Under the "AA" risk category, the applicant must have
generally repaid installment or revolving debt according to its terms or must
have a FICO score of 620 or higher. The applicant cannot have a 30-day late
payment within the last 12 months on an existing mortgage loan. An existing
mortgage loan is required to be current at the time of funding. No open
collection accounts or open charge-offs may remain open after the funding of the
loan. No bankruptcy may have occurred during the preceding two years. No notice
of default filings may have occurred during the preceding three years. The
mortgaged property must be in at least average condition. A maximum
loan-to-value ratio of 95% (or 90% for mortgage loans originated under the
stated income documentation program) is permitted for a mortgage loan on a
single family owner-occupied or two-unit property. A maximum loan-to-value ratio
of 85% is permitted for a mortgage loan on a non-owner occupied property, an
owner-occupied condominium or a three- to four-family residential property. The
maximum loan-to-value ratio for rural, remote or unique properties is 85%. The
maximum combined loan-to-value ratio, including any related subordinate lien, is
100% for either a refinance loan or a purchase money loan. The maximum debt
service-to-income ratio is usually 55% unless the loan-to-value ratio is
reduced. Open non-medical collection accounts or charge-off accounts, not
affecting title, with balances under $500 may remain open.
"A+" Risk. Under the "A+" risk category, the applicant must have
generally repaid installment or revolving debt according to its terms or must
have a FICO score of 620 or higher. A maximum of one 30-day late payment and no
60-day late payments within the last 12 months is acceptable on an existing
mortgage loan. An existing mortgage loan is required to be current at the time
of funding. No open collection accounts or open charge-offs may remain open
after the funding of the loan. No bankruptcy may have occurred during the
preceding two years. No notice of default filings may have occurred during the
preceding three years. The mortgaged property must be in at least average
condition. A maximum loan-to-value ratio of 95% (or 85% for mortgage loans
originated under the stated income documentation
S-54
program) is permitted for a mortgage loan on a single family owner-occupied or
two-unit property. A maximum loan-to-value ratio of 85% is permitted for a
mortgage loan on a non-owner occupied property, an owner-occupied condominium or
a three- to four-family residential property. The maximum loan-to-value ratio
for rural, remote or unique properties is 85%. The maximum combined
loan-to-value ratio, including any related subordinate lien, is 100% for either
a refinance loan or a purchase money loan. The maximum debt service-to-income
ratio is usually 45% to 50% unless the loan-to-value ratio is reduced. Open
non-medical collection accounts or charge-off accounts, not affecting title,
with balances under $500 may remain open.
"A-" Risk. Under the "A-" risk category, an applicant must have
generally repaid installment or revolving debt according to its terms or must
have a FICO score of 590 or higher. A maximum of three 30-day late payment and
no 60-day late payments within the last 12 months is acceptable on an existing
mortgage loan. An existing mortgage loan is required to be current at the time
of funding of the loan. Minor derogatory items are allowed as to non-mortgage
credit. Medical derogatories are not considered. Open collection accounts or
open charge-offs not affecting title with balances of less than $1,000 may
remain open after funding of the loan. No bankruptcy may have occurred during
the preceding two years. No notice of default filings may have occurred during
the preceding three years. The mortgaged property must be in at least average
condition. A maximum loan-to-value ratio of 90% (or 80% for mortgage loans
originated under the stated income documentation program) is permitted for a
mortgage loan on a single family owner-occupied or two-unit property. A maximum
loan-to-value ratio of 80% (or 70% for mortgage loans originated under the
stated income documentation program) is permitted for a mortgage loan on a
non-owner-occupied property. A maximum loan-to-value ratio of 85% (or 75% for
mortgage loans originated under the stated income documentation program), is
permitted for a mortgage loan on an owner- occupied condominium or a three- to
four-family residential property. The maximum loan-to-value ratio for rural,
remote, or unique properties is 80%. The maximum combined loan-to-value ratio,
including any related subordinate lien, is 100% for a refinance loan and 100%
for a purchase money loan. The maximum debt service-to-income ratio is usually
50% unless the loan-to-value ratio is reduced.
"B" Risk. Under the "B" risk category, an applicant may have
experienced isolated credit problems, but should have generally repaid
installment or revolving debt according to its terms or must have a FICO score
of 570 or higher. Unlimited 30-day late payments and a maximum of one 60-day
late payment within the last 12 months is acceptable on an existing mortgage
loan. An existing mortgage loan must be less than 90 days late at the time of
funding of the loan. As to non-mortgage credit, some prior defaults may have
occurred. Medical derogatories are not considered. In most cases, open
charge-offs or collection accounts with balances of less than $2,500 may remain
open after the funding of the loan. No bankruptcy within the past 18 months or
notice of default filings within the last two years by the applicant may have
occurred. The mortgaged property must be in at least average condition. A
maximum loan-to-value ratio of 85% (or 75% for mortgage loans originated under
the stated income documentation program), is permitted for a mortgage loan on an
owner-occupied detached property originated under the full documentation
program. A maximum loan-to-value ratio of 75% is permitted for a mortgage loan
on a non-owner-occupied property, an owner-occupied condominium or a three- to
four-family residential property (65% for a mortgage loan on a non-owner
occupied property and 70% for a mortgage loan on an owner-occupied condominium
or a three- to four-family residential property originated under the stated
income documentation program). The maximum loan-to-value ratio for rural, remote
or unique properties is 70%. The maximum combined loan-to-value ratio, including
any related subordinate lien, is 100% for a refinance loan and for a purchase
money loan. The maximum debt service-to-income ratio is usually 55% unless the
loan-to-value ratio is reduced.
"C" Risk. Under the "C" risk category, an applicant may have
experienced significant credit problems in the past. Unlimited 30-day and 60-day
late payments and a maximum of one 90-day late payment within the last 12 months
is acceptable on an existing mortgage loan. An existing mortgage loan
S-55
must be less than 120 days late at the time of funding of the loan. As to
non-mortgage credit, significant prior defaults may have occurred. Open
charge-offs or collection accounts with balances of less than $5,000 may remain
open after the funding of the loan. No bankruptcy or notice of default filings
by the applicant may have occurred during the preceding 12 months. The mortgaged
property must be in average condition. In most cases, a maximum loan-to-value
ratio of 75% for a mortgage loan on a single family, owner-occupied or two-unit
property for a full documentation program (70% for mortgage loans originated
under the stated income documentation program), is permitted. A maximum
loan-to-value ratio of 70% is permitted for a mortgage loan on a
non-owner-occupied property, an owner-occupied condominium or a three-to-four
family residential property (60% for a mortgage loan on a non-owner-occupied
property and 65% for a mortgage loan on an owner-occupied condominium or a
three- to four-family residential property originated under the stated income
documentation program). Rural, remote or unique properties are not allowed. The
maximum combined loan-to-value ratio, including any related subordinate lien, is
85% for a refinance loan and for a purchase money loan. The maximum debt
service-to-income ratio is usually 55% unless the loan-to-value ratio is
reduced.
"C-" Risk. Under the "C-" risk category, an applicant may have
experienced significant credit problems in the past. A maximum of two 90-day
late payments and one 120-day late payment is acceptable on an existing mortgage
loan. An existing mortgage loan must be less than 150 days late at the time of
funding of the loan. As to non-mortgage credit, significant prior defaults may
have occurred. Open charge-offs or collection accounts with balances may remain
open after the funding of the loan. There may be no current notice of default
and any bankruptcy must be discharged. The mortgaged property may exhibit some
deferred maintenance. A maximum loan-to-value ratio of 70% (55% for mortgage
loans originated under the stated income documentation program) is permitted for
a mortgage loan on a single family owner-occupied or two-unit property. A
maximum loan-to-value ratio of 65% is permitted for a mortgage loan on a
non-owner occupied property, an owner-occupied condominium or a three- to
four-family residential property (45% for a mortgage loan on a
non-owner-occupied property and 50% for a mortgage loan on an owner-occupied
condominium or a three- to four-family residential property originated under the
stated income documentation program). Rural, remote or unique properties are not
allowed. The maximum combined loan-to-value ratio, including any related
subordinate lien, is 85% for a refinance loan and 80% for a purchase money loan.
The maximum debt service-to-income ratio is usually 55% unless the loan-to-value
ratio is reduced.
Mortgage Credit Only ("MO") A+ Risk. Under the MO "A+" risk category,
the applicant is allowed a maximum of two 30-day late payments and no 60-day
late payments within the last 12 months on an existing mortgage loan. An
existing mortgage loan is required to be current at the time of funding. No
bankruptcy may have occurred within the past two years and no notice of default
filings may have occurred ever. The mortgaged property must be in at least
average condition. A maximum loan-to-value ratio of 85% for mortgage loans
originated under the full documentation program is permitted for a mortgage loan
on a single family owner-occupied or two-unit property. MO "A+" loans are not
made available under the stated income documentation program. A maximum
loan-to-value ratio of 80% is permitted for a mortgage loan on a non-owner
occupied property, owner-occupied condominium, or three- to four-family
residential property. The MO "A+" program is not available for rural, remote or
unique properties. The maximum combined loan-to-value ratio, including any
related subordinate lien, is 100% for a refinance loan. The maximum debt
service-to-income ratio is generally 50% unless the loan-to-value ratio is
reduced. The maximum loan amount is $300,000.
Mortgage Credit Only ("MO") A- Risk. The MO "A-" risk category allows
for three 30-day late payments and no 60-day late payments within the last 12
months on an existing mortgage loan. An existing mortgage loan is not required
to be current at the time the application is submitted. Derogatory items are
allowed as to non-mortgage credit. No bankruptcy or notice of default filings
may have occurred during the preceding two years. The mortgaged property must be
in at least average condition.
S-56
A maximum loan-to-value ratio of 75% for mortgage loans originated under the
full documentation program is permitted for a mortgage loan on a single family
owner-occupied or two-unit property. MO "A-" loans are not made available under
the stated income documentation program. A maximum loan-to-value ratio of 70% is
permitted for a mortgage loan on a non-owner occupied property, owner-occupied
condominium, or three- to four-family residential property. The MO "A-" program
is not available for rural, remote or unique properties. The maximum combined
loan-to-value ratio, including any related subordinate lien, is 90% for a
refinance loan. The debt service-to-income ratio is generally equal to or less
than 55%. The maximum loan amount is $250,000.
Home Saver Program. New Century originates loans under a program called
"Home Saver" to enable borrowers with an existing delinquent loan to preserve
their home ownership. The existing loan may be over 90 days delinquent, but any
bankruptcy proceeding must be dismissed before the loan is funded. The
loan-to-value ratio may not exceed 65%. Home Saver loans are not made available
under the stated income documentation program. A maximum loan-to-value ratio of
60% is permitted for a mortgage loan on a non-owner occupied property,
owner-occupied condominium or a three- to four-family residential property. The
Home Saver program is not available for rural, remote or unique properties. The
maximum combined loan-to-value ratio, including any related subordinate lien, is
80% for a refinance loan. The maximum loan amount is $300,000.
Credit Score Program. Under the "Credit Score Program" for full
documentation loans, the credit risk grade is determined by the primary
borrower's credit score. Loans with a minimum score of 630 and one 30-day late
mortgage payment can have a maximum loan-to-value ratio of 90%. Loans with a
minimum score of 600 can have a maximum loan-to-value ratio of 85%. Loans with a
minimum score of 580 can have a maximum loan-to-value ratio of 75%. Loans with a
minimum score of 540 can have a maximum loan-to-value ratio of 70%. The maximum
loan-to-value ratio is reduced by 5% for condominiums, full documentation
program non-owner occupied properties or stated income documentation loans.
Loans for non-owner occupied stated income, 3-4 unit properties, manufactured
housing, unique properties or properties located in rural or remote areas are
not allowed. No borrower, regardless of credit score, could have had a
foreclosure or bankruptcy within the last 2 years. All other derogatory credit
is factored into the credit score and is not evaluated individually. The maximum
debt service-to-income ratio for loans with loan-to-value ratios greater than or
equal to 85% is 50%. The maximum debt-to-service ratio for loans with
loan-to-value ratios less than 85% but greater than 70% is 55%. The maximum
debt-to-service ratio for loans with loan-to-value ratios less than or equal to
70% is 59%. The maximum loan amount for this program is $500,000.
Exceptions. As described above, the foregoing categories and criteria
are guidelines only. On a case-by-case basis, it may be determined that an
applicant warrants a debt service-to-income ratio exception, a pricing
exception, a loan-to-value ratio exception, an exception from certain
requirements of a particular risk category, etc. An exception may be allowed if
the application reflects compensating factors, such as: low loan-to-value ratio;
pride of ownership; a maximum of one 30-day late payment on all mortgage loans
during the last 12 months; and stable employment or ownership of current
residence of four or more years. An exception may also be allowed if the
applicant places a down payment through escrow of at least 20% of the purchase
price of the mortgaged property or if the new loan reduces the applicant's
monthly aggregate mortgage payment by 25% or more. Accordingly, a mortgagor may
qualify in a more favorable risk category than, in the absence of compensating
factors, would satisfy only the criteria of a less favorable risk category. It
is expected that a substantial portion of the Mortgage Loans will represent
these kinds of exceptions.
S-57
OCWEN FEDERAL BANK FSB
The information contained herein with regard to Ocwen has been provided
by Ocwen. None of the Depositor, the Seller, the Trustee, the Originator or any
of their respective affiliates has made any independent investigation of such
information or has made or will make any representation as to the accuracy or
completeness of such information.
General. Ocwen Federal Bank FSB is a federally chartered savings bank
with its home office in Fort Lee, New Jersey, its servicing operations in
Orlando, Florida and its corporate offices in West Palm Beach, Florida. Ocwen
Federal Bank FSB is a wholly owned subsidiary of Ocwen Financial Corporation, a
public financial services holding company ("OCN") headquartered in West Palm
Beach, Florida. OCN's primary businesses are the servicing, special servicing
and resolution of nonconforming, subperforming and nonperforming residential and
commercial mortgage loans for third parties, as well as providing loan servicing
technology and business-to-business e-commerce solutions for the mortgage and
real estate industries.
Ocwen Federal Bank FSB is rated "SQ1" as a primary servicer of subprime
loans and as a special servicer by Moody's Investors Service, Inc. ("Moody's"),
is rated as a "Strong" residential subprime servicer and residential special
servicer by Standard & Poor's Ratings Services, a division of The McGraw-Hill
Companies, Inc. ("S&P") and has an "RPS2" rating as a subprime servicer and an
"RSS2" rating as special servicer from Fitch Ratings ("Fitch" and, together with
Moody's and S&P, the "Rating Agencies"). In addition, Ocwen Federal Bank FSB is
an approved Freddie Mac and Fannie Mae seller/servicer. As of March 31, 2003,
Ocwen Federal Bank FSB provided servicing for residential mortgage loans with an
aggregate unpaid principal balance of approximately $30.2 billion, substantially
all of which are being serviced for third parties.
As of March 31, 2003, OCN had approximately $1.242 billion in assets,
approximately $939.5 million in liabilities and approximately $302.5 million in
equity. As of March 31, 2003, Ocwen Federal Bank FSB's core capital ratio was
approximately 13.46% and its total risk-based capital ratio was approximately
19.61%, as measured by the Office of Thrift Supervision. For the quarter ended
March 31, 2003, OCN's net loss was approximately $8.4 million, down from an
approximate net loss of $10.0 million reported for the quarter ended December
31, 2002. OCN reported approximately $216.8 million of cash and cash equivalents
as of March 31, 2003, up from approximately $192.2 million as of December 31,
2002. On August 14, 2002, Standard and Poor's lowered its long term credit
rating on Ocwen Financial Corporation and Ocwen Federal Bank FSB to "B-" and
"B+", respectively.
The following tables set forth, for the non-conforming credit mortgage
loan servicing portfolio serviced by Ocwen Federal Bank FSB, certain information
relating to the delinquency, foreclosure, REO and loss experience with respect
to such mortgage loans (including loans in foreclosure in Ocwen Federal Bank
FSB's servicing portfolio (which portfolio does not include mortgage loans that
are subserviced by others)) at the end of the indicated periods. The indicated
periods of delinquency are based on the number of days past due on a contractual
basis. No mortgage loan is considered delinquent for these purposes until it is
one month past due on a contractual basis.
S-58
OCWEN
DELINQUENCIES AND FORECLOSURES
(DOLLARS IN THOUSANDS)
AS OF AS OF
DECEMBER 31, 2000 DECEMBER 31, 2001
---------------------------------------------- -----------------------------------------------
BY NO. PERCENT BY PERCENT BY BY NO. PERCENT BY PERCENT BY
OF BY DOLLAR NO. OF DOLLAR OF BY DOLLAR NO. OF DOLLAR
LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT
----- ------ ----- ------ ----- ------ ----- ------
Total Portfolio ........ 87,846 $ 7,436,096 100.00% 100.00% 186,955 $17,422,016 100.00% 100.00%
Period of Delinquency(1)
30-59 days ......... 4,654 383,087 5.30 5.15 8,520 719,620 4.56 4.13
60-89 days ......... 2,164 178,911 2.46 2.41 3,755 324,753 2.01 1.86
90 days or more .... 14,119 1,192,144 16.07 16.03 22,709 1,896,796 12.15 10.89
Total Delinquent Loans . 20,937 1,754,142 23.83 23.59 34,984 2,941,169 18.71 16.88
Loans in Foreclosure(2) 6,015 530,414 6.85 7.13 10,286 908,884 5.50 5.22
AS OF AS OF
DECEMBER 31, 2002 DECEMBER 31, 2003
---------------------------------------------- -----------------------------------------------
BY NO. PERCENT BY PERCENT BY BY NO. PERCENT BY PERCENT BY
OF BY DOLLAR NO. OF DOLLAR OF BY DOLLAR NO. OF DOLLAR
LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT
----- ------ ----- ------ ----- ------ ----- ------
Total Portfolio ........ 229,335 $26,356,007 100.00% 100.00% 222,978 $25,248,125 100.00% 100.00%
Period of Delinquency(1)
30-59 days ......... 8,483 858,552 3.70 3.26 6,556 693,187 2.94 2.75
60-89 days ......... 3,718 393,762 1.62 1.49 3,066 339,412 1.38 1.34
90 days or more .... 19,823 1,820,509 8.64 6.91 20,992 1,970,614 9.41 7.80
Total Delinquent Loans . 32,024 3,072,823 13.96 11.66 30,614 3,003,213 13.73 11.89
Loans in Foreclosure(2) 4,342 436,557 1.89 1.66 9,524 1,015,300 4.27 4.02
- -----------
(1) Includes 18,559 loans totaling $1,581,233 for March 31, 2003, which were
delinquent at the time of transfer to Ocwen.
(2) Loans in foreclosure are also included under the heading "Total Delinquent
Loans."
S-59
OCWEN
REAL ESTATE OWNED
(DOLLARS IN THOUSANDS)
AT AT AT AT
DECEMBER 31, 2000 DECEMBER 31, 2001 DECEMBER 31, 2002 MARCH 31, 2003
---------------------------------------------------------------------------------------------------
BY NO. OF BY DOLLAR BY NO. OF BY DOLLAR BY NO. OF BY DOLLAR BY NO. OF BY DOLLAR
LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT
----- ------ ----- ------ ----- ------ ----- ------
Total Portfolio.......... 87,846 $7,436,096 186,955 $17,422,016 229,335 $26,356,007 222,978 $25,248,125
Foreclosed Loans(1)...... 2,982 $ 236,264 3,983 $ 301,782 3,484 $ 285,598 3,925 $ 329,968
Foreclosure Ratio(2)..... 3.39% 3.18% 2.13% 1.73% 1.52% 1.08% 1.76% 1.31%
- ------------
(1) For the purpose of these tables, "Foreclosed Loans" means the principal
balance of mortgage loans secured by mortgaged properties the title to
which has been acquired by Ocwen.
(2) The "Foreclosure Ratio" is equal to the aggregate principal balance or
number of Foreclosed Loans divided by the aggregate principal balance, or
number, as applicable, of mortgage loans in the Total Portfolio at the end
of the indicated period.
OCWEN
LOAN GAIN/(LOSS) EXPERIENCE
(DOLLARS IN THOUSANDS)
AS OF AS OF AS OF AS OF
DECEMBER 31, 2000 DECEMBER 31, 2001 DECEMBER 31, 2002 MARCH 31, 2003
----------------- ----------------- ----------------- --------------
Total Portfolio(1)................ $7,436,096 $17,422,016 $26,356,007 $25,248,125
Net Gains/(Losses) (2)(3)......... ($282,261) ($266,262) ($275,036) ($231,211)
Net Gains/(Losses) as a
Percentage of Total Portfolio.. (3.80)% (1.53)% (1.04)% (0.92)%
- ------------
(1) "Total Portfolio" on the date stated above is the principal balance of the
mortgage loans outstanding on the last day of the period.
(2) "Net Gains/(Losses)" are actual gains or losses incurred on liquidated
properties and shortfall payoffs for each respective period. Gains or
losses on liquidated properties are calculated as net sales proceeds less
unpaid principal at the time of payoff. Shortfall payoffs are calculated as
the difference between the principal payoff amount and unpaid principal at
the time of payoff.
(3) Includes ($144,166) as of March 31, 2003 of losses attributable to loans
that were delinquent at the time of transfer to Ocwen.
S-60
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Asset Backed Pass-Through Certificates, Series 2003-HE3 will be
issued pursuant to the Pooling Agreement. Set forth below are summaries of the
specific terms and provisions pursuant to which the Offered Certificates will be
issued. The following summaries do not purport to be complete and are subject
to, and are qualified in their entirety by reference to, the provisions of the
Pooling Agreement. When particular provisions or terms used in the Pooling
Agreement are referred to, the actual provisions (including definitions of
terms) are incorporated by reference.
The Trust will issue
o the Class A1 Certificates,
o the Class A2 Certificates,
o the Class A-IO Certificates,
o the Class A-INV-IO Certificates,
o the Class M1 Certificates,
o the Class M2 Certificates,
o the Class M3 Certificates,
o the Class M4 Certificates,
o the Class M5 Certificates,
o the Class B-IO Certificates,
o the Class X Certificates,
o the Class P Certificates, and
o the Class R Certificates.
The Class A1 Certificates and Class A2 Certificates are referred to as
the "Class A Certificates." The Class M1 Certificates, Class M2 Certificates,
Class M3 Certificates, Class M4 Certificates and Class M5 Certificates are
referred to as the "Mezzanine Certificates," or the "Offered Subordinate
Certificates." The Class R Certificates are referred to as the "Residual
Certificates." The Class A-INV-IO Certificates, Class B-IO Certificates, Class X
Certificates, Class P Certificates and the Residual Certificates are referred to
as the "Physical Certificates." The Class A Certificates, Class A-IO
Certificates and Class A-INV-IO Certificates are referred to as the "Senior
Certificates." The Offered Subordinate Certificates and the Physical
Certificates, other than the Class A-INV-IO Certificates, are referred to as the
"Subordinate Certificates." The Class A Certificates and the Offered Subordinate
Certificates are referred to as the "LIBOR Certificates." Only the LIBOR
Certificates and the Class A-IO Certificates are offered hereby (together, the
"Offered Certificates").
The Offered Certificates will have the initial Certificate Principal
Balances or Notional Amounts specified in the table beginning on page S-6,
subject to a permitted variance of plus or minus five percent. The Class A-IO,
Class A-INV-IO and Class B-IO Certificates will not have a Certificate Principal
Balance, but will bear interest on their respective Notional Amount from time to
time. The Class P Certificates will have an initial Certificate Principal
Balance of $100 and will not bear interest. The Class P Certificates will be
entitled to all prepayment premiums received in respect of the Mortgage Loans,
and such amounts will not be available for distribution to the holders of the
Offered Certificates. The Class R Certificates will not have an initial
Certificate Principal Balance and will not bear interest.
The Offered Certificates will be issued in book-entry form as described
below. All classes of Offered Certificates, other than the Class A-IO
Certificates, will be issued in minimum denominations of
S-61
$25,000 original principal amount and integral multiples of $1 in excess
thereof. The Class A-IO Certificates will be issued in minimum denominations of
$100,000 original notional amount and integral multiples of $1 in excess
thereof. The assumed final maturity date (the "Assumed Final Distribution Date")
for the Offered Certificates is the Distribution Date in June 2033.
Distributions on the Offered Certificates will be made by the Trustee
on the 15th day of each month, or if such day is not a business day, on the
first business day thereafter, commencing on July 15, 2003 (each, a
"Distribution Date"), to the persons in whose names such certificates are
registered at the close of business on the Record Date. The "Record Date" for
any certificate issued in book-entry form is the business day immediately
preceding such Distribution Date and the "Record Date" for any physical
certificate or any book-entry certificate that becomes a definitive certificate
(as defined herein), will be the last business day of the month immediately
preceding the month in which the related Distribution Date occurs.
BOOK-ENTRY CERTIFICATES
The Offered Certificates will be book-entry certificates (the
"Book-Entry Certificates"). Persons acquiring beneficial ownership interests in
the Book-Entry Certificates ("Certificate Owner") will hold such certificates
through The Depository Trust Company ("DTC") in the United States, or
Clearstream Banking Luxembourg, formerly known as Cedelbank SA ("Clearstream")
or Euroclear (in Europe) if they are participants of such systems, or indirectly
through organizations which are participants in such systems. The Book-Entry
Certificates will be issued in one or more certificates that equal the aggregate
Certificate Principal Balance of such certificates and will initially be
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 The Chase Manhattan Bank
will act as depositary for Euroclear (in such capacities, individually the
"Relevant Depositary" and collectively the "European Depositaries"). Investors
may hold such beneficial interests in the Book-Entry Certificates in the minimum
denominations described above under "--General." Except as described below, no
person acquiring a Book-Entry Certificate (each, a "beneficial owner") will be
entitled to receive a physical certificate representing such certificate (a
"Definitive Certificate"). Unless and until Definitive Certificates are issued,
it is anticipated that the only certificateholder of the Offered Certificates
will be Cede & Co., as nominee of DTC. Certificate Owners will not be
certificateholders as that term is used in the Pooling 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 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 Trustee through DTC and DTC
participants. While the Book-Entry Certificates are outstanding (except under
the circumstances described below), under the rules, regulations and procedures
creating and affecting DTC and its operations (the "Rules"), DTC is required to
make book-entry transfers among Participants on whose behalf it acts with
respect to the Book-Entry Certificates and is required to receive and transmit
distributions of principal of, and interest on, the Book-Entry
S-62
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 (as defined below) or Euroclear Participant (as defined
below) 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.
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 DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by the Relevant Depositary; however, such cross market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in accordance
with its rules and procedures and within its established deadlines (European
time). The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to the
Relevant Depositary to take action to effect final settlement on its behalf by
delivering or receiving securities in DTC, and making or receiving payment in
accordance with normal procedures for same day funds settlement applicable to
DTC. Clearstream Participants and Euroclear Participants may not deliver
instructions directly to the European Depositaries.
DTC, which is a New York-chartered limited purpose trust company,
performs services for its participants, some of which (and/or their
representatives) own DTC. In accordance with its normal procedures, DTC is
expected to record the positions held by each DTC participant in the Book-Entry
Certificates, whether held for its own account or as a nominee for another
person. In general, beneficial ownership of Book-Entry Certificates will be
subject to the Rules, as in effect from time to time.
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Clearstream, 67 Bd Grande-Duchesse Charlotte, L-1331 Luxembourg, 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 ("IML"), 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 Morgan Guaranty Trust 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 worldwide 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 any of 29
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 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
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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 Trustee to DTC. DTC will be responsible for crediting
the amount of such payments to the accounts of the applicable DTC participants
in accordance with DTC's normal procedures. Each DTC participant will be
responsible for disbursing such payments to the beneficial owners of the
Book-Entry Certificates that it represents and to each Financial Intermediary
for which it acts as agent. Each such Financial Intermediary will be responsible
for disbursing funds to the beneficial owners of the Book-Entry Certificates
that it represents.
Under a book-entry format, beneficial owners of the Book-Entry
Certificates may experience some delay in their receipt of payments, since such
payments will be forwarded by the Trustee 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.
Because DTC can only act on behalf of Financial Intermediaries, the ability of a
beneficial owner to pledge Book-Entry Certificates to persons or entities that
do not participate in the Depository system, or otherwise take actions in
respect of such Book-Entry Certificates, may be limited due to the lack of
physical certificates for such Book-Entry Certificates. In addition, issuance of
the Book-Entry Certificates in book-entry form may reduce the liquidity of such
certificates in the secondary market since certain potential investors may be
unwilling to purchase certificates for which they cannot obtain physical
certificates.
Monthly and annual reports on the Trust will be provided to Cede & Co.,
as nominee of DTC, and may be made available by Cede & Co. to beneficial owners
upon request, in accordance with the rules, regulations and procedures creating
and affecting the Depository, and to the Financial Intermediaries to whose DTC
accounts the Book-Entry Certificates of such beneficial owners are credited.
DTC has advised the Trustee that, unless and until Definitive
Certificates are issued, DTC will take any action permitted to be taken by the
holders of the Book-Entry Certificates under the 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 Trustee in writing that DTC is no longer willing,
qualified or able to discharge properly its responsibilities as nominee and
depository with respect to the Book-Entry Certificates and the Depositor 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, beneficial owners having Percentage Interests
aggregating not less than 51% of the Book-Entry Certificates advise the Trustee
and DTC through the Financial Intermediaries
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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 Trustee 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 Trustee will issue Definitive Certificates, and thereafter
the Trustee will recognize the holders of such Definitive Certificates as
certificateholders 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. See "Annex I" to this prospectus supplement.
None of the Depositor, the Originator, the Seller, the Servicer nor the
Trustee will have any responsibility for any aspect of the records relating to
or payments made on account of beneficial ownership interests of the Book-Entry
Certificates held by Cede & Co., as nominee for DTC, or for maintaining,
supervising or reviewing any records relating to such beneficial ownership
interests.
GLOSSARY
The "Accrual Period" for (a) the Class A-IO Certificates for a given
Distribution Date will be the calendar month preceding the month of such
Distribution Date based on a 360-day year consisting of twelve 30-day months,
(b) the LIBOR Certificates for a given Distribution Date will be the actual
number of days (based on a 360-day year) included in the period commencing on
the immediately preceding Distribution Date (or, in the case of the first such
Accrual Period, commencing on the Closing Date) and ending on the day
immediately preceding such Distribution Date, (c) the Class A-INV-IO
Certificates for a given Distribution Date will be the actual number of days
(based on a 360-day year) included in the period commencing on the immediately
preceding Distribution Date (or, in the case of the first such Accrual Period,
commencing on the Closing Date) and ending on the day immediately preceding such
Distribution Date and (d) the Class B-IO Certificates for a given Distribution
Date will be the period beginning on the prior Distribution Date (or, in the
case of the first such Accrual Period, commencing on the Closing Date) and
ending the day preceding such Distribution Date based on a 360-day year
consisting of twelve 30-day months.
An "Allocated Realized Loss Amount" with respect to any class of
Offered Subordinate Certificates and any Distribution Date is an amount equal to
the sum of (i) any Realized Loss allocated to that class of certificates on that
Distribution Date and (ii) any Allocated Realized Loss Amount for that class of
certificates from the previous Distribution Date that has not been reimbursed.
The "Basic Principal Distribution Amount" means with respect to any
Distribution Date the amounts in clauses (b)(i) - (iv) of the definition of
Principal Distribution Amount.
The "Certificate Principal Balance" of any LIBOR Certificate or Class P
Certificate immediately prior to any Distribution Date will be equal to the
Certificate Principal Balance thereof on the Closing Date (the "Original
Certificate Principal Balance") reduced by the sum of (a) all amounts actually
distributed in respect of principal of such class and (b) with respect to the
Offered Subordinate Certificates, any reductions in the Certificate Principal
Balance thereof deemed to have occurred in connection with allocations of
Realized Losses on all prior Distribution Dates.
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The "Class A Principal Distribution Amount" is an amount equal to the
excess of (x) the aggregate Certificate Principal Balance of the Class A
Certificates immediately prior to such Distribution Date over (y) the lesser of
(A) the product of (1) approximately 59.80% and (2) the aggregate Principal
Balance of the Mortgage Loans as of the last day of the related Due Period and
(B) the aggregate Principal Balance of the Mortgage Loans as of the last day of
the related Due Period minus $3,033,762.
The "Class A-INV-IO Notional Balance" will equal, for any Distribution
Date the amount set forth below for such Distribution Date:
Class A-INV-IO Class A-INV-IO
Notional Notional
Distribution Date Balance ($) Distribution Date Balance ($)
----------------- ----------- ----------------- -----------
July 2003.................... 600,000,000 July 2004.................... 356,700,000
August 2003.................. 574,600,000 August 2004.................. 341,500,000
September 2003............... 550,200,000 September 2004............... 327,000,000
October 2003................. 526,900,000 October 2004................. 313,100,000
November 2003................ 504,500,000 November 2004................ 299,800,000
December 2003................ 483,100,000 December 2004................ 287,100,000
January 2004................. 462,600,000 January 2005................. 274,900,000
February 2004................ 443,000,000 February 2005................ 263,200,000
March 2004................... 424,200,000 March 2005................... 252,000,000
April 2004................... 406,200,000 April 2005................... 241,300,000
May 2004..................... 389,000,000 May 2005..................... 231,100,000
June 2004.................... 372,500,000 June 2005.................... 221,200,000
On and after the Distribution Date in July 2005, the Class A-INV-IO
Notional Balance will be $0.
The "Class A-IO Notional Balance" will equal, for any Distribution Date
the amount set forth below for such Distribution Date:
Class A-IO Class A-IO
Notional Notional
Distribution Date Balance ($) Distribution Date Balance ($)
----------------- ----------- ----------------- -----------
July 2003.................... 47,500,000 July 2004.................... 35,800,000
August 2003.................. 46,400,000 August 2004.................. 34,900,000
September 2003............... 45,400,000 September 2004............... 34,000,000
October 2003................. 44,400,000 October 2004................. 33,200,000
November 2003................ 43,400,000 November 2004................ 32,400,000
December 2003................ 42,400,000 December 2004................ 31,600,000
January 2004................. 41,500,000 January 2005................. 30,800,000
February 2004................ 40,500,000 February 2005................ 30,000,000
March 2004................... 39,500,000 March 2005................... 29,300,000
April 2004................... 38,600,000 April 2005................... 28,500,000
May 2004..................... 37,600,000 May 2005..................... 27,800,000
June 2004.................... 36,700,000 June 2005.................... 27,100,000
On and after the Distribution Date in July 2005, the Class A-IO Notional Balance
will be $0.
The "Class A1 Percentage" will equal, with respect to any Distribution
Date, the percentage equivalent of a fraction, the numerator of which is the
Subgroup 1 Principal Remittance Amount for such Distribution Date and the
denominator of which is the Principal Remittance Amount for such Distribution
Date.
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The "Class A2 Percentage" will equal, with respect to any Distribution
Date, 100% minus the Class A1 Percentage for such Distribution Date.
The "Class M1 Principal Distribution Amount" is an amount equal to the
excess of (x) the sum of (1) the aggregate Certificate Principal Balance of the
Class A Certificates (after taking into account the payment of the Class A
Principal Distribution Amount on such Distribution Date) and (2) the Certificate
Principal Balance of the Class M1 Certificates immediately prior to such
Distribution Date over (y) the lesser of (A) the product of (1) approximately
72.80% and (2) the aggregate Principal Balance of the Mortgage Loans as of the
last day of the related Due Period and (B) the aggregate Principal Balance of
the Mortgage Loans as of the last day of the related Due Period minus
$3,033,762.
The "Class M2 Principal Distribution Amount" is an amount equal to the
excess of (x) the sum of (1) the aggregate Certificate Principal Balance of the
Class A Certificates (after taking into account the payment of the Class A
Principal Distribution Amount on such Distribution Date), (2) the Certificate
Principal Balance of the Class M1 Certificates (after taking into account the
payment of the Class M1 Principal Distribution Amount on such Distribution Date)
and (3) the Certificate Principal Balance of the Class M2 Certificates
immediately prior to such Distribution Date over (y) the lesser of (A) the
product of (1) approximately 83.80% and (2) the aggregate Principal Balance of
the Mortgage Loans as of the last day of the related Due Period and (B) the
aggregate Principal Balance of the Mortgage Loans as of the last day of the
related Due Period minus $3,033,762.
The "Class M3 Principal Distribution Amount" is an amount equal to the
excess of (x) the sum of (1) the aggregate Certificate Principal Balance of the
Class A Certificates (after taking into account the payment of the Class A
Principal Distribution Amount on such Distribution Date), (2) the Certificate
Principal Balance of the Class M1 Certificates (after taking into account the
payment of the Class M1 Principal Distribution Amount on such Distribution
Date), (3) the Certificate Principal Balance of the Class M2 Certificates (after
taking into account the payment of the Class M2 Principal Distribution Amount on
such Distribution Date) and (4) the Certificate Principal Balance of the Class
M3 Certificates immediately prior to such Distribution Date over (y) the lesser
of (A) the product of (1) approximately 87.30% and (2) the aggregate Principal
Balance of the Mortgage Loans as of the last day of the related Due Period and
(B) the aggregate Principal Balance of the Mortgage Loans as of the last day of
the related Due Period minus $3,033,762.
The "Class M4 Principal Distribution Amount" is an amount equal to the
excess of (x) the sum of (1) the aggregate Certificate Principal Balance of the
Class A Certificates (after taking into account the payment of the Class A
Principal Distribution Amount on such Distribution Date), (2) the Certificate
Principal Balance of the Class M1 Certificates (after taking into account the
payment of the Class M1 Principal Distribution Amount on such Distribution
Date), (3) the Certificate Principal Balance of the Class M2 Certificates (after
taking into account the payment of the Class M2 Principal Distribution Amount on
such Distribution Date), (4) the Certificate Principal Balance of the Class M3
Certificates (after taking into account the payment of the Class M3 Principal
Distribution Amount on such Distribution Date) and (5) the Certificate Principal
Balance of the Class M4 Certificates immediately prior to such Distribution Date
over (y) the lesser of (A) the product of (1) approximately 92.30% and (2) the
aggregate Principal Balance of the Mortgage Loans as of the last day of the
related Due Period and (B) the aggregate Principal Balance of the Mortgage Loans
as of the last day of the related Due Period minus $3,033,762.
The "Class M5 Principal Distribution Amount" is an amount equal to the
excess of (x) the sum of (1) the aggregate Certificate Principal Balance of the
Class A Certificates (after taking into account the payment of the Class A
Principal Distribution Amount on such Distribution Date), (2) the Certificate
Principal Balance of the Class M1 Certificates (after taking into account the
payment of the Class M1
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Principal Distribution Amount on such Distribution Date), (3) the Certificate
Principal Balance of the Class M2 Certificates (after taking into account the
payment of the Class M2 Principal Distribution Amount on such Distribution
Date), (4) the Certificate Principal Balance of the Class M3 Certificates (after
taking into account the payment of the Class M3 Principal Distribution Amount on
such Distribution Date), (5) the Certificate Principal Balance of the Class M4
Certificates (after taking into account the payment of the Class M4 Principal
Distribution Amount on such Distribution Date) and (6) the Certificate Principal
Balance of the Class M5 Certificates immediately prior to such Distribution Date
over (y) the lesser of (A) the product of (1) approximately 95.30% and (2) the
aggregate Principal Balance of the Mortgage Loans as of the last day of the
related Due Period and (B) the aggregate Principal Balance of the Mortgage Loans
as of the last day of the related Due Period minus $3,033,762.
The "Credit Enhancement Percentage" for any Distribution Date is the
percentage obtained by dividing (x) the sum of (i) the aggregate Certificate
Principal Balance of the Offered Subordinate Certificates (after giving effect
to the distribution of the Principal Distribution Amount on such Distribution
Date) and (ii) the Overcollateralized Amount (after giving effect to the
distribution of the Principal Distribution Amount on such Distribution Date) by
(y) the aggregate Principal Balance of the Mortgage Loans as of the last day of
the related Due Period.
A Mortgage Loan is "Delinquent" if any monthly payment due on a Due
Date is not made by the close of business on the next scheduled Due Date for
such Mortgage Loan. A Mortgage Loan is "30 days Delinquent" if such monthly
payment has not been received by the close of business on the corresponding day
of the month immediately succeeding the month in which such monthly payment was
due or, if there was no such corresponding day (e.g., as when a 30-day month
follows a 31-day month in which a payment was due on the 31st day of such
month), then on the last day of such immediately succeeding month; and similarly
for "60 days Delinquent" and "90 days Delinquent" etc.
A "Due Period" with respect to any Distribution Date is the period
commencing on the second day of the month immediately preceding the month in
which such Distribution Date occurs and ending on the first day of the month in
which such Distribution Date occurs.
The "Interest Remittance Amount" with respect to any Distribution Date
is that portion of the Available Funds for such Distribution Date attributable
to interest received or advanced with respect to the Mortgage Loans and
Compensating Interest paid by the Servicer with respect to the Mortgage Loans.
The "Monthly Interest Distributable Amount" for any Distribution Date
and each class of Offered, Class A-INV-IO and Class B-IO Certificates will equal
the amount of interest accrued during the related Accrual Period at the related
Pass-Through Rate on the Certificate Principal Balance, or in the case of the
Class A-IO, Class A-INV-IO and Class B-IO Certificates, on their respective
Notional Amount for such Distribution Date, in each case, reduced by any Net
Prepayment Interest Shortfalls and Relief Act Interest Shortfalls allocated to
such class (allocated to each class based on its respective entitlements to
interest irrespective of any Net Prepayment Interest Shortfalls or Relief Act
Interest Shortfalls for such Distribution Date).
The "Net Monthly Excess Cashflow" for any Distribution Date is equal to
the sum of (a) any Overcollateralization Release Amount and (b) the excess of
(x) the Available Funds for such Distribution Date over (y) the sum for such
Distribution Date of (A) the Monthly Interest Distributable Amounts for the
Offered Certificates, the Class A-INV-IO Certificates and the Class B-IO
Certificates, (B) the Unpaid Interest Shortfall Amounts for the Class A
Certificates, the Class A-IO Certificates and the Class A-INV-IO Certificates,
(C) the Principal Remittance Amount and (D) the Strip Amount.
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The "Notional Amount" for the Class A-IO Certificates will equal (x) on
or prior to the Distribution Date in June 2005, the lesser of (i) the Class A-IO
Notional Balance and (ii) the aggregate Principal Balance of the Mortgage Loans
as of the first day of the month prior to the month of such Distribution Date
(after giving effect to scheduled payments of principal due on such date) and
(y) on any Distribution Date after the Distribution Date in June 2005, $0.00.
The "Notional Amount" for the Class A-INV-IO Certificates will equal (x) on or
prior to the Distribution Date in June 2005, the lesser of (i) the Class
A-INV-IO Notional Balance and (ii) the aggregate Principal Balance of the
Mortgage Loans as of the first day of the month prior to the month of such
Distribution Date (after giving effect to scheduled payments of principal due on
such date) and (y) on any Distribution Date after the Distribution Date in June
2005, $0.00. The "Notional Amount" for the Class B-IO Certificates will equal
(x) on or prior to the Distribution Date in June 2005, the lesser of (i)
$52,000,000 and (ii) the aggregate Principal Balance of the Mortgage Loans as of
the first day of the month prior to the month of such Distribution Date (after
giving effect to scheduled payments of principal due on such date) and (y) on
any Distribution Date after the Distribution Date in June 2005, $0.00.
An "Overcollateralization Deficiency Amount" with respect to any
Distribution Date equals the amount, if any, by which the Overcollateralization
Target Amount exceeds the Overcollateralized Amount on such Distribution Date
(after giving effect to distributions in respect of the Basic Principal
Distribution Amount on such Distribution Date).
The "Overcollateralization Increase Amount" for any Distribution Date
is the lesser of (x) the Net Monthly Excess Cashflow for such Distribution Date
and (y) the Overcollateralization Deficiency Amount for such Distribution Date.
The "Overcollateralization Release Amount" means, with respect to any
Distribution Date, the lesser of (x) the Basic Principal Distribution Amount for
such Distribution Date and (y) the excess, if any, of (1) the Overcollateralized
Amount for such Distribution Date (assuming that 100% of the Basic Principal
Distribution Amount is applied as a principal payment on such Distribution Date)
over (2) the Overcollateralization Target Amount for such Distribution Date.
The "Overcollateralization Target Amount" means with respect to any
Distribution Date (1) prior to the Stepdown Date, approximately 2.35% of the
aggregate Principal Balance of the Mortgage Loans as of the Cut-off Date, (2) on
or after the Stepdown Date provided a Trigger Event is not in effect, the
greater of (x) 4.70% of the aggregate Principal Balance of the Mortgage Loans as
of the last day of the related Due Period and (y) $3,033,762, and (3) on or
after the Stepdown Date if a Trigger Event is in effect, the
Overcollateralization Target Amount for the immediately preceding Distribution
Date.
The "Overcollateralized Amount" for any Distribution Date is the
amount, if any, by which (x) the Pool Balance as of the last day of the related
Due Period exceeds (y) the sum of the aggregate Certificate Principal Balance of
the LIBOR Certificates as of such Distribution Date (after giving effect to
distributions to be made on such Distribution Date).
The "Prepayment Period" for any Distribution Date is the calendar month
prior to the month in which such Distribution Date occurs.
The "Principal Distribution Amount" for any Distribution Date is the
lesser of:
(a) the excess of Available Funds after distribution of interest
on the Class A, Class A-INV-IO, Class A-IO and Subordinate
Certificates, including, with respect to
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the Class A, Class A-INV-IO and Class A-IO Certificates, any
Unpaid Interest Shortfall Amounts and the Strip Amount; and
(b) the sum of:
(i) the principal portion of all scheduled monthly
payments on the Mortgage Loans due during the related
Due Period, whether or not received on or prior to
the related Determination Date;
(ii) the principal portion of all proceeds received in
respect of the repurchase of a Mortgage Loan (or, in
the case of a substitution, certain amounts
representing a principal adjustment) as required by
the Pooling Agreement during the calendar month
preceding the month of such Distribution Date;
(iii) the principal portion of all unscheduled collections
in respect of insurance proceeds and liquidation
proceeds received during the calendar month preceding
the month of such Distribution Date, to the extent
applied as recoveries of principal on the Mortgage
Loans;
(iv) the principal portion of all unscheduled collections
in respect of full and partial principal prepayments
received during the related Prepayment Period;
(v) the principal portion of any Realized Losses incurred
on any Mortgage Loan during the calendar month
preceding the month of such Distribution Date to the
extent covered by Net Monthly Excess Cashflow for
such Distribution Date; and
(vi) the amount of any Overcollateralization Increase
Amount for such Distribution Date;
minus
(vii) the amount of any Overcollateralization Release
Amount for such Distribution Date.
In no event will the Principal Distribution Amount with respect to any
Distribution Date be (x) less than zero or (y) greater than the outstanding
Certificate Principal Balance of the LIBOR Certificates.
The "Principal Remittance Amount" means with respect to any
Distribution Date, that portion of Available Funds equal to the sum of (i) all
scheduled payments of principal collected or advanced on the Mortgage Loans by
the Servicer that were due during the related Due Period, (ii) the principal
portion of all partial and full principal prepayments of the Mortgage Loans
applied by the Servicer during the related Prepayment Period, (iii) the
principal portion of all related Net Liquidation Proceeds and Insurance Proceeds
received during the calendar month preceding the month of such Distribution
Date, (iv) that portion of the Purchase Price, representing principal of any
repurchased Mortgage Loan, deposited to the Collection Account during the
calendar month preceding the month of such Distribution Date, (v) the principal
portion of any related Substitution Adjustments deposited in the Collection
Account during the calendar month preceding the month of such Distribution Date,
and (vi) on the Distribution Date on which the Trust is to be terminated in
accordance with the Pooling Agreement, that portion of the Termination Price, in
respect of principal.
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A "Realized Loss" means, with respect to any defaulted Mortgage Loan
that is finally liquidated (a "Liquidated Mortgage Loan"), the amount of loss
realized equal to the portion of the Principal Balance remaining unpaid after
application of all liquidation proceeds net of amounts reimbursable to the
Servicer for related Advances, Servicing Advances and Servicing Fees (such
amount, the "Net Liquidation Proceeds") in respect of such Mortgage Loan.
The "Stepdown Date" means the earlier to occur of (1) the Distribution
Date on which the aggregate Certificate Principal Balance of the Class A
Certificates has been reduced to zero and (2) the later to occur of (x) the
Distribution Date occurring in July 2006 and (y) the first Distribution Date on
which the Credit Enhancement Percentage is greater than or equal to 40.20%.
The "Strip Amount" means with respect to any Distribution Date on or
prior to the Distribution Date in June 2005, the product of approximately
0.1956% per annum and the Scheduled Notional Amount (as defined below under
"--The Yield Maintenance Agreement") for that Distribution Date, and after the
Distribution Date in June 2005, zero.
The "Subgroup 1 Interest Remittance Amount" with respect to any
Distribution Date is that portion of the Available Funds for such Distribution
Date attributable to interest received or advanced with respect to the Subgroup
1 Mortgage Loans and Compensating Interest paid by the Servicer with respect to
the Subgroup 1 Mortgage Loans.
The "Subgroup 1 Principal Remittance Amount" means, with respect to any
Distribution Date, the portion of the Principal Remittance Amount for such
Distribution Date derived from the Subgroup 1 Mortgage Loans.
The "Subgroup 2 Interest Remittance Amount" with respect to any
Distribution Date is that portion of the Available Funds for such Distribution
Date attributable to interest received or advanced with respect to the Subgroup
2 Mortgage Loans and Compensating Interest paid by the Servicer with respect to
the Subgroup 2 Mortgage Loans.
A "Trigger Event" is in effect with respect to any Distribution Date on
or after the Stepdown Date if either (i) the percentage obtained by dividing (x)
the aggregate Principal Balance of the Mortgage Loans that are 60 days or more
Delinquent as of the last day of the prior calendar month by (y) the aggregate
Principal Balance of the Mortgage Loans as of the last day of the previous
calendar month exceeds 40% of the Credit Enhancement Percentage for such
Distribution Date or (ii) the cumulative Realized Losses as a percentage of the
aggregate Principal Balance of the Mortgage Loans as of the last day of the
previous calendar month is greater than the percentage set forth in the
following table:
- ------------------------------------------- --------------------------------
Range of Distribution Dates Percentage*
- ------------------------------------------- --------------------------------
July 2006 - June 2007 2.75%
- ------------------------------------------- --------------------------------
July 2007 - June 2008 4.25%
- ------------------------------------------- --------------------------------
July 2008 - June 2009 5.75%
- ------------------------------------------- --------------------------------
July 2009 and thereafter 6.50%
- ------------------------------------------- --------------------------------
---------
* The percentages indicated are the percentages applicable for the
first Distribution Date in the corresponding range of Distribution
Dates. The percentage for each succeeding Distribution Date in a
range increases incrementally by 1/12th of the positive difference
between the percentage applicable to the first Distribution Date
in that range and the percentage applicable to the first
Distribution Date in the succeeding range.
The "Unpaid Interest Shortfall Amount" means (i) for the first
Distribution Date and with respect to the Class A Certificates, the Class A-IO
Certificates, the Class A-INV-IO Certificates, the Mezzanine Certificates and
the Class B-IO Certificates, zero, and (ii) for such class of certificates and
any
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Distribution Date after the first Distribution Date, the amount, if any, by
which (a) the sum of (1) the Monthly Interest Distributable Amount for such
class of certificates for the immediately preceding Distribution Date and (2)
the outstanding Unpaid Interest Shortfall Amount, if any, for such class of
certificates for such preceding Distribution Date exceeds (b) the aggregate
amount distributed on such class of certificates in respect of interest on such
preceding Distribution Date, plus (except with respect to the Class A-IO, Class
A-INV-IO and Class B-IO Certificates) interest on the amount of interest due but
not paid on the class of certificates on such preceding Distribution Date, to
the extent permitted by law, at the Pass-Through Rate on such Distribution Date
for such class of certificates for the related Accrual Period.
The "Unpaid Realized Loss Amount" means for any class of Offered
Subordinate Certificates, the portion of the aggregate Allocated Realized Loss
Amount previously allocated to that class remaining unpaid from prior
Distribution Dates.
ALLOCATION OF AVAILABLE FUNDS
Distributions to holders of each class of Offered Certificates will be
made on each Distribution Date from Available Funds. With respect to any
Distribution Date, "Available Funds" will be equal to the sum of the following
amounts with respect to the Mortgage Loans, net of amounts reimbursable
therefrom to the Servicer and the Trustee:
1. the aggregate amount of scheduled monthly payments on the Mortgage
Loans due during the related Due Period and received by the related
Determination Date, after deduction of the Servicing Fee for such
Distribution Date and any accrued and unpaid Servicing Fees in respect
of any prior Distribution Dates;
2. unscheduled payments in respect of the Mortgage Loans, including
full and partial prepayments for such Mortgage Loans occurring during
the related Prepayment Period (excluding prepayment premiums) and
insurance proceeds, Net Liquidation Proceeds and proceeds from
repurchases of and substitutions for such Mortgage Loans occurring
during the calendar month preceding the month of such Distribution
Date; and
3. payments from the Servicer in connection with Advances and
Prepayment Interest Shortfalls for such Distribution Date.
Generally, distributions with respect to the Class A1 Certificates will
be made from Available Funds from amounts collected on the Subgroup 1 Mortgage
Loans. Distributions with respect to the Class A2 Certificates, in general, will
be made from Available Funds from amounts collected on the Subgroup 2 Mortgage
Loans. Distributions with respect to the Class A-IO, Class A-INV-IO, Class B-IO,
Class M1, Class M2, Class M3, Class M4 and Class M5 Certificates, in general,
will be made from Available Funds from amounts collected on the Subgroup 1 and
Subgroup 2 Mortgage Loans.
The holders of the Class P Certificates will be entitled to all
prepayment premiums received on the Mortgage Loans and such amounts will not be
available for distribution to the holders of the Offered Certificates.
Interest Distributions on the Offered Certificates
On each Distribution Date the Trustee will withdraw from the
Distribution Account that portion of Available Funds for such Distribution Date
consisting of the Interest Remittance Amount for such
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Distribution Date, and make the following disbursements and transfers in the
order of priority described below, in each case to the extent of the Interest
Remittance Amount remaining for such Distribution Date.
1. to the Counterparty, the Strip Amount for that Distribution Date and
any unpaid Strip Amounts due from preceding Distribution Dates;
2. concurrently, to the holders of the Senior Certificates, the related
Monthly Interest Distributable Amount for each such class for such
Distribution Date, on a pro rata basis, based on the entitlement of
each such class pursuant to this clause 2. and applied in accordance
with the allocation rules set forth below;
3. concurrently, to the holders of the Senior Certificates, the related
Unpaid Interest Shortfall Amount, if any, for each such class for each
such Distribution Date, on a pro rata basis based on the entitlement of
each such class pursuant to this clause 3. and applied in accordance
with the allocation rules set forth below;
4. to the holders of the Class M1 Certificates, the Monthly Interest
Distributable Amount allocable to such certificates;
5. to the holders of the Class M2 Certificates, the Monthly Interest
Distributable Amount allocable to such certificates;
6. to the holders of the Class M3 Certificates, the Monthly Interest
Distributable Amount allocable to such certificates;
7. to the holders of the Class M4 Certificates, the Monthly Interest
Distributable Amount allocable to such certificates; and
8. concurrently, to the holders of the Class M5 and Class B-IO
Certificates, the related Monthly Interest Distributable Amount for
each such class for such Distribution Date, on a pro rata basis, based
on the entitlement of each such class pursuant to this clause 8.
The Interest Remittance Amount distributed pursuant to clauses 2. and
3. above will be applied to the Senior Certificates as follows:
1. amounts distributed to the Class A1 Certificates will reduce the
Subgroup 1 Interest Remittance Amount before any reduction to the
Subgroup 2 Interest Remittance Amount in respect of such distribution;
and
2. amounts distributed to the Class A2, Class A-IO and Class A-INV-IO
Certificates will reduce the Subgroup 2 Interest Remittance Amount
before any reduction to the Subgroup 1 Interest Remittance Amount in
respect of such distributions.
Any Interest Remittance Amounts remaining undistributed following these
distributions will be used in determining the amount of Net Monthly Excess
Cashflow, if any, for such Distribution Date. On any Distribution Date, any
Relief Act Interest Shortfalls and any Prepayment Interest Shortfalls to the
extent not covered by Compensating Interest paid by the Servicer will first
reduce Net Monthly Excess Cashflow and then reduce the Monthly Interest
Distributable Amounts with respect to the Offered Certificates and the Class
A-INV-IO and Class B-IO Certificates on a pro rata basis based on the respective
amounts of interest accrued on such certificates for such Distribution Date.
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Principal Distributions on the Offered Certificates
On each Distribution Date (a) prior to the Stepdown Date or (b) on
which a Trigger Event is in effect, the Trustee will withdraw from the
Distribution Account that portion of Available Funds equal to the Principal
Distribution Amount for such Distribution Date, and make the following
disbursements and transfers in the order of priority described below, in each
case to the extent of the Principal Distribution Amount remaining for such
Distribution Date:
1. to the holders of the Class A Certificates, allocated as provided
below, until the aggregate Certificate Principal Balance thereof has
been reduced to zero;
2. to the holders of the Class M1 Certificates, until the Certificate
Principal Balance thereof has been reduced to zero;
3. to the holders of the Class M2 Certificates, until the Certificate
Principal Balance thereof has been reduced to zero;
4. to the holders of the Class M3 Certificates, until the Certificate
Principal Balance thereof has been reduced to zero;
5. to the holders of the Class M4 Certificates, until the Certificate
Principal Balance thereof has been reduced to zero; and
6. to the holders of the Class M5 Certificates, until the Certificate
Principal Balance thereof has been reduced to zero.
On each Distribution Date (a) on or after the Stepdown Date and (b) on
which a Trigger Event is not in effect, the holders of each class of LIBOR
Certificates will be entitled to receive distributions in respect of principal
to the extent of the Principal Distribution Amount in the following amounts and
order of priority:
1. to the holders of the Class A Certificates, allocated as described
below, the Class A Principal Distribution Amount until the aggregate
Certificate Principal Balance thereof has been reduced to zero;
2. to the holders of the Class M1 Certificates, the Class M1 Principal
Distribution Amount until the Certificate Principal Balance thereof has
been reduced to zero;
3. to the holders of the Class M2 Certificates, the Class M2 Principal
Distribution Amount until the Certificate Principal Balance thereof has
been reduced to zero;
4. to the holders of the Class M3 Certificates, the Class M3 Principal
Distribution Amount until the Certificate Principal Balance thereof has
been reduced to zero;
5. to the holders of the Class M4 Certificates, the Class M4 Principal
Distribution Amount until the Certificate Principal Balance thereof has
been reduced to zero; and
6. to the holders of the Class M5 Certificates, the Class M5 Principal
Distribution Amount until the Certificate Principal Balance thereof has
been reduced to zero.
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The Principal Distribution Amount or the Class A Principal Distribution
Amount, as applicable, is required to be distributed to the Class A Certificates
as follows:
(1) (a) The Class A1 Percentage thereof to the Class A1
Certificates until the Certificate Principal Balance
thereof is reduced to zero; and
(b) The Class A2 Percentage thereof to the Class A2
Certificates until the Certificate Principal Balance
thereof is reduced to zero.
(2) If the Certificate Principal Balance of either class of
Class A Certificates is reduced to zero, the portion of the Principal
Distribution Amount or Class A Principal Distribution Amount, as
applicable, that would have been distributed to such class pursuant to
the foregoing clause (1) shall be distributed to the remaining class of
Class A Certificates until its Certificate Principal Balance is reduced
to zero.
CREDIT ENHANCEMENT
The credit enhancement provided for the benefit of the holders of the
Offered Certificates consists of subordination and overcollateralization.
The rights of the holders of the Subordinate Certificates to receive
distributions will be subordinated, to the extent described in this prospectus
supplement, to the rights of the holders of the Senior Certificates. This
subordination is intended to enhance the likelihood of regular receipt by the
holders of the Senior Certificates of the full amount of their scheduled monthly
payments of interest and principal, as applicable, and to afford such holders
protection against Realized Losses.
The protection afforded to the holders of the Class A and Class A-IO
Certificates by means of the subordination of the Subordinate Certificates will
be accomplished by the preferential right of the holders of the Senior
Certificates to receive on any Distribution Date, prior to distribution on the
Subordinate Certificates, distributions in respect of interest and principal, as
applicable.
In addition, the rights of the holders of the Offered Subordinate
Certificates with lower payment priorities will be junior to the rights of
holders of the Offered Subordinate Certificates with higher payment priorities,
and the rights of the holders of the Offered Subordinate Certificates to receive
distributions in respect of the Mortgage Loans will be senior to the rights of
the holders of the Class X Certificates and, except with respect to the Class M5
Certificates, the Class B-IO Certificates to the extent described in this
prospectus supplement. This subordination is intended to enhance the likelihood
of regular receipt by the more senior classes of certificates of distributions
in respect of interest and principal and to afford such classes protection
against Realized Losses.
OVERCOLLATERALIZATION PROVISIONS
The weighted average net Loan Rate for the Mortgage Loans is generally
expected to be higher than the weighted average of the Pass-Through Rates on the
Offered Certificates, the Class A-INV-IO Certificates and the Class B-IO
Certificates and the rate at which the Strip Amount is calculated. As a result,
interest collections on the Mortgage Loans are expected to be generated in
excess of the amount of interest payable to the Offered Certificates, the Class
A-INV-IO Certificates and the Class B-IO Certificates and the fees and expenses
payable by the Trust. The Pooling Agreement requires that on each Distribution
Date on and after the August 2003 Distribution Date, the Net Monthly Excess
Cashflow, if any, be applied on such Distribution Date as an accelerated payment
of principal on the class or classes of
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Offered Certificates then entitled to receive distributions in respect of
principal, but only to the limited extent hereafter described.
With respect to any Distribution Date, any Net Monthly Excess Cashflow
will be paid as follows:
1. to the holders of the class or classes of Offered Certificates then
entitled to receive distributions in respect of principal, in an amount
equal to the principal portion of any Realized Losses incurred on the
Mortgage Loans during the calendar month preceding the month of such
Distribution Date, payable to such holders as part of the Principal
Distribution Amount as described under "--Allocation of Available
Funds--Principal Distributions on the Offered Certificates" above;
2. to the holders of the class or classes of Offered Certificates then
entitled to receive distributions in respect of principal, in an amount
equal to any Overcollateralization Increase Amount, payable to such
holders as part of the Principal Distribution Amount as described under
"--Allocation of Available Funds--Principal Distributions on the
Offered Certificates" above;
3. to the holders of the Class M1 Certificates, in an amount equal to
the Unpaid Interest Shortfall Amount allocable to such class;
4. to the holders of the Class M1 Certificates, in an amount equal to
the Allocated Realized Loss Amount allocable to such class;
5. to the holders of the Class M2 Certificates, in an amount equal to
the Unpaid Interest Shortfall Amount allocable to such class;
6. to the holders of the Class M2 Certificates, in an amount equal to
the Allocated Realized Loss Amount allocable to such class;
7. to the holders of the Class M3 Certificates, in an amount equal to
the Unpaid Interest Shortfall Amount allocable to such class;
8. to the holders of the Class M3 Certificates, in an amount equal to
the Allocated Realized Loss Amount allocable to such class;
9. to the holders of the Class M4 Certificates, in an amount equal to
the Unpaid Interest Shortfall Amount allocable to such class;
10. to the holders of the Class M4 Certificates, in an amount equal to
the Allocated Realized Loss Amount allocable to such class;
11. concurrently, to the holders of the Class M5 and Class B-IO
Certificates, pro rata, in an amount equal to the Unpaid Interest
Shortfall Amount allocable to each such class;
12. to the holders of the Class M5 Certificates, in an amount equal to
the Allocated Realized Loss Amount allocable to such class;
13. concurrently, to the holders of the Senior Certificates, pro rata,
in an amount equal to each such class' previously allocated and not
reimbursed share of Net Prepayment Interest Shortfalls and Relief Act
Interest Shortfalls, if any;
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14. to the holders of the Class M1 Certificates, in an amount equal to
such class' previously allocated and not reimbursed share of Net
Prepayment Interest Shortfalls and Relief Act Interest Shortfalls, if
any;
15. to the holders of the Class M2 Certificates, in an amount equal to
such class' previously allocated and not reimbursed share of Net
Prepayment Interest Shortfalls and Relief Act Interest Shortfalls, if
any;
16. to the holders of the Class M3 Certificates, in an amount equal to
such class' previously allocated and not reimbursed share of Net
Prepayment Interest Shortfalls and Relief Act Interest Shortfalls, if
any;
17. to the holders of the Class M4 Certificates, in an amount equal to
such class' previously allocated and not reimbursed share of Net
Prepayment Interest Shortfalls and Relief Act Interest Shortfalls, if
any;
18. concurrently, to the holders of the Class M5 and Class B-IO
Certificates, pro rata, in an amount equal to each such class'
previously allocated and not reimbursed share of Net Prepayment
Interest Shortfalls and Relief Act Interest Shortfalls, if any;
19. to the Net WAC Reserve Fund for distribution to the LIBOR
Certificates, an amount equal to any Net WAC Rate Carryover Amount for
the LIBOR Certificates for such Distribution Date (after giving effect
to any amounts paid under the Yield Maintenance Agreement that are
available to pay any Net WAC Rate Carryover Amounts on such
Distribution Date);
20. to the holders of the Class X Certificates as provided in the
Pooling Agreement;
21. to the Counterparty, any termination payments required to be made
by the Trust as described below under "--Yield Maintenance Agreement;"
and
22. to the holders of the Residual Certificates, any remaining amounts;
provided that if such Distribution Date is the Distribution Date
immediately following the expiration of the latest prepayment charge
term or any Distribution Date thereafter, then any such remaining
amounts will be distributed first, to the holders of the Class P
Certificates, until the Certificate Principal Balance thereof has been
reduced to zero; and second, to the holders of the Residual
Certificates.
On each Distribution Date, after making the distributions of the
Available Funds as described above, the Trustee will withdraw from the Net WAC
Reserve Fund the amount deposited therein pursuant to subclause 19 above and
will distribute these amounts to the holders of the LIBOR Certificates in the
same order of priority as the Monthly Interest Distributable Amount is allocated
to such classes of certificates.
On each Distribution Date, the Trustee will withdraw from the
Distribution Account all amounts representing prepayment charges in respect of
the Mortgage Loans received during the related Prepayment Period and will
distribute these amounts to the holders of the Class P Certificates. On the
first Distribution Date on which the aggregate Certificate Principal Balance of
the Class A and Subordinate Offered Certificates is reduced to zero, the Class P
Certificates shall be entitled to its outstanding Certificate Principal Balance
prior to any distributions of Net Monthly Excess Cashflow on such Distribution
Date.
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ALLOCATION OF LOSSES; SUBORDINATION
If on any Distribution Date, after giving effect to all distributions
of principal as described above, the aggregate Certificate Principal Balance of
the LIBOR Certificates exceeds the aggregate Principal Balance of the Mortgage
Loans, then the Certificate Principal Balance of the class of Offered
Subordinate Certificates then outstanding with the lowest priority of payment
will be reduced (beginning with the Class M5 Certificates) by an amount equal to
that excess.
The Pooling Agreement does not permit the allocation of Realized Losses
to the Class A, Class A-INV-IO, Class A-IO or Class P Certificates. Investors in
the Class A Certificates should note that although Realized Losses cannot be
allocated to the Class A Certificates, under certain loss scenarios there will
not be enough principal and interest on the Mortgage Loans on a Distribution
Date to pay the Class A and Class A-IO Certificates all interest and principal
amounts, as applicable, to which they are then entitled.
PASS-THROUGH RATES
The "Pass-Through Rate" on any Distribution Date with respect to any
class of LIBOR Certificates will equal the lesser of (a) the related Formula
Rate and (b) the Net WAC Rate for such Distribution Date. With respect to the
LIBOR Certificates, interest in respect of any Distribution Date will accrue
during the related Accrual Period on the basis of a 360-day year and the actual
number of days elapsed.
On or prior to the Distribution Date in June 2005, the Pass-Through
Rate for the Class A-IO Certificates will equal the lesser of (a) 4.00% and (b)
the Class A-IO Net WAC Rate for such Distribution Date. After the Distribution
Date in June 2005, the Pass-Through Rate for the Class A-IO Certificates will be
0.00% per annum, and such class will cease to accrue interest. With respect to
the Class A-IO Certificates, interest in respect of any Distribution Date will
accrue during the related Accrual Period on the basis of a 360-day year
consisting of twelve 30-day months.
On or prior to the Distribution Date in June 2005, the Pass-Through
Rate for the Class A-INV-IO Certificates will be a per annum rate equal to the
lesser of (a) the excess, if any, of 1.31% over the Certificate Index and (b)
the excess, if any, of the Class A-INV-IO Net WAC Rate over the Certificate
Index. After the Distribution Date in June 2005, the Pass-Through Rate for the
Class A-INV-IO Certificates will be 0.00% per annum, and such class will cease
to accrue interest. With respect to the Class A-INV-IO Certificates, interest in
respect of any Distribution Date will accrue during the related Accrual Period
on the basis of a 360-day year and the actual number of days elapsed.
On or prior to the Distribution Date in June 2005, the Pass-Through
Rate for the Class B-IO Certificates will be a per annum rate equal to the
lesser of (a) 3.50% and (b) the Class B-IO Cap Rate for such Distribution Date.
After the Distribution Date in June 2005, the Pass-Through Rate for the Class
B-IO Certificates will be 0.00% per annum, and such class will cease to accrue
interest. With respect to the Class B-IO Certificates, interest in respect of
any Distribution Date will accrue during the related Accrual Period on the basis
of a 360-day year consisting of twelve 30-day months.
The "Net WAC Rate" for any Distribution Date with respect to the LIBOR
Certificates shall be a per annum rate (subject to adjustment based on the
actual number of days elapsed in the related Accrual Period) equal to the
difference between (A) the weighted average of the Loan Rates of the Mortgage
Loans as of the first day of the month preceding the month of such Distribution
Date, weighted on the basis of the related Principal Balances as of such date
and (B) the sum of (1) the Servicing Fee Rate for the Mortgage Loans and (2) the
sum of (i) the Strip Amount for such Distribution Date and (ii) the
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aggregate Monthly Interest Distributable Amount for the Class A-IO, Class
A-INV-IO and Class B-IO Certificates for such Distribution Date, multiplied by a
fraction, the numerator of which is twelve and the denominator of which is the
aggregate outstanding Principal Balance of the Mortgage Loans as of the first
day of the month preceding the month of such Distribution Date (expressed as a
percentage).
The "Class A-INV-IO Net WAC Rate" for any Distribution Date on or prior
to the Distribution Date in June 2005, shall be a per annum rate (subject to
adjustment based on the actual number of days elapsed in the related Accrual
Period) equal to the difference between (A) the weighted average of the Loan
Rates of the Mortgage Loans as of the first day of the month preceding the month
of such Distribution Date, weighted on the basis of the related Principal
Balances as of such date and (B) the sum of (1) the Servicing Fee Rate for the
Mortgage Loans and (2) the Strip Amount for such Distribution Date, multiplied
by a fraction, the numerator of which is twelve and the denominator of which is
the aggregate outstanding Principal Balance of the Mortgage Loans as of the
first day of the month preceding the month of such Distribution Date (expressed
as a percentage).
The "Class A-IO Net WAC Rate" for any Distribution Date on or prior to
the Distribution Date in June 2005, shall be a per annum rate equal to the
difference between (A) the weighted average of the Loan Rates of the Mortgage
Loans as of the first day of the month preceding the month of such Distribution
Date, weighted on the basis of the related Principal Balances as of such date
and (B) the sum of (1) the Servicing Fee Rate for the Mortgage Loans and (2) the
sum of (i) the Strip Amount for such Distribution Date and (ii) the Monthly
Interest Distributable Amount for the Class A-INV-IO Certificates for such
Distribution Date, multiplied by a fraction, the numerator of which is twelve
and the denominator of which is the aggregate outstanding Principal Balance of
the Mortgage Loans as of the first day of the month preceding the month of such
Distribution Date (expressed as a percentage).
The "Class B-IO Cap Rate" for any Distribution Date on or prior to the
Distribution Date in June 2005 shall be a per annum rate equal to the difference
between (A) the weighted average of the Loan Rates of the Mortgage Loans as of
the first day of the month preceding the month of such Distribution Date,
weighted on the basis of the related Principal Balances as of such date and (B)
the sum of (1) the Servicing Fee Rate for the Mortgage Loans and (2) the sum of
(i) the Strip Amount for such Distribution Date and (ii) the Monthly Interest
Distributable Amount for the Class A-IO and Class A-INV-IO Certificates for such
Distribution Date, multiplied by a fraction, the numerator of which is twelve
and the denominator of which is the aggregate outstanding Principal Balance of
the Mortgage Loans as of the first day of the month preceding the month of such
Distribution Date (expressed as a percentage), subject to adjustment on the
first Accrual Period based on the actual number of days elapsed during the first
Accrual Period.
If on any Distribution Date, the Pass-Through Rate for any class of
LIBOR Certificates is the Net WAC Rate, then the "Net WAC Rate Carryover Amount"
for such class for such Distribution Date is an amount equal to the sum of (i)
the excess of (x) the amount of interest such class of Offered Certificates
accrued on such Distribution Date at the related Formula Rate, over (y) the
amount of interest such class of certificates accrued for such Distribution Date
at the Net WAC Rate and (ii) the unpaid portion of any related Net WAC Rate
Carryover Amount from the prior Distribution Date together with interest accrued
on such unpaid portion for the most recently ended Accrual Period at the Formula
Rate applicable for such class for such Accrual Period. Any Net WAC Rate
Carryover Amount on the LIBOR Certificates will be paid on that Distribution
Date from payments available under the Yield Maintenance Agreement and on future
Distribution Dates from and to the extent of funds available therefor in
accordance with the priorities described above.
The "Formula Rate" for any class of LIBOR Certificates is the sum of
(i) the interbank offered rate for one-month United States dollar deposits in
the London market as of the related LIBOR
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Determination Date (the "Certificate Index") and (ii) a related margin (the
"Certificate Margin"). The Certificate Margins with respect to the Classes of
LIBOR Certificates on each Distribution Date will be as follows:
Certificate Margin to and Including Certificate Margin after the
Class of LIBOR Certificates the Optional Termination Date Optional Termination Date
--------------------------- ----------------------------- -------------------------
Class A1 0.330% 0.660%
Class A2 0.350% 0.700%
Class M1 0.830% 1.245%
Class M2 2.000% 3.000%
Class M3 2.350% 3.525%
Class M4 4.000% 6.000%
Class M5 4.000% 6.000%
NET WAC RESERVE FUND
On the Closing Date, the Trustee will establish a reserve fund account
(the "Net WAC Reserve Fund") from which payments in respect of Net WAC Rate
Carryover Amounts on the LIBOR Certificates will be made. The Net WAC Reserve
Fund will be an asset of the Trust but not of any REMIC. On each Distribution
Date, to the extent required following the distribution of Available Funds as
described under "--Allocation of Available Funds" above and any payments under
the Yield Maintenance Agreement, the Trustee will withdraw from amounts in the
Net WAC Reserve Fund to pay the LIBOR Certificates any Net WAC Rate Carryover
Amounts in the following order of priority, in each case to the extent of
amounts remaining in the Net WAC Reserve Fund:
(i) concurrently, to the Class A Certificates, pro rata;
(ii) to the Class M1 Certificates;
(iii) to the Class M2 Certificates;
(iv) to the Class M3 Certificates;
(v) to the Class M4 Certificates; and
(vi) to the Class M5 Certificates.
THE YIELD MAINTENANCE AGREEMENT
The Trust will have the benefit of an interest rate yield maintenance
agreement documented pursuant to an ISDA Master Agreement (Multicurrency-Cross
Border), together with a Schedule and a Confirmation (the "Yield Maintenance
Agreement") from Credit Suisse First Boston International ("CSFBi") (together
with any successor, the "Counterparty"). Under the Yield Maintenance Agreement,
the Counterparty will agree to pay to the Trust on each Distribution Date an
amount equal to the product of:
(1) the excess, if any, of LIBOR over the rate specified in this
prospectus supplement under "Annex II; LIBOR Strike Rate" for that Distribution
Date;
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(2) the Scheduled Notional Amount for that Distribution Date; and
(3) a fraction, the numerator of which is the actual number of days
elapsed from the previous Distribution Date to but excluding the current
Distribution Date (or, for the first Distribution Date, the actual number of
days elapsed from the Closing Date to but excluding the first Distribution
Date), and the denominator of which is 360.
The Yield Maintenance Agreement and any payments made by the
Counterparty thereunder will be an asset of the Trust but will not be an asset
of any REMIC.
The "Scheduled Notional Amount" is set forth with respect to each
Distribution Date in "Annex II; Scheduled Notional Amount." The initial
Scheduled Notional Amount will be $72,000,000. The Scheduled Notional Amount
declines in accordance with the expected amortization of the Mortgage Loans. The
Yield Maintenance Agreement will terminate immediately following the
Distribution Date in June 2005.
The Yield Maintenance Agreement will be governed by and construed in
accordance with the law of the State of New York and will be documented under
the ISDA Master Agreement, as supplemented by the Schedule and the Confirmation.
The obligations of the Counterparty are limited to those specifically set forth
in the Yield Maintenance Agreement.
CSFBi was incorporated in England under the Companies Act 1985 on May
9, 1990 with registered no. 2500199 and was re-registered as unlimited under the
name "Credit Suisse Financial Products" on July 6, 1990. Its registered office
and principal place of business is at One Cabot Square, London E14 4QJ. CSFBi is
an authorized institution under the Banking Act 1987 and is regulated by The
Securities and Futures Authority. Effective as of March 27, 2000, Credit Suisse
Financial Products was renamed "Credit Suisse First Boston International". This
change was a renaming only.
CSFBi is an unlimited company and, as such, its shareholders have a
joint, several and unlimited obligation to meet any insufficiency in the assets
of CSFBi in the event of its liquidation. CSFBi's ordinary voting shares are
owned, as to 56%, by Credit Suisse First Boston, as to 24%, by Credit Suisse
First Boston (International) Holding AG and, as to 20%, by Credit Suisse Group.
CSFBi commenced business on July 16, 1990. Its principal business is banking,
including the trading of derivative products linked to interest rates, equities,
foreign exchange, commodities and credit.
CSFBi has been assigned a senior unsecured debt rating of "A+" by S&P,
a senior debt rating of "Aa3 (negative outlook)" by Moody's and a long-term
rating of "AA- (negative outlook)" by Fitch.
The Pooling Agreement will contain provisions permitting the Trustee to
enter into any amendment to the Yield Maintenance Agreement requested by the
Counterparty to cure any ambiguity in, or correct or supplement any provision
of, the Yield Maintenance Agreement, so long as the Trustee determines that the
amendment will not adversely affect the interests of the certificateholders. The
Counterparty will be a third-party beneficiary of the Pooling Agreement.
The respective obligations of the Counterparty and the Trust to pay
specified amounts due under the Yield Maintenance Agreement will be subject to
the following conditions precedent: (1) no Cap Default or event that with the
giving of notice or lapse of time or both would become a Cap Default shall have
occurred and be continuing with respect to the Yield Maintenance Agreement; and
(2) no Termination Event has occurred or been effectively designated with
respect to the Yield Maintenance Agreement.
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"Events of Default" under the Yield Maintenance Agreement (each a "Cap
Default") include the following standard events of default under the ISDA Master
Agreement:
o "Failure to Pay,"
o "Breach of Agreement,"
o "Misrepresentation,"
o "Merger without Assumption," and
o "Bankruptcy,"
as described in Sections 5(a)(i), 5(a)(ii), 5(a)(iii), 5(a)(iv), and 5(a)(viii)
of the ISDA Master Agreement.
"Termination Events" under the Yield Maintenance Agreement consist of
the following standard events under the ISDA Master Agreement:
o "Illegality" (which generally relates to changes in law causing it
to become unlawful for either party to perform its obligations
under the Yield Maintenance Agreement);
o "Tax Event" (which generally relates to either party to the Yield
Maintenance Agreement receiving a payment under the Yield
Maintenance Agreement from which an amount has been deducted or
withheld for or on account of taxes);
o "Tax Event Upon Merger" (which generally relates to either party
to the Yield Maintenance Agreement receiving a payment under the
Yield Maintenance Agreement from which an amount has been deducted
or withheld for or on account of taxes resulting from a merger);
and
o "Credit Event Upon Merger" (which generally relates to the Trust
or the Counterparty and an entity providing credit support for it
becoming weaker as a result of a merger),
as described in Sections 5(b)(i), 5(b)(ii), 5(b)(iii) and 5(b)(iv) of the ISDA
Master Agreement. In addition, there are additional Termination Events relating
to the Trust if the Trust should terminate or if the Pooling Agreement or other
transaction documents are amended in a manner adverse to the Counterparty
without the consent of the Counterparty.
If the Trust fails to pay a cap premium on any Distribution Date, the
Counterparty, in addition to the other remedies available to it under the Yield
Maintenance Agreement, can set off the amount of such cap premium against the
Counterparty's obligations under the Yield Maintenance Agreement.
Upon the occurrence of any Cap Default under the Yield Maintenance
Agreement, the non-defaulting party will have the right to designate an Early
Termination Date (as defined in the ISDA Master Agreement). The Trust may not
designate an Early Termination Date without the consent of the controlling party
specified in the Pooling Agreement. With respect to Termination Events, an Early
Termination Date may be designated by one of the parties (as specified in the
Yield Maintenance Agreement) and will occur only upon notice and, in some
circumstances, after any affected party has used reasonable efforts to transfer
its rights and obligations under the Yield Maintenance Agreement to a related
entity within a limited period after notice has been given of the Termination
Event, all as set forth in the Yield Maintenance Agreement. The occurrence of an
Early Termination Date under the Yield Maintenance Agreement will constitute a
"Cap Early Termination."
Upon any Cap Early Termination of the Yield Maintenance Agreement, the
Trust or the Counterparty may be liable to make a termination payment to the
other (regardless, if applicable, of which
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of the parties has caused the termination). The amount of the termination
payment will be based on the value of the Yield Maintenance Agreement computed
in accordance with the procedures set forth in the Yield Maintenance Agreement
taking into account the present value of the unpaid cap premiums that would have
been owed by the Trust under the remaining scheduled term of the Yield
Maintenance Agreement. In the event that the Trust is required to make a
termination payment, that termination payment will be subordinate to the right
of the certificateholders.
If the Counterparty no longer has a long-term credit rating of at least
A (or its equivalent) from at least one of the Rating Agencies (a "Counterparty
Rating Agency Downgrade"), the Counterparty shall, no later than the 30th day
following the Counterparty Rating Agency Downgrade: (i) obtain a replacement
yield maintenance agreement reasonably acceptable to the Trustee with a
counterparty that is a bank or other financial institution that has a rating
that is in one of the three highest long-term credit rating categories from at
least one of the Rating Agencies rating the Offered Certificates; (ii) obtain a
guaranty of or a contingent agreement of another person with a long-term credit
rating of at least A (or its equivalent) from at least one of the Rating
Agencies to honor the Counterparty's obligations under the Yield Maintenance
Agreement; (iii) post mark-to-market collateral with the Trustee in an amount
sufficient to restore the immediately prior ratings of the Offered Certificates;
(iv) establish any other arrangement satisfactory to the Rating Agencies to
restore the ratings of the Offered Certificates; or (v) terminate the Yield
Maintenance Agreement in accordance with its terms.
CALCULATION OF CERTIFICATE INDEX
On the second LIBOR Business Day preceding the commencement of each
Accrual Period for the LIBOR Certificates (each such date, a "LIBOR
Determination Date"), the Trustee will determine the Certificate Index for such
Accrual Period for the LIBOR Certificates on the basis of the London interbank
offered rate for one-month United States dollar deposits, as such rates appear
on the Telerate Page 3750, as of 11:00 a.m. (London time) on such LIBOR
Determination Date. If such rate does not appear on Telerate Page 3750, the rate
for that day will be determined on the basis of the offered rates of the
Reference Banks for one-month United States dollar deposits, as of 11:00 a.m.
(London time) on such LIBOR Determination Date. The Trustee will request the
principal London office of each of the Reference Banks to provide a quotation of
its rate. If on such LIBOR Determination Date two or more Reference Banks
provide such offered quotations, the Certificate Index for the related Accrual
Period will be the arithmetic mean of such offered quotations (rounded upwards
if necessary to the nearest whole multiple of 0.0625%). If on such LIBOR
Determination Date fewer than two Reference Banks provide such offered
quotations, the Certificate Index for the related Accrual Period shall be the
higher of (x) the Certificate Index as determined on the previous LIBOR
Determination Date and (y) the Reserve Interest Rate.
As used in this section, "LIBOR Business Day" means a day on which
banks are open for dealing in foreign currency and exchange in London; "Telerate
Page 3750" means the display page currently so designated on the Dow Jones
Telerate Capital Markets Report (or such other page as may replace that page on
that service for the purpose of displaying comparable rates or prices);
"Reference Banks" means leading banks selected by the Trustee and engaged in
transactions in Eurodollar deposits in the international Eurocurrency market (1)
with an established place of business in London, (2) which have been designated
as such by the Trustee and (3) not controlling, controlled by or under common
control with, the Depositor, the Servicer or any successor servicer or the
Originator; and "Reserve Interest Rate" shall be the rate per annum that the
Trustee determines to be either (x) the arithmetic mean (rounded upwards if
necessary to the nearest whole multiple of 0.0625%) of the one-month United
States dollar lending rates which New York City banks selected by the Trustee
are quoting on the relevant LIBOR Determination Date to the principal London
offices of leading banks in the London interbank market or (y) in the event that
the Trustee can determine no such arithmetic mean, the lowest one-month United
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States dollar lending rate which New York City banks selected by the Trustee are
quoting on such LIBOR Determination Date to leading European banks.
The establishment of the Certificate Index on each LIBOR Determination
Date by the Trustee and its calculation of the rates of interest applicable to
the LIBOR Certificates for the related Accrual Period will (in the absence of
manifest error) be final and binding.
REPORTS TO CERTIFICATEHOLDERS
On each Distribution Date, the Trustee will provide or make available
to each holder of a certificate, the Rating Agencies and the Counterparty a
statement (based solely on information received from the Servicer) setting
forth, among other things, the information set forth in the prospectus under
"Description of the Certificates--Reports to Securityholders." The Trustee will
make the statement (and, at its option, any additional files containing the same
information in an alternative format) available each month via the Trustee's
website. The Trustee's website will initially be located at
"http://www.ctslink.com". Assistance in using the website can be obtained by
calling the Trustee's customer service desk at (301) 815-6600. Parties that are
unable to use the above distribution option are entitled to have a paper copy
mailed to them via first class mail by calling the customer service desk and so
indicating. The Trustee shall have the right to change the way statements are
distributed in order to make such distribution more convenient and/or more
accessible to the above parties, and the Trustee shall provide timely and
adequate notification to all above parties regarding any such changes.
In addition, within a reasonable period of time after the end of each
calendar year, the Trustee will prepare and deliver to each holder of a
certificate of record during the previous calendar year a statement containing
information necessary to enable holders of the certificates to prepare their tax
returns. Such statements will not have been examined and reported upon by an
independent public accountant.
THE POOLING AGREEMENT
GENERAL
The Offered Certificates will be issued pursuant to the Pooling
Agreement. The Trust created under the Pooling Agreement will consist of (i) all
of the Depositor's right, title and interest in the Mortgage Loans, the related
mortgage notes, mortgages and other related documents, (ii) all payments on or
collections in respect of the Mortgage Loans due after the Cut-off Date,
together with any proceeds thereof, (iii) any Mortgaged Properties acquired on
behalf of certificateholders by foreclosure or by deed in lieu of foreclosure,
and any revenues received thereon, (iv) the rights of the Trustee under all
insurance policies required to be maintained pursuant to the Pooling Agreement,
(v) the Net WAC Reserve Fund, (vi) the rights of the Trustee under the Yield
Maintenance Agreement and (vii) the rights of the Seller under the Mortgage Loan
Purchase Agreement. The Offered Certificates will be transferable and
exchangeable at the corporate trust offices of the Trustee.
ASSIGNMENT OF THE MORTGAGE LOANS
On the Closing Date, the Depositor will transfer to the Trust all of
its right, title and interest in and to each Mortgage Loan, the related mortgage
note, mortgage, assignment of mortgage in recordable form to the Trustee and
other related documents (collectively, the "Mortgage Loan Documents"), including
all scheduled payments with respect to each such Mortgage Loan due after the
Cut-off Date. The Trustee, concurrently with each such transfer, will deliver
the Offered Certificates to the Depositor. Each Mortgage Loan transferred to the
Trust will be identified on a schedule (the "Mortgage Loan
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Schedule") delivered to the Trustee pursuant to the Pooling Agreement. Such
schedule will include information such as the Principal Balance of each Mortgage
Loan as of the Cut-off Date and its Loan Rate as well as other information.
The Pooling Agreement will require that, within the time period
specified therein, the Depositor will deliver or cause to be delivered to the
Trustee (or a custodian, as the Trustee's agent for such purpose) the Mortgage
Loan Documents and the mortgage notes endorsed in blank or to the Trustee. In
lieu of delivery of original mortgages or mortgage notes, if such original is
not available or lost, the Depositor may deliver or cause to be delivered true
and correct copies thereof, or, with respect to a lost mortgage note, a lost
note affidavit executed by the Originator. The assignments of mortgage are
generally required to be recorded by or on behalf of the Trust in the
appropriate offices for real property records. Any cost associated with the
recording of such assignments of mortgage will not be an expense of the Trust or
the Trustee.
Within 45 days of the Closing Date, the Trustee (or a custodian) will
review the Mortgage Loan Documents pursuant to the Pooling Agreement and if any
Mortgage Loan Document is found to be defective in any material respect and such
defect is not cured within 90 days following notification thereof to the
Originator by the Trustee (or a custodian), the Originator will be obligated to
repurchase the related Mortgage Loan at a price equal to the outstanding
Principal Balance of such Mortgage Loan as of the date of purchase, plus all
accrued and unpaid interest thereon, computed at the Loan Rate through the end
of the calendar month in which the repurchase is effected, plus the amount of
any unreimbursed Advances and Servicing Advances made by the Servicer (the
"Purchase Price"). Rather than repurchase the related Mortgage Loan, the
Originator may remove such Mortgage Loan (a "Deleted Mortgage Loan") from the
Trust and substitute in its place a Qualified Substitute Mortgage Loan (as
defined below). However, such substitution is permitted only within two years of
the Closing Date and may not be made unless an opinion of counsel is provided to
the effect that such substitution will not disqualify any REMIC or result in a
prohibited transaction tax under the Internal Revenue Code. This cure,
repurchase or substitution obligation constitutes the sole remedy available to
certificateholders or the Trustee for the omission of, or a material defect in,
a Mortgage Loan Document.
A "Qualified Substitute Mortgage Loan" is a mortgage loan substituted
by the Originator or the Seller, as applicable, for a Deleted Mortgage Loan
which must, on the date of such substitution, (i) have an outstanding Principal
Balance (or in the case of a substitution of more than one Mortgage Loan for a
Deleted Mortgage Loan, an aggregate Principal Balance), not in excess of, and
not more than 5% less than, the Principal Balance of the Deleted Mortgage Loan;
(ii) have a Loan Rate not less than the Loan Rate of the Deleted Mortgage Loan
and not more than 1% in excess of the Loan Rate of such Deleted Mortgage Loan;
(iii) if an adjustable-rate mortgage loan, have a Maximum Loan Rate and Minimum
Loan Rate not less than the respective Maximum Loan Rate and Minimum Loan Rate
for the Deleted Mortgage Loan and have a Gross Margin equal to or greater than
the Deleted Mortgage Loan, and have the same Index and Adjustment Date frequency
as the Deleted Mortgage Loan; (iv) have the same Due Date as the Deleted
Mortgage Loan; (v) have a remaining term to maturity not more than one year
earlier and not later than the remaining term to maturity of the Deleted
Mortgage Loan; (vi) comply with each representation and warranty as to the
Mortgage Loans set forth in the Mortgage Loan Purchase Agreement and the
Reconstitution Agreement (in each case, deemed to be made as of the date of
substitution); (vii) have been underwritten or reunderwritten by the Originator
in accordance with the same underwriting criteria and guidelines as the Mortgage
Loans being replaced; (viii) be of the same or better credit quality as the
Mortgage Loan being replaced; and (ix) satisfy certain other conditions
specified in the Pooling Agreement.
In connection with the substitution of a Qualified Substitute Mortgage
Loan, the Originator or the Seller, as applicable, will be required to deposit
or cause to be deposited in the Collection Account on or
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prior to the next succeeding Determination Date after such obligation arises an
amount (the "Substitution Adjustment") equal to the excess of the Principal
Balance of the related Deleted Mortgage Loan over the Principal Balance of such
Qualified Substitute Mortgage Loan.
Under the Reconstitution Agreement, the Originator will make certain
representations and warranties as to the accuracy in all material respects of
certain information furnished to the Trustee with respect to each Mortgage Loan
(e.g., Cut-off Date Principal Balance and the Loan Rate). In addition, the
Originator will make certain other representations and warranties with respect
to each Mortgage Loan, including, but not limited to, the following: (i) all of
the prepayment penalties on the Subgroup 1 and Subgroup 2 Mortgage Loans with
prepayment penalties expire no later than three years and five years,
respectively, following the origination of the related Mortgage Loan; (ii) no
Mortgage Loan will be subject to the Home Ownership and Equity Protection Act of
1994 or any comparable state law; (iii) no Subgroup 1 Mortgage Loan originated
on or after October 1, 2002 and before March 7, 2003 is secured by property
located in the State of Georgia; (iv) no proceeds from any Mortgage Loan were
used to finance single-premium credit insurance policies. Furthermore, the
Originator will represent and warrant with respect to each Mortgage Loan as of
the Closing Date that, among other things, at the time of transfer to the
Seller, the Originator has transferred and assigned all of its right, title and
interest in each Mortgage Loan and the Mortgage Loan Documents, free of any
lien. The Seller will represent and warrant in the Pooling Agreement with
respect to each Mortgage Loan that (i) each Mortgage Loan at the time of
origination complied in all material respects with applicable local, state and
federal laws, including, but not limited to, all applicable predatory and
abusive lending laws and (ii) no Mortgage Loan is a "high cost" mortgage loan,
as defined by the applicable predatory and abusive lending laws.
Upon discovery of a breach of any such representation and warranty
which materially and adversely affects the interests of the certificateholders
in the related Mortgage Loan and Mortgage Loan Documents, the Originator or the
Seller, as applicable, will have a period of 90 days after discovery or notice
of the breach to effect a cure. If the breach cannot be cured within the 90-day
period, the Originator or the Seller, as applicable, will be obligated to (x)
substitute for such Mortgage Loan a Qualified Substitute Mortgage Loan or (y)
purchase such Mortgage Loan from the Trust at the Purchase Price. However, a
substitution of the related Mortgage Loan is permitted only within two years of
the Closing Date and may not be made unless an opinion of counsel is provided to
the effect that such substitution will not disqualify any REMIC or result in a
prohibited transaction tax under the Internal Revenue Code.
Pursuant to the Pooling Agreement, the Servicer will service and
administer the Mortgage Loans as more fully set forth therein.
PAYMENTS ON MORTGAGE LOANS; DEPOSITS TO COLLECTION ACCOUNT AND DISTRIBUTION
ACCOUNT
The Servicer shall establish and maintain or cause to be maintained a
separate trust account (the "Collection Account") for the benefit of the
certificateholders. The Collection Account will be an Eligible Account (as
defined in the Pooling Agreement). Upon receipt by the Servicer of amounts in
respect of the Mortgage Loans (excluding amounts representing the Servicing Fee
or other servicing compensation, reimbursement for Advances and Servicing
Advances (each, as defined below) and insurance proceeds to be applied to the
restoration or repair of a Mortgaged Property or similar items), the Servicer
will deposit such amounts in the Collection Account. Amounts so deposited may be
invested in Permitted Investments (as described in the Pooling Agreement)
maturing no later than one business day prior to the date on which the amount on
deposit therein is required to be deposited in the Distribution Account. The
Trustee will establish an account (the "Distribution Account") into which will
be deposited amounts withdrawn from the Collection Account on the Servicer
Remittance Date (as defined below) and deposited to the Distribution Account for
distribution to certificateholders on a Distribution Date. The
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Distribution Account will be an Eligible Account, and amounts on deposit therein
may be invested in Permitted Investments (as described in the Pooling Agreement)
maturing no later than the related Distribution Date.
ADVANCES
Subject to the following limitations, the Servicer will be obligated to
advance or cause to be advanced on or before each Distribution Date its own
funds, or funds in the Collection Account that are not included in the Available
Funds for such Distribution Date, or both (each, an "Advance"), in an amount
equal to the aggregate of all payments of principal and interest (net of
Servicing Fees) that were due during the related Due Period on the Mortgage
Loans and that were delinquent on the related Determination Date, plus certain
amounts representing assumed payments not covered by any current net income on
the Mortgaged Properties acquired by foreclosure or deed in lieu of foreclosure.
Advances are required to be made only to the extent they are deemed by
the Servicer to be recoverable from related late collections, insurance
proceeds, condemnation proceeds or liquidation proceeds. The purpose of making
such Advances is to maintain a regular cash flow to the certificateholders,
rather than to guarantee or insure against losses. The Servicer will not be
required, however, to make any Advances with respect to reductions in the amount
of the monthly payments on the Mortgage Loans due to bankruptcy proceedings or
the application of the Relief Act. Subject to the recoverability standard below,
the Servicer's obligation to make Advances as to any Mortgage Loan will continue
until the Mortgage Loan is paid in full or until the recovery of all Liquidation
Proceeds thereon.
All Advances will be reimbursable to the Servicer from late
collections, insurance proceeds, condemnation proceeds and liquidation proceeds
from the Mortgage Loan as to which such unreimbursed Advance was made, unless
such amounts are deemed to be nonrecoverable by the Servicer, in which case
reimbursement will be made to the Servicer from the general funds in the
Collection Account. The Servicer may recover from amounts in the Collection
Account the amount of any Advance that remains unreimbursed to the Servicer from
the related liquidation proceeds after the final liquidation of the related
Mortgage Loan, and such reimbursement amount will not be available for
remittance to the Trustee for distribution on the Offered Certificates. In the
event the Servicer fails in its obligation to make any required Advance, the
Trustee, in its capacity as successor servicer, will be obligated to make any
such Advance, to the extent required in the Pooling Agreement.
In the course of performing its servicing obligations, the Servicer
will pay all reasonable and customary "out-of-pocket" costs and expenses
(including reasonable attorneys' fees and disbursements) incurred in the
performance of its servicing obligations, including, but not limited to, the
cost of (i) the preservation, restoration, inspection and protection of the
Mortgaged Properties, (ii) any enforcement or judicial proceedings, including
foreclosures, and (iii) the management and liquidation of Mortgaged Properties
acquired in satisfaction of the related mortgage. Each such expenditure will
constitute a "Servicing Advance." The Servicer is obligated to pay certain
insurance premiums and certain ongoing expenses associated with the Mortgage
Loans and incurred by the Servicer in connection with its responsibilities under
the Pooling Agreement and is entitled to reimbursement therefor as provided in
the Pooling Agreement. The Servicer is required to make a Servicing Advance only
to the extent it is deemed by the Servicer to be recoverable from related late
collections, insurance proceeds, condemnation proceeds or liquidation proceeds.
The Servicer is also obligated to accurately and fully report its
borrower credit files to all three credit repositories in a timely manner.
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The Servicer's right to reimbursement for Servicing Advances is limited
to late collections, liquidation proceeds, condemnation proceeds, released
Mortgaged Property proceeds, insurance proceeds and such other amounts as may be
collected by the Servicer from the related Mortgagor or otherwise relating to
the Mortgage Loan in respect of which such unreimbursed amounts are owed, unless
such amounts are deemed to be nonrecoverable by the Servicer, in which event
reimbursement will be made to the Servicer from general funds in the Collection
Account.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The principal compensation to be paid to the Servicer in respect of its
servicing activities (the "Servicing Fee") will be at the "Servicing Fee Rate"
of 0.50% per annum on the Principal Balance of each Mortgage Loan. As additional
servicing compensation, the Servicer is entitled to retain all service-related
fees, including assumption fees, modification fees, extension fees, late payment
charges and other ancillary fees (but not prepayment premiums, which will be
distributed to the holders of the Class P Certificates), to the extent collected
from mortgagors and non-sufficient fund fees, together with any interest or
other income earned on funds held in the Collection Account. The Servicer is
obligated to deposit into the Collection Account the amount of any Prepayment
Interest Shortfall (payments made by the Servicer in satisfaction of such
obligation, "Compensating Interest") but only in an amount up to its Servicing
Fee for the related Distribution Date.
The Counterparty will receive the Strip Amount on each Distribution
Date.
The "Servicer Remittance Date" is the second business day prior to each
Distribution Date. The "Determination Date" with respect to any Distribution
Date, will be the fifth day of the calendar month in which such Distribution
Date occurs or, if such fifth day is not a business day, the business day
immediately preceding such fifth day. With respect to any Determination Date and
each Mortgage Loan as to which a principal prepayment was applied during the
related Prepayment Period, the "Prepayment Interest Shortfall" is an amount
equal to the interest at the applicable Loan Rate (net of the Servicing Fee) on
the amount of such principal prepayment for the number of days from the date on
which the principal prepayment is applied through the last day of the calendar
month preceding such Determination Date.
A "Net Prepayment Interest Shortfall", with respect to any Distribution
Date, is the excess of Prepayment Interest Shortfalls over the amount the
Servicer is obligated to remit as Compensating Interest. The Servicer shall not
be obligated to pay Compensating Interest with respect to any interest
shortfalls due to application of the Relief Act.
OPTIONAL PURCHASE OF DEFAULTED LOANS
As to any Mortgage Loan which is delinquent in payment by 90 days or
more, the Servicer may, at its option, purchase such Mortgage Loan from the
Trust at the Purchase Price for such Mortgage Loan; provided, however, that the
Servicer must first purchase the Mortgage Loan that, as of the time of such
purchase, has been delinquent for the greatest period before purchasing Mortgage
Loans that have been delinquent lesser periods.
THE TRUSTEE
Wells Fargo Bank Minnesota, N.A. will be the Trustee under the Pooling
Agreement. The Depositor and the Servicer may maintain other banking
relationships in the ordinary course of business with the Trustee and its
affiliates. Offered Certificates may be surrendered at the corporate trust
office of the Trustee located for certificate transfer purposes at Wells Fargo
Center, Sixth Street and Marquette Avenue, Minneapolis, Minnesota 55479-0113,
Attention: Corporate Trust Services--CSFB ABSC Series
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2003-HE3, or at other addresses as the Trustee may designate from time to time.
In the event the Trustee advises the Depositor and the Servicer that it is
unable to continue to perform its obligations under the terms of the Pooling
Agreement prior to the appointment of a successor, the Trustee is obligated to
perform these obligations until a new trustee is appointed.
CERTAIN MATTERS REGARDING THE TRUSTEE
The principal compensation to be paid to the Trustee in respect of its
respective obligations under the Pooling Agreement will be equal to certain
investment earnings on the amounts on deposit in the Distribution Account. The
Pooling Agreement will provide that each of the Trustee and any director,
officer, employee or agent of the Trustee will be indemnified by the Trust up to
the level specified in the Pooling Agreement and will be held harmless against
any loss, liability or expense (not including expenses, disbursements and
advances incurred or made by the Trustee, including the compensation and the
expenses and disbursements of its agents and counsel, in the ordinary course of
its performance in accordance with the provisions of the Pooling Agreement)
incurred by the Trustee arising out of or in connection with the acceptance or
administration of its obligations and duties under the Pooling Agreement, other
than any loss, liability or expense (x) that constitutes a specific liability of
the Trustee under the Pooling Agreement or (y) incurred by reason of willful
misfeasance, bad faith or negligence in the performance of its respective duties
under the Pooling Agreement or as a result of a breach, or by reason of reckless
disregard, of its respective obligations and duties under the Pooling Agreement.
The Pooling Agreement will provide that the Trustee may withdraw amounts owing
to it under the Pooling Agreement prior to distributions to certificateholders.
VOTING RIGHTS
At all times 94% of all voting rights will be allocated among the
holders of the LIBOR Certificates in proportion to the then outstanding
Certificate Principal Balances of their respective certificates. At all times 1%
of all voting rights will be allocated to the holders of the Class A-IO
Certificates, 1% of all voting rights will be allocated to the holders of the
Class A-INV-IO Certificates, 1% of all voting rights will be allocated to the
holders of the Class B-IO Certificates, 1% of all voting rights will be
allocated to the holders of the Class X Certificates, 1% of all voting rights
will be allocated to the holders of the Class P Certificates and 1% of all
voting rights will be allocated to the holders of the Class R Certificates. The
voting rights allocated to any class of certificates will be allocated among all
holders of the certificates of such class in proportion to the outstanding
Percentage Interests.
SERVICER EVENTS OF DEFAULT
As provided in the Pooling Agreement, the Servicer may be removed as
the servicer of the mortgage loans if there is a Servicer Event of Default. The
Servicer Events of Default include the following events with respect to the
Servicer:
1. any failure by the Servicer to remit to the Trustee for
distribution to the certificateholders any payment (other than Advances
that are required to be made from its own funds) which continues
unremedied for a period of one business day after the date upon which
written notice of such failure, requiring the same to be remedied,
shall have been given to the Servicer by the Depositor or the Trustee,
or to the Servicer, the Depositor and the Trustee by the holders of
certificates entitled to at least 25% of the voting rights; or
2. any failure on the part of the Servicer duly to observe or
perform in any material respect any of the covenants or agreements on
the part of the Servicer contained in the Pooling Agreement which
continues unremedied for a period of 45 days after the earlier of (x)
the date on
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which written notice of such failure, requiring the same to be
remedied, shall have been given to the Servicer by the Depositor or the
Trustee, or to the Servicer, the Depositor and the Trustee by the
holders of certificates entitled to at least 25% of the voting rights
and (y) actual knowledge of such failure by a Servicing Officer of the
Servicer; or
3. a decree or order of a court or agency or supervisory
authority having jurisdiction in the premises in an involuntary case
under any present or future federal or state bankruptcy, insolvency or
similar law or the appointment of a conservator or receiver or
liquidator in any insolvency, readjustment of debt, marshaling of
assets and liabilities or similar proceeding, or for the winding-up or
liquidation of its affairs, shall have been entered against the
Servicer and if such proceeding is being contested by the Servicer in
good faith, such decree or order shall have remained in force
undischarged or unstayed for a period of 60 days or results in the
entry of an order for relief or any such adjudication or appointment;
or
4. the Servicer shall consent to the appointment of a
conservator or receiver or liquidator in any insolvency, readjustment
of debt, marshaling of assets and liabilities or similar proceedings of
or relating to it or of or relating to all or substantially all of its
property; or
5. the Servicer shall admit in writing its inability to pay
its debts generally as they become due, file a petition to take
advantage of any applicable insolvency or reorganization statute, make
an assignment for the benefit of its creditors, or voluntarily suspend
payment of its obligations; or
6. any failure by the Servicer of the Servicer Termination
Test (as set forth in the Pooling Agreement); or
7. any failure of the Servicer to make any Advances when due
and that continue unremedied until 3:00 p.m. New York time on the first
business day after the date upon which written notice of such failure,
requiring the same to be remedied, shall have been given to the
Servicer by the Depositor or the Trustee.
If a Servicer Event of Default described in clauses 1. through 6.
occurs, then, so long as the Servicer Event of Default shall not have been
remedied, the Depositor or the Trustee may, and at the written direction of the
holders of certificates entitled to at least 51% of voting rights, the Trustee
shall, by notice in writing to the Servicer (and to the Depositor if given by
the Trustee or to the Trustee if given by the Depositor), terminate all of the
rights and obligations of the Servicer in its capacity as the Servicer under the
Pooling Agreement. If the Servicer Event of Default described in clause 7.
occurs, the Trustee shall, by notice in writing to the Servicer, the Seller and
the Depositor, terminate all of the rights and obligations of the Servicer in
its capacity as the servicer under the Pooling Agreement.
The Servicer Termination Test for the Servicer is set forth in the
Pooling Agreement. The Servicer will fail the Servicer Termination Test if loss
amounts with respect to the Mortgage Loans exceed certain parameters as set
forth in the Pooling Agreement.
Under certain circumstances, Ocwen may designate a successor servicer
if it has been terminated as Servicer under the Pooling Agreement. Any successor
servicer appointed by Ocwen must qualify as a successor servicer under the
Pooling Agreement and be approved by the Rating Agencies (by written
confirmation that such appointment of that successor servicer would not result
in the reduction or withdrawal of the rating of any outstanding class of
certificates), the Trustee, the Depositor and the Seller.
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No assurance can be given that termination of the rights and
obligations of the Servicer under the Pooling Agreement would not adversely
affect the servicing of the Mortgage Loans, including the delinquency experience
of the Mortgage Loans. In the event the Trustee is required to act as successor
servicer, it will act to become the successor servicer within 120 days of the
Servicer's termination. During this 120-day period, the terminated Servicer will
continue to service the Mortgage Loans, although the Trustee will be obligated
to make all Advances required in respect of the Mortgage Loans.
TERMINATION
The Servicer will have the right to purchase all of the Mortgage Loans
and thereby effect the early retirement of the certificates, on any Distribution
Date on which the aggregate Principal Balance of the Mortgage Loans in the Trust
is equal to or less than 10% of the aggregate Principal Balance of the Mortgage
Loans as of the Cut-off Date. The first Distribution Date on which such option
could be exercised is referred to herein as the "Optional Termination Date." In
the event that the option is exercised, the purchase will be made at a price
(the "Termination Price") generally equal to the sum of (i) 100% of the
aggregate outstanding Principal Balance of the Mortgage Loans plus accrued
interest thereon at the applicable Loan Rate to the date of purchase, (ii) the
fair market value of all other property of the Trust and (iii) any unreimbursed
Advances and Servicing Fees and other amounts payable to the Servicer and the
Trustee. If such option is exercised by the Servicer, the Trust will be
terminated effecting an early retirement of the certificates. Distributions on
the certificates relating to any optional termination will first be paid to the
Class A and Class A-IO Certificates and then to the Offered Subordinate
Certificates. The proceeds from that distribution may not be sufficient to
distribute the full amount to which each class of Offered Certificates is
entitled.
AMENDMENT
The Pooling Agreement may be amended by the Depositor, the Seller, the
Servicer and the Trustee without the consent of any of the certificateholders to
cure any ambiguity, to correct, modify or supplement any provision in the
Pooling Agreement, to make any other provisions with respect to matters or
questions arising under the Pooling Agreement which are not inconsistent with
the provisions of the Pooling Agreement, or to maintain the qualification of the
Trust as a REMIC, provided that the action will not adversely affect in any
material respect the interests of any certificateholder. The Pooling Agreement
may also be amended by the Depositor, the Seller, the Servicer and the Trustee
with the consent of the holders of certificates evidencing not less than 66% of
the voting rights for any purpose, but that no amendment may:
o reduce in any manner the amount of or delay the timing of,
payments received on the Mortgage Loans which are required to be
distributed on any certificate without the consent of the holder
of the certificate,
o adversely affect in any material respect the interests of the
holders of any class of certificates in a manner other than as
described in the preceding bullet point, without the consent of
the holders of certificates of that class evidencing not less than
66% of the aggregate voting rights of that class, or
o reduce the percentage of voting rights required by the preceding
bullet point for the consent to any amendment without the consent
of the holders of all certificates covered by the Pooling
Agreement then outstanding.
However, the Trustee need not consent to any amendment of the Pooling Agreement
unless it shall first have received an opinion of counsel to the effect that the
amendment will not cause the Trust to fail to
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qualify as a REMIC at any time that the related certificates are outstanding. In
addition to the conditions described above, the consent of the Counterparty will
also be necessary for certain amendments of the Pooling Agreement that
materially affect the Counterparty's rights thereunder, as more fully described
in the Pooling Agreement.
SERVICER ALTERNATIVES TO FORECLOSURE
The Servicer may foreclose on any delinquent Mortgage Loan or, subject
to certain limitations set forth in the Pooling Agreement, work out an agreement
with the mortgagor, which may involve waiving or modifying any term of the
Mortgage Loan; provided that in the judgment of the Servicer, any such
modification or waiver could reasonably be expected to result in collections and
other recoveries in respect of such Mortgage Loan in excess of Net Liquidation
Proceeds that would reasonably be expected to be recovered upon the foreclosure
of, or other realization upon, such Mortgage Loan. If the Servicer extends the
payment period or accepts a lesser amount than stated in the mortgage note in
satisfaction of the mortgage note, your yield may be reduced.
YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS
The yields to maturity of the Offered Certificates will be sensitive to
defaults on the Mortgage Loans. If a purchaser of an Offered Certificate
calculates its anticipated yield based on an assumed rate of default and amount
of losses that is lower than the default rate and amount of losses actually
incurred, its actual yield to maturity will be lower than that so calculated. In
general, the earlier a loss occurs, the greater is the effect on an investor's
yield to maturity. There can be no assurance as to the delinquency, foreclosure
or loss experience with respect to the Mortgage Loans. Because the Mortgage
Loans were underwritten in accordance with standards less stringent than those
generally acceptable to Fannie Mae and Freddie Mac with regard to a borrower's
credit standing and repayment ability, the risk of delinquencies with respect
to, and losses on, the Mortgage Loans will be greater than that of mortgage
loans underwritten in accordance with Fannie Mae and Freddie Mac standards.
The rate of principal payments, the aggregate amount of distributions
and the yields to maturity of the Offered Certificates will be affected by the
rate and timing of payments of principal on the Mortgage Loans. In particular,
the yields to maturity of each class of Class A Certificates will be most
affected by the rate and timing of payments of principal on the Mortgage Loans
in the related Subgroup. The rate of principal payments on the Mortgage Loans
will in turn be affected by the amortization schedules of the Mortgage Loans and
by the rate of principal prepayments (including for this purpose prepayments
resulting from refinancing, liquidations of the Mortgage Loans due to defaults,
casualties or condemnations and purchases by the Originator or the Servicer).
Because certain of the Mortgage Loans contain prepayment premiums, the rate of
principal payments may be less than the rate of principal payments for Mortgage
Loans that did not have prepayment premiums. The Mortgage Loans are subject to
the "due-on-sale" provisions included therein that provide that the Mortgage
Loan is assumable by a creditworthy purchaser of the related Mortgaged Property.
See "The Mortgage Pool" herein.
Prepayments, liquidations and purchases of the Mortgage Loans
(including any optional purchase) will result in distributions on the Offered
Certificates of principal amounts that would otherwise be distributed over the
remaining terms of the Mortgage Loans. Since the rate of payment of principal on
the Mortgage Loans will depend on future events and a variety of other factors,
no assurance can be given as to such rate or the rate of principal prepayments.
The extent to which the yield to maturity of a class of Offered Certificates may
vary from the anticipated yield will depend upon the degree to which such class
of Offered Certificates is purchased at a discount or premium. Further, an
investor should consider the risk that, in the case of any Offered Certificate
purchased at a discount, a slower than anticipated rate of principal payments
(including prepayments) on the Mortgage Loans could result in an actual yield to
such
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investor that is lower than the anticipated yield and, in the case of any
Offered Certificate purchased at a premium, a faster than anticipated rate of
principal payments on the Mortgage Loans could result in an actual yield to such
investor that is lower than the anticipated yield.
The rate of principal payments (including prepayments) on pools of
mortgage loans may vary significantly over time and may be influenced by a
variety of economic, geographic, social and other factors, including changes in
mortgagors' housing needs, job transfers, unemployment, mortgagors' net equity
in the mortgaged properties and servicing decisions. In general, if prevailing
interest rates were to fall significantly below the Loan Rates on the Mortgage
Loans, such Mortgage Loans could be subject to higher prepayment rates than if
prevailing interest rates were to remain at or above the Loan Rates on such
Mortgage Loans. Conversely, if prevailing interest rates were to rise
significantly, the rate of prepayments on such Mortgage Loans would generally be
expected to decrease. The Mortgage Loans may be subject to a greater rate of
principal prepayments in a low interest rate environment. For example, if
prevailing interest rates were to fall, mortgagors may be inclined to refinance
their Mortgage Loans with a fixed-rate loan to "lock in" a lower interest rate
or to refinance their Mortgage Loans with other more competitive adjustable-rate
mortgage loans. The existence of the applicable Periodic Rate Cap and Maximum
Rate with respect to the adjustable-rate Mortgage Loans also may affect the
likelihood of prepayments resulting from refinancings. No assurances can be
given as to the rate of prepayments on the Mortgage Loans in stable or changing
interest rate environments. In addition, substantially all of the
adjustable-rate Mortgage Loans will not have their initial Adjustment Date for
two or three years after the origination thereof. The prepayment experience of
these delayed first adjustment Mortgage Loans may differ from that of the other
Mortgage Loans. The delayed first adjustment Mortgage Loans may be subject to
greater rates of prepayments as they approach their initial Adjustment Dates
even if market interest rates are only slightly higher or lower than the Loan
Rates on such Mortgage Loans as borrowers seek to avoid changes in their monthly
payments.
Approximately 83.98% of the Mortgage Loans (by aggregate Cut-off Date
Principal Balance) provide for payment by the borrower of a prepayment premium
in limited circumstances on certain prepayments. The holders of the Class P
Certificates will be entitled to all prepayment premiums received on the
Mortgage Loans, and such amounts will not be available for distribution on the
other classes of certificates. Under certain circumstances, as described in the
Pooling Agreement, the Servicer may waive the payment of any otherwise
applicable prepayment premium. Investors should conduct their own analysis of
the effect, if any, that the prepayment premiums, and decisions by the Servicer
with respect to the waiver thereof, may have on the prepayment performance of
the Mortgage Loans. The Depositor makes no representations as to the effect that
the prepayment premiums, and decisions by the Servicer with respect to the
waiver thereof, may have on the prepayment performance of the Mortgage Loans.
To the extent the Net WAC Rate is paid on the LIBOR Certificates, a
shortfall in interest equal to the Net WAC Rate Carryover Amount will occur.
Such shortfall will only be payable from amounts paid under the Yield
Maintenance Agreement and the Net Monthly Excess Cashflow, but only to the
extent that the Overcollateralization Target Amount has been reached or
maintained and certain other amounts have been paid. See "Description of the
Certificates--Overcollateralization Provisions" in this prospectus supplement.
ADDITIONAL INFORMATION
The Depositor has filed certain yield tables and other computational
materials with respect to the Offered Certificates with the Securities and
Exchange Commission (the "Commission") in a report on Form 8-K and may file
certain additional yield tables and other computational materials with respect
to the Offered Certificates with the Commission in a report on Form 8-K. Such
tables and materials were
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prepared by the underwriter at the request of certain prospective investors,
based on assumptions provided by, and satisfying the special requirements of,
such prospective investors. Such tables and assumptions may be based on
assumptions that differ from the Structuring Assumptions (as defined herein).
Accordingly, such tables and other materials may not be relevant to or
appropriate for investors other than those specifically requesting them.
WEIGHTED AVERAGE LIVES
The timing of changes in the rate of principal prepayments on the
Mortgage Loans may significantly affect an investor's actual yield to maturity,
even if the average rate of principal prepayments is consistent with such
investor's expectation. In general, the earlier a principal prepayment on the
Mortgage Loans occurs, the greater the effect of such principal prepayment on an
investor's yield to maturity. The effect on an investor's yield of principal
prepayments occurring at a rate higher (or lower) than the rate anticipated by
the investor during the period immediately following the issuance of the Offered
Certificates may not be offset by a subsequent like decrease (or increase) in
the rate of principal prepayments.
The weighted average life of an Offered Certificate is the average
amount of time that will elapse from the Closing Date, until each dollar of
principal is repaid to the investors in such Offered Certificate. Because it is
expected that there will be prepayments and defaults on the Mortgage Loans, the
actual weighted average lives of the Offered Certificates are expected to vary
substantially from the weighted average remaining terms to stated maturity of
the Mortgage Loans as set forth herein under "The Mortgage Pool."
The Assumed Final Distribution Date for the Offered Certificates is as
set forth in this prospectus supplement under "Description of the
Certificates--General." The weighted average lives of the Offered Certificates
are likely to be shorter than would be the case if payments actually made on the
Mortgage Loans conformed to the foregoing assumptions, and the actual final
Distribution Date with respect to the Offered Certificates could occur
significantly earlier than the Assumed Final Distribution Date because
o prepayments are likely to occur,
o excess cashflow, if any, will be applied as principal of the Class
A Certificates and the Offered Subordinate Certificates as
described herein,
o the Overcollateralization Target Amount may change as described in
the Pooling Agreement, and
o the Servicer may cause a termination of the Trust as provided
herein.
Prepayments of mortgage loans are commonly measured relative to a
prepayment standard or model. The model used in this prospectus supplement (the
"Prepayment Assumption") assumes:
(i) In the case of the fixed-rate Mortgage Loans, 115% PPC. "PPC"
means a constant prepayment rate ("CPR") of 4.00% per annum of
the then unpaid principal balance of such Mortgage Loans in
the first month of the life of such Mortgage Loans and an
additional approximately 1.4545% (precisely 16/11 expressed as
a percentage) per annum in each month thereafter until the
12th month, and then beginning in the 12th month and in each
month thereafter during the life of such Mortgage Loans, a CPR
of 20% per annum.
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(ii) In the case of the adjustable-rate Mortgage Loans, a CPR of
26% per annum.
CPR is a prepayment assumption that represents a constant assumed rate
of prepayment each month relative to the then outstanding principal balance of a
pool of mortgage loans for the life of such mortgage loans. The model does not
purport to be either an historical description of the prepayment experience of
any pool of mortgage loans or a prediction of the anticipated rate of prepayment
of any mortgage loans, including the Mortgage Loans to be included in the Trust.
Each of the "Prepayment Scenarios" in the table below assumes the respective
percentages of CPR or PPC, as applicable, indicated for such scenario.
The table entitled "Percent of Original Certificate Principal Balance
Outstanding" was prepared on the basis of the assumptions in the following
paragraph and the table set forth below. There are certain differences between
the loan characteristics included in such assumptions and the characteristics of
the actual Mortgage Loans. Any such discrepancy may have an effect upon the
percentages of Original Certificate Principal Balances outstanding and weighted
average lives of the Offered Certificates set forth in that table. In addition,
since the actual Mortgage Loans in the Trust will have characteristics that
differ from those assumed in preparing the tables set forth below, the
distributions of principal of the Offered Certificates may be made earlier or
later than indicated in the table.
The percentages and weighted average lives in the table entitled
"Percent of Original Certificate Principal Balance Outstanding" were determined
assuming that (the "Structuring Assumptions"):
o the Mortgage Loans have the characteristics set forth in the
tables below,
o the closing date for the Offered Certificates occurs on June 3,
2003 and the Offered Certificates were sold to investors on such
date,
o distributions on the Offered Certificates are made on the 15th day
of each month regardless of the day on which the Distribution Date
actually occurs, commencing in July 2003, in accordance with the
allocation of Available Funds set forth above under "Description
of the Certificates--Allocation of Available Funds,"
o the prepayment rates are those indicated in the "Prepayment
Scenarios" table below,
o the Originator is not required to substitute or repurchase any or
all of the Mortgage Loans pursuant to the Pooling Agreement and no
optional termination is exercised, except with respect to the
entries identified by the row captioned "Weighted Average Life
(years) to Optional Termination" in the tables below,
o scheduled payments for all Mortgage Loans are received on the
first day of each month commencing in July 2003, the principal
portion of such payments is computed prior to giving effect to
prepayments received in such month and there are no losses or
delinquencies with respect to such Mortgage Loans,
o all related Mortgage Loans prepay at the same rate and all such
payments are treated as prepayments in full of individual Mortgage
Loans, with no shortfalls in collection of interest,
o such prepayments are received on the last day of each month
commencing in the month of the Closing Date,
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o one-month LIBOR is at all times equal to 1.310%,
o the Loan Rate for each adjustable-rate Mortgage Loan is adjusted
on its next Adjustment Date (and on subsequent Adjustment Dates,
if necessary) to equal the sum of (a) the assumed level of the
Index and (b) the respective Gross Margin (such sum being subject
to the applicable Periodic Rate Caps, Minimum Loan Rates and
Maximum Loan Rates), and
o six-month LIBOR is at all times equal to 1.290%.
Nothing contained in the foregoing assumptions should be construed as a
representation that the Mortgage Loans will not experience delinquencies or
losses.
Based on the foregoing assumptions, the following table entitled
"Percent of Original Certificate Principal Balance Outstanding" indicates the
percentages of the Original Certificate Principal Balance of the Offered
Certificates (other than the Class A-IO Certificates) that would be outstanding
after each of the Distribution Dates shown at various Prepayment Scenarios and
the corresponding weighted average lives.
PREPAYMENT SCENARIOS
SCENARIO I SCENARIO II SCENARIO III SCENARIO IV SCENARIO V SCENARIO VI SCENARIO VII
---------- ----------- ------------ ----------- ---------- ----------- ------------
Fixed-Rate Mortgage
Loans(1)................... 0% 50% 85% 115% 150% 175% 200%
Adjustable-Rate Mortgage
Loans(2)................... 0% 15% 21% 26% 35% 40% 45%
- -----------------------
(1) Percentage per annum (PPC).
(2) Percentage per annum (CPR).
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ASSUMED MORTGAGE LOAN CHARACTERISTICS
SUBGROUP 1
ORIGINAL REMAINING
TERM TO TERM TO
NET ORIGINAL STATED STATED
LOAN BALANCE GROSS LOAN LOAN AMORTIZATION MATURITY MATURITY GROSS MIN. RATE
DESCRIPTION ($) RATE (%) RATE (%) TERM (MONTHS) (MONTHS) (MONTHS) MARGIN (%) (%)
- --------------------- ------------ ---------- -------- ------------- -------- --------- ---------- ---------
Adjustable-Rate 2/28* 46,637,095 7.868 7.368 360 360 358 5.931 7.868
20,368,683 7.721 7.221 360 360 358 5.907 7.721
223,790,757 7.646 7.146 360 360 358 5.915 7.646
3,848,751 8.117 7.617 360 360 358 6.053 8.117
MONTHS TO
INITIAL NEXT
MAX. RATE PERIODIC PERIODIC ADJUSTMENT
DESCRIPTION (%) CAP (%) CAP (%) DATE
- --------------------- --------- --------- -------- -----------
Adjustable-Rate 2/28* 14.844 1.488 1.486 22
14.721 1.500 1.500 22
14.645 1.500 1.499 22
15.117 1.500 1.500 22
ORIGINAL REMAINING
TERM TO TERM TO
NET ORIGINAL STATED STATED
LOAN BALANCE GROSS LOAN LOAN AMORTIZATION MATURITY MATURITY GROSS MIN. RATE
DESCRIPTION ($) RATE (%) RATE (%) TERM (MONTHS) (MONTHS) (MONTHS) MARGIN (%) (%)
- --------------------- ------------ ---------- -------- ------------- -------- --------- ---------- ---------
Adjustable-Rate 3/27* 2,446,244 7.996 7.496 360 360 358 5.725 7.996
1,243,153 7.544 7.044 360 360 358 5.516 7.544
2,959,414 7.688 7.188 360 360 358 5.448 7.688
8,273,106 7.386 6.886 360 360 358 5.608 7.386
MONTHS TO
INITIAL NEXT
MAX. RATE PERIODIC PERIODIC ADJUSTMENT
DESCRIPTION (%) CAP (%) CAP (%) DATE
- --------------------- --------- --------- -------- -----------
Adjustable-Rate 3/27* 14.996 1.500 1.500 34
14.544 1.500 1.500 34
14.688 1.500 1.500 34
14.386 1.500 1.500 34
ORIGINAL REMAINING
TERM TO TERM TO
NET ORIGINAL STATED STATED
LOAN BALANCE GROSS LOAN LOAN AMORTIZATION MATURITY MATURITY GROSS MIN. RATE
DESCRIPTION ($) RATE (%) RATE (%) TERM (MONTHS) (MONTHS) (MONTHS) MARGIN (%) (%)
- --------------------- ------------ ---------- -------- ------------- -------- --------- ---------- ---------
Fixed-Rate 13,454,361 8.182 7.682 328 328 326 N/A N/A
7,029,688 7.653 7.153 338 338 336 N/A N/A
5,062,651 7.818 7.318 355 355 353 N/A N/A
33,053,762 7.927 7.427 345 345 343 N/A N/A
MONTHS TO
INITIAL NEXT
MAX. RATE PERIODIC PERIODIC ADJUSTMENT
DESCRIPTION (%) CAP (%) CAP (%) DATE
- --------------------- --------- --------- -------- -----------
Fixed-Rate N/A N/A N/A N/A
N/A N/A N/A N/A
N/A N/A N/A N/A
N/A N/A N/A N/A
- -----------------------
* These Mortgage Loans have Loan Rates that adjust based upon the six-month
LIBOR index.
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SUBGROUP 2
ORIGINAL REMAINING
TERM TO TERM TO
NET ORIGINAL STATED STATED
LOAN BALANCE GROSS LOAN LOAN AMORTIZATION MATURITY MATURITY GROSS MIN. RATE
DESCRIPTION ($) RATE (%) RATE (%) TERM (MONTHS) (MONTHS) (MONTHS) MARGIN (%) (%)
- --------------------- ------------ ---------- -------- ------------- -------- --------- ---------- ---------
Adjustable-Rate 2/28* 19,470,928 7.605 7.105 358 358 356 5.771 7.605
15,335,717 7.571 7.071 360 360 358 6.001 7.571
131,302,017 7.449 6.949 360 360 358 5.867 7.449
1,256,929 8.429 7.929 360 360 358 6.471 8.429
MONTHS TO
INITIAL NEXT
MAX. RATE PERIODIC PERIODIC ADJUSTMENT
DESCRIPTION (%) CAP (%) CAP (%) DATE
- --------------------- --------- --------- -------- -----------
Adjustable-Rate 2/28* 14.607 1.550 1.547 21
14.571 1.500 1.500 22
14.447 1.499 1.499 22
15.429 1.500 1.500 22
ORIGINAL REMAINING
TERM TO TERM TO
NET ORIGINAL STATED STATED
LOAN BALANCE GROSS LOAN LOAN AMORTIZATION MATURITY MATURITY GROSS MIN. RATE
DESCRIPTION ($) RATE (%) RATE (%) TERM (MONTHS) (MONTHS) (MONTHS) MARGIN (%) (%)
- --------------------- ------------ ---------- -------- ------------- -------- --------- ---------- ---------
Adjustable-Rate 3/27* 2,421,037 7.323 6.823 360 360 358 6.237 7.323
202,096 6.000 5.500 360 360 358 5.250 6.000
950,914 7.632 7.132 360 360 358 5.698 7.632
2,790,317 7.458 6.958 360 360 358 5.872 7.458
MONTHS TO
INITIAL NEXT
MAX. RATE PERIODIC PERIODIC ADJUSTMENT
DESCRIPTION (%) CAP (%) CAP (%) DATE
- --------------------- --------- --------- -------- -----------
Adjustable-Rate 3/27* 14.295 1.486 1.486 38
13.000 1.500 1.500 34
14.632 1.500 1.500 34
14.458 1.500 1.500 34
ORIGINAL REMAINING
TERM TO TERM TO
NET ORIGINAL STATED STATED
LOAN BALANCE GROSS LOAN LOAN AMORTIZATION MATURITY MATURITY GROSS MIN. RATE
DESCRIPTION ($) RATE (%) RATE (%) TERM (MONTHS) (MONTHS) (MONTHS) MARGIN (%) (%)
- --------------------- ------------ ---------- -------- ------------- -------- --------- ---------- ---------
Fixed-Rate 12,758,471 9.050 8.550 318 318 316 N/A N/A
8,287,716 7.689 7.189 339 339 337 N/A N/A
6,556,770 9.512 9.012 287 287 285 N/A N/A
37,251,910 7.757 7.257 343 343 341 N/A N/A
MONTHS TO
INITIAL NEXT
MAX. RATE PERIODIC PERIODIC ADJUSTMENT
DESCRIPTION (%) CAP (%) CAP (%) DATE
- --------------------- --------- --------- -------- -----------
Fixed-Rate N/A N/A N/A N/A
N/A N/A N/A N/A
N/A N/A N/A N/A
N/A N/A N/A N/A
- -----------------------
* These Mortgage Loans have Loan Rates that adjust based upon the
six-month LIBOR index.
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PERCENT OF ORIGINAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING(1)
CLASS A1
PREPAYMENT SCENARIO
----------------------------------------------------------------------------------------------------
SCENARIO I SCENARIO II SCENARIO III SCENARIO IV SCENARIO V SCENARIO VI SCENARIO VII
---------- ----------- ------------ ----------- ---------- ----------- ------------
DISTRIBUTION DATE
Initial Percentage..... 100% 100% 100% 100% 100% 100% 100%
June 25, 2004.......... 96 79 72 66 56 50 45
June 25, 2005.......... 95 64 52 43 28 21 14
June 25, 2006.......... 94 50 36 25 10 3 0
June 25, 2007.......... 92 39 28 22 10 3 0
June 25, 2008.......... 91 32 22 16 8 3 0
June 25, 2009.......... 89 27 17 12 5 3 0
June 25, 2010.......... 87 23 14 8 3 2 0
June 25, 2011.......... 85 19 11 6 2 1 0
June 25, 2012.......... 83 16 8 4 1 * 0
June 25, 2013.......... 81 14 6 3 1 0 0
June 25, 2014.......... 79 11 5 2 * 0 0
June 25, 2015.......... 76 10 4 2 0 0 0
June 25, 2016.......... 73 8 3 1 0 0 0
June 25, 2017.......... 70 7 2 1 0 0 0
June 25, 2018.......... 67 5 2 * 0 0 0
June 25, 2019.......... 63 4 1 0 0 0 0
June 25, 2020.......... 60 4 1 0 0 0 0
June 25, 2021.......... 55 3 1 0 0 0 0
June 25, 2022.......... 51 2 * 0 0 0 0
June 25, 2023.......... 46 2 0 0 0 0 0
June 25, 2024.......... 41 1 0 0 0 0 0
June 25, 2025.......... 36 1 0 0 0 0 0
June 25, 2026.......... 33 1 0 0 0 0 0
June 25, 2027.......... 29 * 0 0 0 0 0
June 25, 2028.......... 24 * 0 0 0 0 0
June 25, 2029.......... 20 0 0 0 0 0 0
June 25, 2030.......... 15 0 0 0 0 0 0
June 25, 2031.......... 10 0 0 0 0 0 0
June 25, 2032.......... 5 0 0 0 0 0 0
June 25, 2033.......... 0 0 0 0 0 0 0
Weighted Average
Life to Maturity
(in years)(2)...... 18.04 4.79 3.40 2.67 1.80 1.39 1.10
Weighted Average
Life to Optional
Termination
(in years)(2)(3)... 17.97 4.51 3.17 2.48 1.67 1.31 1.10
- -----------------------
* Greater than zero but less than 0.5%.
(1) Rounded to the nearest whole percentage.
(2) The weighted average life of any class of Offered Certificates is
determined by (i) multiplying the assumed net reduction, if any, in the
principal amount on each Distribution Date on such class of Offered
Certificates by the number of years from the date of issuance of the
Offered Certificates to the related Distribution Date, (ii) summing the
results, and (iii) dividing the sum by the aggregate amount of the assumed
net reductions in principal amount on such class of Offered Certificates.
(3) Calculated pursuant to footnote (2) but assumes the Optional Termination is
exercised on the earliest possible Distribution Date on which the Servicer
is permitted to exercise such option.
S-100
PERCENT OF ORIGINAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING(1)
CLASS A2
PREPAYMENT SCENARIO
----------------------------------------------------------------------------------------------------
SCENARIO I SCENARIO II SCENARIO III SCENARIO IV SCENARIO V SCENARIO VI SCENARIO VII
---------- ----------- ------------ ----------- ---------- ----------- ------------
DISTRIBUTION DATE
Initial Percentage..... 100% 100% 100% 100% 100% 100% 100%
June 25, 2004.......... 96 81 74 68 58 53 47
June 25, 2005.......... 95 65 53 44 30 22 16
June 25, 2006.......... 93 52 37 26 11 4 0
June 25, 2007.......... 92 41 30 23 11 4 0
June 25, 2008.......... 90 34 24 17 10 4 0
June 25, 2009.......... 88 29 19 13 7 4 0
June 25, 2010.......... 87 25 15 9 5 3 0
June 25, 2011.......... 85 21 12 7 3 2 0
June 25, 2012.......... 82 18 9 5 2 1 0
June 25, 2013.......... 80 16 8 4 2 1 0
June 25, 2014.......... 78 13 6 3 1 0 0
June 25, 2015.......... 75 11 5 2 * 0 0
June 25, 2016.......... 72 10 4 2 0 0 0
June 25, 2017.......... 69 8 3 1 0 0 0
June 25, 2018.......... 65 7 2 1 0 0 0
June 25, 2019.......... 62 6 2 1 0 0 0
June 25, 2020.......... 58 5 2 0 0 0 0
June 25, 2021.......... 53 4 1 0 0 0 0
June 25, 2022.......... 49 4 1 0 0 0 0
June 25, 2023.......... 44 3 1 0 0 0 0
June 25, 2024.......... 38 3 * 0 0 0 0
June 25, 2025.......... 33 2 0 0 0 0 0
June 25, 2026.......... 29 2 0 0 0 0 0
June 25, 2027.......... 25 1 0 0 0 0 0
June 25, 2028.......... 21 1 0 0 0 0 0
June 25, 2029.......... 17 * 0 0 0 0 0
June 25, 2030.......... 12 0 0 0 0 0 0
June 25, 2031.......... 7 0 0 0 0 0 0
June 25, 2032.......... 3 0 0 0 0 0 0
June 25, 2033.......... 0 0 0 0 0 0 0
Weighted Average
Life to Maturity
(in years)(2)...... 17.55 5.19 3.62 2.82 1.96 1.53 1.15
Weighted Average
Life to Optional
Termination
(in years)(2)(3)... 17.51 4.77 3.29 2.57 1.75 1.38 1.15
- -----------------------
* Greater than zero but less than 0.5%.
(1) Rounded to the nearest whole percentage.
(2) The weighted average life of any class of Offered Certificates is
determined by (i) multiplying the assumed net reduction, if any, in the
principal amount on each Distribution Date on such class of Offered
Certificates by the number of years from the date of issuance of the
Offered Certificates to the related Distribution Date, (ii) summing the
results, and (iii) dividing the sum by the aggregate amount of the assumed
net reductions in principal amount on such class of Offered Certificates.
(3) Calculated pursuant to footnote (2) but assumes the Optional Termination is
exercised on the earliest possible Distribution Date on which the Servicer
is permitted to exercise such option.
S-101
PERCENT OF ORIGINAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING(1)
CLASS M1
PREPAYMENT SCENARIO
----------------------------------------------------------------------------------------------------
SCENARIO I SCENARIO II SCENARIO III SCENARIO IV SCENARIO V SCENARIO VI SCENARIO VII
---------- ----------- ------------ ----------- ---------- ----------- ------------
DISTRIBUTION DATE
Initial Percentage..... 100% 100% 100% 100% 100% 100% 100%
June 25, 2004.......... 100 100 100 100 100 100 100
June 25, 2005.......... 100 100 100 100 100 100 100
June 25, 2006.......... 100 100 100 100 100 100 93
June 25, 2007.......... 100 100 79 61 78 100 93
June 25, 2008.......... 100 90 62 45 25 52 62
June 25, 2009.......... 100 77 49 33 16 15 35
June 25, 2010.......... 100 65 39 24 11 6 19
June 25, 2011.......... 100 55 30 18 7 4 7
June 25, 2012.......... 100 47 24 13 5 0 1
June 25, 2013.......... 100 40 19 10 1 0 0
June 25, 2014.......... 100 34 15 7 0 0 0
June 25, 2015.......... 100 28 11 5 0 0 0
June 25, 2016.......... 100 24 9 4 0 0 0
June 25, 2017.......... 100 20 7 1 0 0 0
June 25, 2018.......... 100 17 5 0 0 0 0
June 25, 2019.......... 100 14 4 0 0 0 0
June 25, 2020.......... 100 12 2 0 0 0 0
June 25, 2021.......... 100 9 0 0 0 0 0
June 25, 2022.......... 100 8 0 0 0 0 0
June 25, 2023.......... 100 6 0 0 0 0 0
June 25, 2024.......... 100 5 0 0 0 0 0
June 25, 2025.......... 96 4 0 0 0 0 0
June 25, 2026.......... 86 2 0 0 0 0 0
June 25, 2027.......... 75 0 0 0 0 0 0
June 25, 2028.......... 64 0 0 0 0 0 0
June 25, 2029.......... 51 0 0 0 0 0 0
June 25, 2030.......... 38 0 0 0 0 0 0
June 25, 2031.......... 24 0 0 0 0 0 0
June 25, 2032.......... 11 0 0 0 0 0 0
June 25, 2033.......... 0 0 0 0 0 0 0
Weighted Average
Life to Maturity
(in years)(2)...... 26.04 10.14 7.12 5.74 4.99 5.33 5.70
Weighted Average
Life to Optional
Termination
(in years)(2)(3)... 25.89 9.27 6.43 5.20 4.58 4.63 3.95
- -----------------------
(1) Rounded to the nearest whole percentage.
(2) The weighted average life of any class of Offered Certificates is
determined by (i) multiplying the assumed net reduction, if any, in the
principal amount on each Distribution Date on such class of Offered
Certificates by the number of years from the date of issuance of the
Offered Certificates to the related Distribution Date, (ii) summing the
results, and (iii) dividing the sum by the aggregate amount of the assumed
net reductions in principal amount on such class of Offered Certificates.
(3) Calculated pursuant to footnote (2) but assumes the Optional Termination is
exercised on the earliest possible Distribution Date on which the Servicer
is permitted to exercise such option.
S-102
PERCENT OF ORIGINAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING(1)
CLASS M2
PREPAYMENT SCENARIO
----------------------------------------------------------------------------------------------------
SCENARIO I SCENARIO II SCENARIO III SCENARIO IV SCENARIO V SCENARIO VI SCENARIO VII
---------- ----------- ------------ ----------- ---------- ----------- ------------
DISTRIBUTION DATE
Initial Percentage..... 100% 100% 100% 100% 100% 100% 100%
June 25, 2004.......... 100 100 100 100 100 100 100
June 25, 2005.......... 100 100 100 100 100 100 100
June 25, 2006.......... 100 100 100 100 100 100 100
June 25, 2007.......... 100 100 79 61 38 43 41
June 25, 2008.......... 100 90 62 45 25 17 11
June 25, 2009.......... 100 77 49 33 16 10 6
June 25, 2010.......... 100 65 39 24 11 6 0
June 25, 2011.......... 100 55 30 18 7 * 0
June 25, 2012.......... 100 47 24 13 2 0 0
June 25, 2013.......... 100 40 19 10 0 0 0
June 25, 2014.......... 100 34 15 7 0 0 0
June 25, 2015.......... 100 28 11 3 0 0 0
June 25, 2016.......... 100 24 9 * 0 0 0
June 25, 2017.......... 100 20 7 0 0 0 0
June 25, 2018.......... 100 17 4 0 0 0 0
June 25, 2019.......... 100 14 1 0 0 0 0
June 25, 2020.......... 100 12 0 0 0 0 0
June 25, 2021.......... 100 9 0 0 0 0 0
June 25, 2022.......... 100 8 0 0 0 0 0
June 25, 2023.......... 100 6 0 0 0 0 0
June 25, 2024.......... 100 3 0 0 0 0 0
June 25, 2025.......... 96 1 0 0 0 0 0
June 25, 2026.......... 86 0 0 0 0 0 0
June 25, 2027.......... 75 0 0 0 0 0 0
June 25, 2028.......... 64 0 0 0 0 0 0
June 25, 2029.......... 51 0 0 0 0 0 0
June 25, 2030.......... 38 0 0 0 0 0 0
June 25, 2031.......... 24 0 0 0 0 0 0
June 25, 2032.......... 11 0 0 0 0 0 0
June 25, 2033.......... 0 0 0 0 0 0 0
Weighted Average
Life to Maturity
(in years)(2)...... 26.03 10.07 7.05 5.64 4.59 4.40 4.19
Weighted Average
Life to Optional
Termination
(in years)(2)(3)... 25.89 9.27 6.43 5.15 4.22 4.09 3.88
- -----------------------
* Greater than zero but less than 0.5%.
(1) Rounded to the nearest whole percentage.
(2) The weighted average life of any class of Offered Certificates is
determined by (i) multiplying the assumed net reduction, if any, in the
principal amount on each Distribution Date on such class of Offered
Certificates by the number of years from the date of issuance of the
Offered Certificates to the related Distribution Date, (ii) summing the
results, and (iii) dividing the sum by the aggregate amount of the assumed
net reductions in principal amount on such class of Offered Certificates.
(3) Calculated pursuant to footnote (2) but assumes the Optional Termination is
exercised on the earliest possible Distribution Date on which the Servicer
is permitted to exercise such option.
S-103
PERCENT OF ORIGINAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING(1)
CLASS M3
PREPAYMENT SCENARIO
----------------------------------------------------------------------------------------------------
SCENARIO I SCENARIO II SCENARIO III SCENARIO IV SCENARIO V SCENARIO VI SCENARIO VII
---------- ----------- ------------ ----------- ---------- ----------- ------------
DISTRIBUTION DATE
Initial Percentage..... 100% 100% 100% 100% 100% 100% 100%
June 25, 2004.......... 100 100 100 100 100 100 100
June 25, 2005.......... 100 100 100 100 100 100 100
June 25, 2006.......... 100 100 100 100 100 100 100
June 25, 2007.......... 100 100 79 61 38 28 20
June 25, 2008.......... 100 90 62 45 25 17 11
June 25, 2009.......... 100 77 49 33 16 10 *
June 25, 2010.......... 100 65 39 24 11 0 0
June 25, 2011.......... 100 55 30 18 3 0 0
June 25, 2012.......... 100 47 24 13 0 0 0
June 25, 2013.......... 100 40 19 10 0 0 0
June 25, 2014.......... 100 34 15 4 0 0 0
June 25, 2015.......... 100 28 11 0 0 0 0
June 25, 2016.......... 100 24 9 0 0 0 0
June 25, 2017.......... 100 20 4 0 0 0 0
June 25, 2018.......... 100 17 0 0 0 0 0
June 25, 2019.......... 100 14 0 0 0 0 0
June 25, 2020.......... 100 12 0 0 0 0 0
June 25, 2021.......... 100 9 0 0 0 0 0
June 25, 2022.......... 100 7 0 0 0 0 0
June 25, 2023.......... 100 * 0 0 0 0 0
June 25, 2024.......... 100 0 0 0 0 0 0
June 25, 2025.......... 96 0 0 0 0 0 0
June 25, 2026.......... 86 0 0 0 0 0 0
June 25, 2027.......... 75 0 0 0 0 0 0
June 25, 2028.......... 64 0 0 0 0 0 0
June 25, 2029.......... 51 0 0 0 0 0 0
June 25, 2030.......... 38 0 0 0 0 0 0
June 25, 2031.......... 24 0 0 0 0 0 0
June 25, 2032.......... 11 0 0 0 0 0 0
June 25, 2033.......... 0 0 0 0 0 0 0
Weighted Average
Life to Maturity
(in years)(2)...... 26.02 9.97 6.96 5.55 4.42 4.11 3.80
Weighted Average
Life to Optional
Termination
(in years)(2)(3)... 25.89 9.27 6.43 5.13 4.10 3.85 3.58
- -----------------------
* Greater than zero but less than 0.5%.
(1) Rounded to the nearest whole percentage.
(2) The weighted average life of any class of Offered Certificates is
determined by (i) multiplying the assumed net reduction, if any, in the
principal amount on each Distribution Date on such class of Offered
Certificates by the number of years from the date of issuance of the
Offered Certificates to the related Distribution Date, (ii) summing the
results, and (iii) dividing the sum by the aggregate amount of the assumed
net reductions in principal amount on such class of Offered Certificates.
(3) Calculated pursuant to footnote (2) but assumes the Optional Termination is
exercised on the earliest possible Distribution Date on which the Servicer
is permitted to exercise such option.
S-104
PERCENT OF ORIGINAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING(1)
CLASS M4
PREPAYMENT SCENARIO
----------------------------------------------------------------------------------------------------
SCENARIO I SCENARIO II SCENARIO III SCENARIO IV SCENARIO V SCENARIO VI SCENARIO VII
---------- ----------- ------------ ----------- ---------- ----------- ------------
DISTRIBUTION DATE
Initial Percentage..... 100% 100% 100% 100% 100% 100% 100%
June 25, 2004.......... 100 100 100 100 100 100 100
June 25, 2005.......... 100 100 100 100 100 100 100
June 25, 2006.......... 100 100 100 100 100 100 100
June 25, 2007.......... 100 100 79 60 38 28 20
June 25, 2008.......... 100 90 62 45 25 17 8
June 25, 2009.......... 100 77 49 33 16 6 0
June 25, 2010.......... 100 65 39 24 7 0 0
June 25, 2011.......... 100 55 30 18 0 0 0
June 25, 2012.......... 100 47 24 13 0 0 0
June 25, 2013.......... 100 40 19 4 0 0 0
June 25, 2014.......... 100 33 15 0 0 0 0
June 25, 2015.......... 100 28 9 0 0 0 0
June 25, 2016.......... 100 24 3 0 0 0 0
June 25, 2017.......... 100 20 0 0 0 0 0
June 25, 2018.......... 100 17 0 0 0 0 0
June 25, 2019.......... 100 14 0 0 0 0 0
June 25, 2020.......... 100 9 0 0 0 0 0
June 25, 2021.......... 100 4 0 0 0 0 0
June 25, 2022.......... 100 0 0 0 0 0 0
June 25, 2023.......... 100 0 0 0 0 0 0
June 25, 2024.......... 100 0 0 0 0 0 0
June 25, 2025.......... 96 0 0 0 0 0 0
June 25, 2026.......... 86 0 0 0 0 0 0
June 25, 2027.......... 75 0 0 0 0 0 0
June 25, 2028.......... 64 0 0 0 0 0 0
June 25, 2029.......... 51 0 0 0 0 0 0
June 25, 2030.......... 38 0 0 0 0 0 0
June 25, 2031.......... 24 0 0 0 0 0 0
June 25, 2032.......... 8 0 0 0 0 0 0
June 25, 2033.......... 0 0 0 0 0 0 0
Weighted Average
Life to Maturity
(in years)(2)...... 25.99 9.81 6.84 5.44 4.29 3.95 3.62
Weighted Average
Life to Optional
Termination
(in years)(2)(3)... 25.88 9.26 6.42 5.12 4.05 3.75 3.45
- -----------------------
(1) Rounded to the nearest whole percentage.
(2) The weighted average life of any class of Offered Certificates is
determined by (i) multiplying the assumed net reduction, if any, in the
principal amount on each Distribution Date on such class of Offered
Certificates by the number of years from the date of issuance of the
Offered Certificates to the related Distribution Date, (ii) summing the
results, and (iii) dividing the sum by the aggregate amount of the assumed
net reductions in principal amount on such class of Offered Certificates.
(3) Calculated pursuant to footnote (2) but assumes the Optional Termination is
exercised on the earliest possible Distribution Date on which the Servicer
is permitted to exercise such option.
S-105
PERCENT OF ORIGINAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING(1)
CLASS M5
PREPAYMENT SCENARIO
----------------------------------------------------------------------------------------------------
SCENARIO I SCENARIO II SCENARIO III SCENARIO IV SCENARIO V SCENARIO VI SCENARIO VII
---------- ----------- ------------ ----------- ---------- ----------- ------------
DISTRIBUTION DATE
Initial Percentage..... 100% 100% 100% 100% 100% 100% 100%
June 25, 2004.......... 100 100 100 100 100 100 100
June 25, 2005.......... 100 100 100 100 100 100 100
June 25, 2006.......... 100 100 100 100 100 100 79
June 25, 2007.......... 100 100 79 60 38 28 18
June 25, 2008.......... 100 90 62 45 25 10 0
June 25, 2009.......... 100 77 49 33 8 0 0
June 25, 2010.......... 100 65 39 24 0 0 0
June 25, 2011.......... 100 55 30 12 0 0 0
June 25, 2012.......... 100 47 24 * 0 0 0
June 25, 2013.......... 100 40 15 0 0 0 0
June 25, 2014.......... 100 33 4 0 0 0 0
June 25, 2015.......... 100 28 0 0 0 0 0
June 25, 2016.......... 100 24 0 0 0 0 0
June 25, 2017.......... 100 18 0 0 0 0 0
June 25, 2018.......... 100 10 0 0 0 0 0
June 25, 2019.......... 100 2 0 0 0 0 0
June 25, 2020.......... 100 0 0 0 0 0 0
June 25, 2021.......... 100 0 0 0 0 0 0
June 25, 2022.......... 100 0 0 0 0 0 0
June 25, 2023.......... 100 0 0 0 0 0 0
June 25, 2024.......... 100 0 0 0 0 0 0
June 25, 2025.......... 96 0 0 0 0 0 0
June 25, 2026.......... 86 0 0 0 0 0 0
June 25, 2027.......... 75 0 0 0 0 0 0
June 25, 2028.......... 64 0 0 0 0 0 0
June 25, 2029.......... 51 0 0 0 0 0 0
June 25, 2030.......... 38 0 0 0 0 0 0
June 25, 2031.......... 24 0 0 0 0 0 0
June 25, 2032.......... 0 0 0 0 0 0 0
June 25, 2033.......... 0 0 0 0 0 0 0
Weighted Average
Life to Maturity
(in years)(1)...... 25.93 9.47 6.58 5.23 4.10 3.75 3.41
Weighted Average
Life to Optional
Termination
(in years)(1)(2)... 25.88 9.26 6.42 5.11 4.01 3.67 3.35
- -----------------------
* Greater than zero but less than 0.5%.
(1) Rounded to the nearest whole percentage.
(2) The weighted average life of any class of Offered Certificates is
determined by (i) multiplying the assumed net reduction, if any, in the
principal amount on each Distribution Date on such class of Offered
Certificates by the number of years from the date of issuance of the
Offered Certificates to the related Distribution Date, (ii) summing the
results, and (iii) dividing the sum by the aggregate amount of the assumed
net reductions in principal amount on such class of Offered Certificates.
(3) Calculated pursuant to footnote (2) but assumes the Optional Termination is
exercised on the earliest possible Distribution Date on which the Servicer
is permitted to exercise such option.
S-106
SENSITIVITY OF THE CLASS A-IO CERTIFICATES
As indicated in the table below, the yield to investors on the Class
A-IO Certificates will be sensitive to the rate of principal payments (including
prepayments) of the Mortgage Loans to the extent that on any Distribution Date
the Pool Balance is less than the Class A-IO Notional Balance for such
Distribution Date. The Mortgage Loans generally can be prepaid at any time. On
the basis of the assumptions described below, the yield to maturity on the Class
A-IO Certificates would be approximately 0% if prepayments were to occur at
approximately 84.00% CPR (assuming optional termination is not exercised). If
the actual prepayment rate of the Mortgage Loans were to exceed the applicable
level for as little as one month while equaling such level for the remaining
months, the investors in the Class A-IO Certificates would not fully recoup
their initial investments.
The information set forth in the following table has been prepared on
the basis of the Structuring Assumptions (which assume no Realized Losses), and
on the assumption that the purchase price (expressed as a percentage of its
initial Notional Amount) of the Class A-IO Certificates is as follows:
CLASS OF CERTIFICATES PRICE*
- --------------------- ------
Class A-IO........................................... 5.97%
* The price does not include accrued interest. Accrued interest has been
added to such price in calculating the yields set forth in the table
below.
SENSITIVITY OF THE CLASS A-IO CERTIFICATES TO PREPAYMENTS
(PRE-TAX YIELDS)
PREPAYMENT SCENARIO
- ---------------------------------- -----------------------------------------------------------------------------------------------
CLASS A-IO SCENARIO I SCENARIO II SCENARIO III SCENARIO IV SCENARIO V SCENARIO VI SCENARIO VII
- ---------------------------------- ---------- ----------- ------------ ----------- ---------- ----------- ------------
Optional Termination Not Exercised 3.04% 3.04% 3.04% 3.04% 3.04% 3.04% 3.04%
Optional Termination Exercised 3.04% 3.04% 3.04% 3.04% 3.04% 3.04% 3.04%
It is highly unlikely that all of the Mortgage Loans will have the
characteristics assumed or that the Mortgage Loans will prepay at any constant
rate until maturity or that all of the Mortgage Loans will prepay at the same
rate or time. As a result of these factors, the pre-tax yields on the Class A-IO
Certificates are likely to differ from those shown in the table above, even if
all of the Mortgage Loans prepay at the indicated percentages of the Prepayment
Assumption. No representation is made as to the actual rate of principal
payments on the Mortgage Loans for any period or over the lives of the Class
A-IO Certificates or as to the yield on the Class A-IO Certificates. Investors
must make their own decisions as to the appropriate prepayment assumptions to be
used in deciding whether to purchase the Class A-IO Certificates.
YIELD SENSITIVITY OF THE OFFERED SUBORDINATE CERTIFICATES
If the Certificate Principal Balances of the Class M5 Certificates,
Class M4 Certificates, Class M3 Certificates and the Class M2 Certificates have
each been reduced to zero, the yield to maturity on the Class M1 Certificates
will become extremely sensitive to losses on the Mortgage Loans (and the timing
thereof), because the entire amount of any Realized Losses (to the extent not
covered by Net Monthly Excess Cashflow or overcollateralization) will be
allocated to the Class M1 Certificates. If the Certificate Principal Balances of
the Class M5 Certificates, Class M4 Certificates and Class M3 Certificates have
each been reduced to zero, the yield to maturity on the Class M2 Certificates
will become extremely sensitive to losses on the Mortgage Loans (and the timing
thereof), because the entire amount of any
S-107
Realized Losses (to the extent not covered by Net Monthly Excess Cashflow or
overcollateralization) will be allocated to the Class M2 Certificates. If the
Certificate Principal Balances of the Class M5 Certificates and Class M4
Certificates has been reduced to zero, the yield to maturity on the Class M3
Certificates will become extremely sensitive to losses on the Mortgage Loans
(and the timing thereof), because the entire amount of any Realized Losses (to
the extent not covered by Net Monthly Excess Cashflow or overcollateralization)
will be allocated to the Class M3 Certificates. If the Certificate Principal
Balances of the Class M5 Certificates has been reduced to zero, the yield to
maturity on the Class M4 Certificates will become extremely sensitive to losses
on the Mortgage Loans (and the timing thereof), because the entire amount of any
Realized Losses (to the extent not covered by Net Monthly Excess Cashflow or
overcollateralization) will be allocated to the Class M4 Certificates. If the
Overcollateralization Amount is reduced to zero, the yield to maturity on the
Class M5 Certificates will become extremely sensitive to losses on the Mortgage
Loans (and the timing thereof), because the entire amount of any Realized Losses
(to the extent not covered by Net Monthly Excess Cashflow) will be allocated to
the Class M5 Certificates. The initial undivided interests in the Trust
evidenced by the Class M1 Certificates, the Class M2 Certificates, the Class M3
Certificates, the Class M4 Certificates and the Class M5 Certificates are
approximately 6.50%, approximately 5.50%, approximately 1.75%, approximately
2.50% and approximately 1.50%, respectively. Investors in the Offered
Subordinate Certificates should fully consider the risk that Realized Losses on
the Mortgage Loans could result in the failure of such investors to fully
recover their investments. In addition, once Realized Losses have been allocated
to the Offered Subordinate Certificates, such amounts with respect to such
Offered Subordinate Certificates will no longer accrue interest and will not be
reinstated thereafter and no amounts in respect thereof will be distributed to
such Offered Subordinate Certificates. However, Allocated Realized Loss Amounts
may be paid to the holders of the Offered Subordinate Certificates from Net
Monthly Excess Cashflow in the priorities set forth under "Description of the
Certificates --Overcollateralization Provisions" in this prospectus supplement.
Unless the aggregate Certificate Principal Balance of the Class A
Certificates has been reduced to zero, the Offered Subordinate Certificates will
not be entitled to any principal distributions until the Stepdown Date or during
any period in which a Trigger Event is in effect. As a result, the weighted
average lives of the Offered Subordinate Certificates will be longer than would
otherwise be the case if distributions of principal were allocated on a pro rata
basis among the Class A Certificates and the Offered Subordinate Certificates.
As a result of the longer weighted average lives of the Offered Subordinate
Certificates, the holders of such Offered Subordinate Certificates have a
greater risk of suffering a loss on their investments. Further, because a
Trigger Event may occur as a result of delinquencies and not losses on the
Mortgage Loans, it is possible for the Offered Subordinate Certificates to
receive no principal distributions (unless the aggregate Certificate Principal
Balance of the Class A Certificates has been reduced to zero) on and after the
Stepdown Date even if no losses have occurred on the Mortgage Pool.
USE OF PROCEEDS
The Depositor will apply the net proceeds of the sale of the Offered
Certificates against the purchase price of the Mortgage Loans transferred to the
Trust on the Closing Date.
FEDERAL INCOME TAX CONSEQUENCES
Multiple elections will be made to treat designated portions of the
Trust (exclusive of the Yield Maintenance Agreement and the Net WAC Reserve
Fund) as a real estate mortgage investment conduits ("REMICs") for federal
income tax purposes. Upon the issuance of the Offered Certificates, McKee Nelson
LLP, counsel to the Depositor, will deliver its opinion generally to the effect
that, assuming
S-108
compliance with all provisions of the Pooling Agreement, for federal income tax
purposes, each REMIC elected by the Trust will qualify as a REMIC under Sections
860A through 860G of the Internal Revenue Code of 1986 (the "Code").
For federal income tax purposes, (i) the Residual Certificates will
consist of components, each of which will represent the sole class of "residual
interests" in a REMIC elected by the Trust and (ii) the Offered Certificates
(exclusive of any right of the holder of such Offered Certificates to receive
any payments from the Net WAC Reserve Fund in respect of the Net WAC Rate
Carryover Amount), the Class A-INV-IO, the Class B-IO, the Class X and Class P
Certificates will represent the "regular interests" in, and generally will be
treated as debt instruments of, a REMIC.
Subject to the discussion under the caption "Potential Alternative
Treatment of Net WAC Rate Carryover Amounts," each holder of a LIBOR Certificate
will be deemed to own an undivided beneficial ownership interest in two assets,
a REMIC regular interest and the right to receive payments from the Net WAC
Reserve Fund in respect of the Net WAC Rate Carryover Amount. The Net WAC
Reserve Fund is not an asset of any REMIC. The treatment of amounts received by
holders of LIBOR Certificates under such certificateholder's right to receive
the Net WAC Rate Carryover Amount will depend on the portion, if any, of such
certificateholder's purchase price allocable thereto.
Under the REMIC Regulations, each holder of a LIBOR Certificate must
allocate its purchase price for the LIBOR Certificate between its undivided
interest in the regular interest of the related REMIC and its undivided interest
in the right to receive payments from the Net WAC Reserve Fund in respect of the
Net WAC Rate Carryover Amount in accordance with the relative fair market values
of each property right. The OID Regulations provide that the Trust's allocation
of the issue price is binding on all holders unless the holder explicitly
discloses on its tax return that its allocation is different from the Trust's
allocation. For tax reporting purposes, the Trustee intends to treat the right
to receive payments from the Net WAC Reserve Fund in respect of Net WAC Rate
Carryover Amounts as having a nominal value. The right to receive Net WAC Rate
Carryover Amounts is difficult to value, and the Internal Revenue Service
("IRS") could assert that the value of such rights as of the closing date is
greater than the value used for information reporting purposes. Prospective
investors should consider the tax consequences to them if the IRS were to assert
a different value for the right to receive Net WAC Rate Carryover Amounts.
Under the REMIC Regulations, the Trustee is required to account for the
REMIC regular interest and the right to receive payments from the Net WAC
Reserve Fund in respect of the Net WAC Rate Carryover Amount as discrete
property rights. The Trustee intends to treat payments made to the holders of
the LIBOR Certificates with respect to the Net WAC Rate Carryover Amount as
payments under a "notional principal contract," as defined in the notional
principal contracts regulations (the "Notional Principal Contract Regulations").
If the Trustee's treatment of payments of the Net WAC Rate Carryover Amount is
respected, ownership of the right to the Net WAC Rate Carryover Amount will
entitle the owner to amortize the separate price paid for the right to the Net
WAC Rate Carryover Amount under the Notional Principal Contract Regulations.
If a holder of LIBOR Certificates is an individual, amortization of the
price paid for the Net WAC Carryover Amount may be treated as a miscellaneous
itemized deduction. In computing taxable income, an individual is allowed to
deduct miscellaneous itemized deductions only to the extent the sum of such
deductions exceeds two percent of the individual's adjusted gross income.
Further, an individual is not allowed a deduction for miscellaneous itemized
deductions in computing alternative minimum taxable income.
S-109
Upon the sale of a LIBOR Certificate the amount of the sale price
allocated to the selling certificateholder's right to receive payments from the
Net WAC Reserve Fund in respect of the Net WAC Rate Carryover Amount would be
considered a "termination payment" under the Notional Principal Contract
Regulations allocable to the related Class A Certificate or Mezzanine
Certificate, as the case may be. A holder of LIBOR Certificates will have gain
or loss from such a termination of the right to receive payments from the Net
WAC Reserve Fund in respect of the Net WAC Rate Carryover Amount equal to (i)
any termination payment it received or is deemed to have received minus (ii) the
unamortized portion of any amount paid (or deemed paid) by the certificateholder
upon entering into or acquiring its interest in the right to receive payments
from the Net WAC in respect of the Net WAC Rate Carryover Amount.
Gain or loss realized upon the termination of the right to receive
payments from the Net WAC Reserve Fund in respect of the Net WAC Cap Carryover
Amount will generally be treated as capital gain or loss. Moreover, in the case
of a bank or thrift institution, Code Section 582(c) would likely not apply to
treat such gain or loss as ordinary.
In addition, for federal income tax purposes, the Net WAC Reserve Fund
is an "outside reserve fund" that is beneficially owned by the holders of the
Class X Certificates. The rights of the holders of the LIBOR Certificates to
receive payments from the Net WAC Reserve Fund represent, for federal income tax
purposes, contractual rights that are separate from their regular interests
within the meaning of Treasury regulations Section 1.860G-2(i).
POTENTIAL ALTERNATIVE TREATMENT OF NET WAC RATE CARRYOVER AMOUNTS
The right to receive Net WAC Carryover Amounts may be treated as a
partnership between the holders of the LIBOR Certificates and the holders of the
Class X Certificates in respect of the Class X certificateholders' entitlement
to distributions from the upper-tier REMIC, in which case holders of the LIBOR
Certificates will be subject to potentially different timing of income and
foreign holders of the LIBOR Certificates may be subject to withholding in
respect of any Net WAC Carryover Amounts. Also, Treasury regulations have been
promulgated under Section 1275 of the Code generally providing for the
integration of a "qualifying debt instrument" with a hedge if the combined cash
flows of the components are substantially equivalent to the cash flows on a
variable rate debt instrument. However, such regulations specifically disallow
integration of debt instruments subject to Section 1272(a)(6) of the Code.
Therefore, holders of the LIBOR Certificates will be unable to use the
integration method provided for under such regulations with respect to those
certificates.
Holders of the LIBOR Certificates are advised to consult their own tax
advisors regarding the allocation of issue price and the timing, character and
source of income and deductions resulting from the ownership of such LIBOR
Certificates.
ORIGINAL ISSUE DISCOUNT
Subject to the discussion under the caption "Potential Alternative
Treatment of LIBOR Certificates for OID Purposes," for federal income tax
reporting purposes, the LIBOR Certificates will not be treated as having been
issued with original issue discount. The holders of the Offered Certificates,
however, will be required to include in income interest on such Offered
Certificates in accordance with the accrual method of accounting. Although the
tax treatment is not entirely certain, the Trustee will account for the Class
A-IO Certificates as issued with original issue discount equal to the excess of
all expected payments on the Class A-IO Certificates over their issue price.
Although unclear, a holder of a Class A-IO Certificate may be entitled to deduct
a loss to the extent that its remaining basis exceeds the
S-110
maximum amount of future payments to which the certificateholder would be
entitled if there were no further prepayments on the Mortgage Loans.
The IRS has issued regulations (the "OID Regulations") under Sections
1271 to 1275 of the Code generally addressing the treatment of debt instruments
issued with original issue discount. Purchasers of the Class A-IO Certificates
should be aware that the OID Regulations do not adequately address certain
issues relevant to, or are not applicable to, prepayable securities such as the
Class A-IO Certificates. The Class A-IO Certificates may be retired early based
on the pay-down of the assets in the pool. Therefore, the rate at which that OID
will accrue (and be includible in income) on the Class A-IO Certificates, will
have to be determined based on an assumption regarding how fast the assets in
the pool will pay-down (the "prepayment assumption"). Under the legislative
history accompanying enactment of the OID provisions, the prepayment assumption
used to price a debt instrument (such as the Class A-IO Certificates) should
also be used to calculate OID on the debt instrument, as well as the accrual of
any market discount and the amortization of premium. Accordingly, the Depositor
intends to assume the Class A-IO Certificates will be retired based on an
assumed prepayment scenario. No representation is made that the Class A-IO
Certificates will be retired based on such prepayment scenario or based on any
other prepayment assumption.
POTENTIAL ALTERNATIVE TREATMENT OF LIBOR CERTIFICATES FOR OID PURPOSES
In addition, there is considerable uncertainty concerning the
application of the OID Regulations to REMIC regular interests that provide for
payments based on an adjustable-rate such as the LIBOR Certificates. Because of
the uncertainty concerning the application of Section 1272(a)(6) of the Code to
such certificates and because the rules of the OID Regulations relating to debt
instruments having an adjustable-rate of interest are limited in their
application in ways that could preclude their application to such certificates
even in the absence of Section 1272(a)(6) of the Code, the IRS could assert that
the LIBOR Certificates should be treated as issued with original issue discount
or should be governed by the rules applicable to debt instruments having
contingent payments or by some other method not yet set forth in regulations.
Prospective purchasers of the Offered Certificates are advised to consult their
tax advisors concerning the tax treatment of such certificates.
It appears that a reasonable method of reporting original issue
discount with respect to the Offered Certificates, if such certificates are
required to be treated as issued with original issue discount, generally would
be to report all income with respect to such certificates as original issue
discount for each period, computing such original issue discount (i) by assuming
that the value of the applicable index will remain constant for purposes of
determining the original yield to maturity of, and projecting future
distributions on such certificates, thereby treating such certificates as
fixed-rate instruments to which the original issue discount computation rules
described in the prospectus can be applied, and (ii) by accounting for any
positive or negative variation in the actual value of the applicable index in
any period from its assumed value as a current adjustment to original issue
discount with respect to such period.
PREMIUM INSTRUMENTS
Certain of the certificates may be treated for federal income tax
purposes as having been issued at a premium. Whether any holder of a certificate
will be treated as holding such 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 certificates should consult their own tax
advisors regarding the possibility of making an election to amortize such
premium.
S-111
TREATMENT OF OFFERED CERTIFICATES AS REAL ESTATE ASSETS
With respect to the Offered Certificates, this paragraph is relevant to
such certificates exclusive of the rights of the holders of such certificates to
receive certain payments in respect of the Net WAC Rate Carryover Amount. The
Offered Certificates will represent "real estate assets" under Section
856(c)(5)(B) of the Code and qualifying assets under Section 7701(a)(19)(C) in
the same proportion that the assets of the Trust would be so treated, and income
on the Offered Certificates will represent "interest on obligations secured by
mortgages on real property or on interests in real property" under Section
856(c)(3)(B) in the same proportion that the income on the assets of the Trust
would be so treated. Because the Net WAC Rate Carryover Amount is treated as a
separate right of the LIBOR Certificates not payable by any REMIC elected by the
Trust, such right will not be treated as a qualifying asset for any
certificateholder that is a mutual savings bank, domestic building and loan
association, real estate investment trust, or real estate mortgage investment
conduit and any amounts received from the Net WAC Reserve Fund will not be
qualifying real estate income for real estate investment trusts.
PROHIBITED TRANSACTIONS AND REMIC REPORTING
It is not anticipated that any REMIC elected by the Trust will engage
in any transactions that would subject it to the prohibited transactions tax as
defined in Section 860F(a)(2) of the Code, the contributions tax as defined in
Section 860G(d) of the Code or the tax on net income from foreclosure property
as defined in Section 860G(c) of the Code. However, in the event that any such
tax is imposed on any REMIC elected by the Trust, such tax will be borne (i) by
the Trustee, if the Trustee has breached its obligations with respect to REMIC
compliance under the Pooling Agreement, (ii) by a Servicer, if that Servicer has
breached its obligations with respect to REMIC compliance under the Pooling
Agreement and (iii) otherwise by the Trust, with a resulting reduction in
amounts otherwise distributable to the holders of the Offered Certificates.
The responsibility for filing annual federal information returns and
other reports will be borne by the Trustee.
For further information regarding the federal income tax consequences
of investing in the Offered Certificates, see "Material Federal Income Tax
Considerations--REMICs" in the prospectus.
ERISA CONSIDERATIONS
A fiduciary of any employee benefit plan or other plan or arrangement
subject to ERISA or Section 4975 of the Code (a "Plan"), or any other person
investing plan assets of a Plan, including an insurance company, whether
investing through its general or separate accounts, should carefully review with
its legal advisors whether the purchase or holding of Offered Certificates could
give rise to a transaction prohibited or not otherwise permissible under ERISA
or Section 4975 of the Code. The purchase or holding of the Offered Certificates
by or on behalf of, or with plan assets of, a Plan may qualify for exemptive
relief under Credit Suisse First Boston LLC's Underwriter Exemption, as
described under "ERISA Considerations--ERISA Considerations Relating to
Certificates--Underwriter Exemption" in the prospectus. The Underwriter
Exemption relevant to the Offered Certificates was granted by the Department of
Labor as Prohibited Transaction Exemption ("PTE") 89-90, as amended by PTE
97-34, PTE 2000-58 and PTE 2002-41. The Underwriter Exemption permits Offered
Certificates, whether or not subordinated, to be purchased by Plans, provided
such certificates are backed by fully-secured mortgage loans and are rated at
least "BBB-" by Standard & Poor's or Fitch or "Baa3" by Moody's at the time of
their acquisition.
S-112
The purchase or sale of an Offered Certificate by, on behalf of, or
with plan assets of any Plan may result in prohibited transactions or the
imposition of excise taxes or civil penalties if the rating of that class of
certificates has declined below the minimum rating permitted under the
Underwriter Exemption at the time of acquisition by a Plan. For this reason, the
Pooling Agreement provides that transfers of the Class M4 and Class M5
Certificates to a Plan, a trustee or other person acting on behalf of any Plan
or to any person using plan assets to effect such acquisition will not be
registered by the Trustee unless the purchaser thereof provides the Trustee with
a certification (which the purchaser of a Class M4 and Class M5 Certificate in
book-entry form will be deemed to have provided) substantially to the effect
that (i) the Class M4 and Class M5 Certificates are rated at least "BBB-" by
Standard & Poor's or Fitch or "Baa3" by Moody's at the time of acquisition, or
(ii) the source of funds used to purchase such Class M4 Certificates is an
"insurance company general account" (as such term is defined in PTCE 95-60), and
the conditions of Sections I and III set forth in PTCE 95-60 have been
satisfied. The Class M4 and Class M5 Certificates will contain a legend
describing such restrictions on transfer.
The Underwriter Exemption, as amended, contains a number of other
conditions which must be met for the exemption to apply as described in the
prospectus, including the requirement that the investing Plan must be an
"accredited investor" as defined in Rule 501(a)(1) of Regulation D of the
Securities and Exchange Commission under the Securities Act. The Underwriter
Exemption also permits an "eligible yield supplement agreement" such as the
Yield Maintenance Agreement to be an asset of the Trust subject to certain
conditions. An eligible yield supplement agreement is any yield supplement
agreement or similar arrangement or, if purchased by or on behalf of the Trust,
an interest rate cap contract that supplements the interest rates otherwise
payable on obligations held by the Trust ("Cap Agreement"). If the Cap Agreement
has a notional principal amount and/or is written on an International Swaps and
Derivatives Association, Inc. (ISDA) form, the Cap Agreement may only be held as
an asset of the Trust with respect to certificates purchased by a Plan if it
meets the following conditions:
(1) the Cap Agreement is denominated in U.S. dollars;
(2) the Trust pays or receives, on or immediately
prior to the respective payment or distribution date for the
class of securities to which the Cap Agreement relates, a
fixed-rate of interest or a floating rate of interest based on
a publicly available index (e.g., LIBOR or the U.S. Federal
Reserve's Cost of Funds Index (COFI)), with the trust
receiving such payments on at least a quarterly basis and
obligated to make separate payments no more frequently than
the counterparty, with all simultaneous payments being netted;
(3) payments are based on the applicable notional
amount, the day count fractions, the fixed or floating rates
permitted above, and the difference between the products
thereof, calculated on a one-to-one ratio and not on a
multiplier of such difference;
(4) the Cap Agreement does not allow any of these
three preceding requirements to be unilaterally altered
without the consent of the Trustee;
(5) the Cap Agreement is entered into between the
Trust and an "eligible counterparty." An "eligible
counterparty" means a bank or other financial institution
which has a rating at the date of issuance of the securities,
which is in one of the three highest long term credit rating
categories or one of the two highest short term credit rating
categories, utilized by at least one of the Rating Agencies
rating the securities; provided that, if a counterparty is
relying on its short term rating to establish eligibility
hereunder, such counterparty must either have a long term
rating in one of the three
S-113
highest long term rating categories or not have a long term
rating from the applicable Rating Agency; and
(6) the notional amount does not exceed either (i)
the principal balance of the class of certificates to which
the Cap Agreement relates, or (ii) the portion of the
principal balance of such class represented by obligations.
Any fiduciary or other investor of plan assets that proposes to acquire
or hold the Offered Certificates on behalf of or with plan assets of any Plan
should consult with its counsel with respect to (i) whether the specific and
general conditions and the other requirements in the Underwriter Exemption would
be satisfied, and with respect to the Mezzanine Certificates, whether the
conditions described are met or any other prohibited transaction exemption would
apply, and (ii) whether the general fiduciary responsibility provisions of ERISA
and the prohibited transaction provisions of ERISA and Section 4975 of the
Internal Revenue Code apply to the proposed investment. See "ERISA
Considerations--ERISA Considerations Relating to Certificates" in the
prospectus.
The sale of any of the Offered Certificates to a Plan is in no respect
a representation by the Depositor or the Underwriter that an investment in the
Offered Certificates meets all relevant legal requirements relating to
investments by Plans generally or any particular Plan, or that an investment in
the Offered Certificates is appropriate for Plans generally or any particular
Plan.
LEGAL INVESTMENT CONSIDERATIONS
The Offered Certificates will not constitute "mortgage related
securities" for purposes of the Secondary Mortgage Market Enhancement Act of
1984, as amended because certain of the Mortgage Loans are secured by second
liens on the related Mortgaged Property.
The Depositor makes no representations as to the proper
characterization of any class of Offered Certificates for legal investment or
other purposes, or as to the ability of particular investors to purchase any
class of Offered Certificates under applicable legal investment restrictions.
These uncertainties may adversely affect the liquidity of any class of Offered
Certificates. Accordingly, all institutions 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 any class of Offered
Certificates constitutes a legal investment or is subject to investment, capital
or other restrictions.
See "Legal Investment" in the prospectus.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting
Agreement between the Depositor and Credit Suisse First Boston LLC, an affiliate
of the Depositor and the Seller ( the "Underwriter"), the Depositor has agreed
to sell to the Underwriter, and the Underwriter has agreed to purchase from the
Depositor all of the Offered Certificates.
Distribution of the Offered 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. The Underwriter may effect such
transactions by selling Offered Certificates to or through dealers and such
dealers may receive from the Underwriter, for which they act as agent,
compensation in the form of underwriting discounts, concessions or commissions.
The Underwriter and any dealers that participate
S-114
with the Underwriter in the distribution of such Offered Certificates may be
deemed to be underwriters, and any discounts, commissions or concessions
received by them, and any profits on resale of the classes of certificates
purchased by them, may be deemed to be underwriting discounts and commissions
under the Securities Act of 1933, as amended (the "Act"). Proceeds to the
Depositor from the sale of the Offered Certificates, before deducting expenses
payable by the Depositor, will be 99.75% of the aggregate Certificate Principal
Balance of the Offered Certificates.
The Depositor has been advised by the Underwriter that it intends to
make a market in the Offered Certificates but the Underwriter has no obligation
to do so. There can be no assurance that a secondary market for the Offered
Certificates will develop or, if it does develop, that it will continue.
The Depositor has agreed to indemnify the Underwriter against, or make
contributions to the Underwriter with respect to, certain liabilities, including
liabilities under the Act.
LEGAL MATTERS
Certain legal matters with respect to the Offered Certificates will be
passed upon for the Depositor and the Underwriter by McKee Nelson LLP, New York,
New York.
RATINGS
It is a condition to the issuance of the Offered Certificates that they
be assigned the ratings indicated below by S&P, Fitch and Moody's:
- ---------------------------- ------------------------- -------------------------- -------------------------
CLASS OF CERTIFICATES S&P RATING FITCH RATING MOODY'S RATING
- ---------------------------- ------------------------- -------------------------- -------------------------
Class A1 Certificates AAA AAA Aaa
- ---------------------------- ------------------------- -------------------------- -------------------------
Class A2 Certificates AAA AAA Aaa
- ---------------------------- ------------------------- -------------------------- -------------------------
Class A-IO Certificates AAA AAA Aaa
- ---------------------------- ------------------------- -------------------------- -------------------------
Class M1 Certificates AA AA Aa2
- ---------------------------- ------------------------- -------------------------- -------------------------
Class M2 Certificates A A A2
- ---------------------------- ------------------------- -------------------------- -------------------------
Class M3 Certificates A- A- A3
- ---------------------------- ------------------------- -------------------------- -------------------------
Class M4 Certificates BBB BBB Baa2
- ---------------------------- ------------------------- -------------------------- -------------------------
Class M5 Certificates BBB- BBB- Baa3
- ---------------------------- ------------------------- -------------------------- -------------------------
A securities rating addresses the likelihood of the receipt by a
certificateholder of distributions on the Mortgage Loans. The rating takes into
consideration the characteristics of the Mortgage Loans and the structural,
legal and tax aspects associated with the certificates. The ratings on the
Offered Certificates do not, however, constitute statements regarding the
likelihood or frequency of prepayments on the Mortgage Loans, the payment of the
Net WAC Rate Carryover Amount or the possibility that a holder of an Offered
Certificate might realize a lower than anticipated yield.
The Depositor has not engaged any rating agency other than the Rating
Agencies to provide ratings on the Offered Certificates. However, there can be
no assurance as to whether any other rating
S-115
agency will rate the Offered Certificates, or, if it does, what rating would be
assigned by any such other rating agency. Any rating on the Offered Certificates
by another rating agency, if assigned at all, may be lower than the ratings
assigned to the Offered Certificates by the Rating Agencies.
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. In the event that the ratings
initially assigned to any of the Offered Certificates by the Rating Agencies are
subsequently lowered for any reason, no person or entity is obligated to provide
any additional support or credit enhancement with respect to such Offered
Certificates.
S-116
INDEX OF DEFINED TERMS
accredited investor.............................S-113
Accrual Period...................................S-66
Act.............................................S-115
Adjustment Date..................................S-26
Advance..........................................S-88
Allocated Realized Loss Amount...................S-66
Assumed Final Distribution Date..................S-62
Available Funds..................................S-73
Basic Principal Distribution Amount..............S-66
beneficial owner.................................S-62
Book-Entry Certificates..........................S-62
Cap Agreement...................................S-113
Cap Default......................................S-83
Cap Early Termination............................S-83
Certificate Index................................S-81
Certificate Margin...............................S-81
Certificate Owner................................S-62
Certificate Principal Balance....................S-66
Class A Certificates.............................S-61
Class A Principal Distribution Amount............S-67
Class A1 Percentage..............................S-67
Class A2 Percentage..............................S-68
Class A-INV-IO Net WAC Rate......................S-80
Class A-INV-IO Notional Balance..................S-67
Class A-IO Net WAC Rate..........................S-80
Class A-IO Notional Balance......................S-67
Class B-IO Cap Rate..............................S-80
Class M1 Principal Distribution Amount...........S-68
Class M2 Principal Distribution Amount...........S-68
Class M3 Principal Distribution Amount...........S-68
Class M4 Principal Distribution Amount...........S-68
Class M5 Principal Distribution Amount...........S-68
Clearstream......................................S-62
Clearstream Participants.........................S-64
Closing Date.....................................S-24
Code............................................S-109
Collection Account...............................S-87
Commission.......................................S-94
Compensating Interest............................S-89
Cooperative......................................S-64
Counterparty.....................................S-81
Counterparty Rating Agency Downgrade.............S-84
CPR..............................................S-95
Credit Enhancement Percentage....................S-69
CSFBi............................................S-81
Cut-off Date.....................................S-24
Cut-off Date Pool Principal Balance..............S-24
Cut-off Date Principal Balance...................S-24
Definitive Certificate...........................S-62
Deleted Mortgage Loan............................S-86
Delinquent.......................................S-69
Determination Date...............................S-89
Distribution Account.............................S-87
Distribution Date................................S-62
DTC..............................................S-62
Due Date.........................................S-24
Due Period.......................................S-69
eligible counterparty...........................S-113
eligible yield supplement agreement.............S-113
Euroclear........................................S-64
Euroclear Operator...............................S-64
Euroclear Participants...........................S-64
European Depositaries............................S-62
Events of Default................................S-83
Financial Intermediary...........................S-62
Fitch............................................S-58
Formula Rate.....................................S-80
Global Securities...............................S-I-1
Gross Margin.....................................S-26
IML..............................................S-64
Index............................................S-52
Initial Periodic Rate Cap........................S-26
Interest Only Mortgage Loans.....................S-26
Interest Remittance Amount.......................S-69
IRS.............................................S-109
LIBOR Business Day...............................S-84
LIBOR Certificates...............................S-61
LIBOR Determination Date.........................S-84
Liquidated Mortgage Loan.........................S-72
Loan Rate........................................S-26
LTV..............................................S-26
Maximum Loan Rate................................S-26
Mezzanine Certificates...........................S-61
Minimum Loan Rate................................S-26
Monthly Interest Distributable Amount............S-69
Moody's..........................................S-58
Mortgage.........................................S-25
Mortgage Loan Documents..........................S-85
Mortgage Loan Purchase Agreement.................S-24
Mortgage Loan Schedule...........................S-86
Mortgage Loans...................................S-24
Mortgage Pool....................................S-24
Mortgaged Property...............................S-25
NC Capital.......................................S-24
Net Liquidation Proceeds.........................S-72
Net Monthly Excess Cashflow......................S-69
S-117
Net Prepayment Interest Shortfall................S-89
Net WAC Rate.....................................S-79
Net WAC Rate Carryover Amount....................S-80
Net WAC Reserve Fund.............................S-81
New Century......................................S-52
New Century Underwriting Guidelines..............S-52
Notional Amount..................................S-70
Notional Principal Contract Regulations.........S-109
OCN..............................................S-58
Ocwen............................................S-52
Offered Certificates.............................S-61
Offered Subordinate Certificates.................S-61
OID Regulations.................................S-111
Optional Termination Date........................S-92
Original Certificate Principal Balance...........S-66
Originator.......................................S-24
Overcollateralization Deficiency Amount..........S-70
Overcollateralization Increase Amount............S-70
Overcollateralization Release Amount.............S-70
Overcollateralization Target Amount..............S-70
Overcollateralized Amount........................S-70
Pass-Through Rate................................S-79
Periodic Rate Cap................................S-26
Physical Certificates............................S-61
Plan............................................S-112
Pool Balance.....................................S-24
Pooling Agreement................................S-25
PPC..............................................S-95
Prepayment Assumption............................S-95
Prepayment Interest Shortfall....................S-89
Prepayment Period................................S-70
Prepayment Scenarios.............................S-96
Principal Balance................................S-24
Principal Distribution Amount....................S-70
Principal Remittance Amount......................S-71
PTE.............................................S-112
Purchase Price...................................S-86
Qualified Substitute Mortgage Loan...............S-86
qualifying debt instrument......................S-110
Rating Agencies..................................S-58
Realized Loss....................................S-72
Reconstitution Agreement.........................S-25
Record Date......................................S-62
Reference Banks..................................S-84
Relevant Depositary..............................S-62
Relief Act.......................................S-19
Relief Act Interest Shortfalls...................S-19
REMIC............................................S-13
REMICs..........................................S-108
Reserve Interest Rate............................S-84
Residual Certificates............................S-61
residual interests..............................S-109
Rules............................................S-62
S&P..............................................S-58
Scheduled Notional Amount........................S-82
Senior Certificates..............................S-61
Servicer Remittance Date.........................S-89
Servicing Advance................................S-88
Servicing Fee....................................S-89
Servicing Fee Rate...............................S-89
SMMEA............................................S-14
Stepdown Date....................................S-72
Strip Amount.....................................S-72
Structuring Assumptions..........................S-96
Subgroup 1.......................................S-24
Subgroup 1 Interest Remittance Amount............S-72
Subgroup 1 Principal Remittance Amount...........S-72
Subgroup 2.......................................S-24
Subgroup 2 Interest Remittance Amount............S-72
Subordinate Certificates.........................S-61
Substitution Adjustment..........................S-87
Telerate Page 3750...............................S-84
Termination Events...............................S-83
termination payment.............................S-110
Termination Price................................S-92
Terms and Conditions.............................S-64
Trigger Event....................................S-72
Trust............................................S-24
U.S. Person.....................................S-I-4
Underwriter.....................................S-114
Unpaid Interest Shortfall Amount.................S-72
Unpaid Realized Loss Amount......................S-73
Yield Maintenance Agreement......................S-81
S-118
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND
TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the Offered 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 The Depository Trust Company ("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.
I-1
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.
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
the actual number of days in such accrual period, and a year assumed to consist
of 360 days. 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 at 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.
I-2
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 the actual number of days in such accrual period and a year
assumed to consist of 360 days. 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 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. back-up withholding tax (which will be
reduced through 2006) 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, either individuals or entities
treated as corporations, can obtain a complete
I-3
exemption from the withholding tax by filing a signed Form W-8BEN (Certificate
of Foreign Status of Beneficial Owner for United States Tax Withholding).
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 (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 on Income Effectively Connected with the Conduct of a
Trade or Business in the United States).
Exemptions for U.S. Persons (Form W-9). U.S. Persons can obtain a
complete exemption from the withholding tax by filing Form W-9 (Payer's Request
for Taxpayer Identification Number and Certification),
U.S. Federal Income Tax Reporting Procedure. The Certificate Owner of a
Global Security 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 such form is signed.
The term "U.S. Person" means (i) a citizen or resident of the United
States, (ii) a corporation, partnership or other entity treated as a corporation
or partnership for United States federal income tax purposes organized in or
under the laws of the United States or any state thereof or the District of
Columbia (unless, in the case of a partnership, Treasury regulations provide
otherwise) or (iii) an estate the income of which is includible in gross income
for United States tax purposes, regardless of its source, or (iv) a trust if a
Court within the United States is able to exercise primary Supervision over the
administration of the trust and one or more United States persons have authority
to control all substantial decisions of the trust. Notwithstanding the preceding
sentence, to the extent provided in Treasury regulations, certain trusts in
existence on August 20, 1996, and treated as United States persons prior to such
date, that elect to continue to be treated as United States persons will also be
a U.S. Person. This Summary does not deal with all aspects of U.S. Federal
income tax withholding that may be relevant to foreign holders of the Global
Securities.
I-4
ANNEX II
YIELD MAINTENANCE AGREEMENT SCHEDULE
- ---------------------------------- --------------------- -----------------------
LIBOR STRIKE RATE SCHEDULED NOTIONAL
DISTRIBUTION DATE (%) AMOUNT ($)
- ---------------------------------- --------------------- -----------------------
July 2003......................... 2.29 72,000,000
August 2003....................... 2.25 70,500,000
September 2003.................... 2.17 69,000,000
October 2003...................... 2.22 67,500,000
November 2003..................... 2.21 66,100,000
December 2003..................... 2.20 64,700,000
January 2004...................... 2.29 63,300,000
February 2004..................... 2.32 62,000,000
March 2004........................ 2.33 60,600,000
April 2004........................ 2.48 59,400,000
May 2004.......................... 2.52 58,100,000
June 2004......................... 2.57 56,800,000
July 2004......................... 2.75 55,600,000
August 2004....................... 2.82 54,500,000
September 2004.................... 2.88 53,300,000
October 2004...................... 3.09 52,200,000
November 2004..................... 3.17 51,000,000
December 2004..................... 3.25 50,000,000
January 2005...................... 3.45 48,900,000
February 2005..................... 3.55 47,900,000
March 2005........................ 3.63 46,800,000
April 2005........................ 3.75 45,800,000
May 2005.......................... 3.85 44,900,000
June 2005......................... 3.94 43,900,000
- ---------------------------------- --------------------- -----------------------
II-1
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PROSPECTUS
ASSET BACKED SECURITIES CORPORATION
Depositor
ABS MORTGAGE AND MANUFACTURED HOUSING CONTRACT
ASSET-BACKED CERTIFICATES AND ASSET-BACKED NOTES (ISSUABLE IN SERIES)
--------------------
Asset Backed Securities Corporation, as depositor, may offer from time to time
under this prospectus and related prospectus supplements notes or certificates
that are either asset-backed notes or asset-backed certificates which may be
sold from time to time in one or more series. Each series of notes or
certificates, as applicable, will be issued in one or more classes.
The related prospectus supplement will set forth the specific assets of the
trust fund and the seller or sellers from whom the assets are acquired. The
assets may include:
1. One or more pools of
o closed-end and/or revolving home equity loans or manufactured
housing contracts or specified balances of these loans or
contracts and/or loans of which the proceeds have been applied to
the purchase of the related mortgaged property, secured by
mortgages primarily on one- to four-family residential
properties,
o loans made to finance the purchase of rights relating to
cooperatively owned properties secured by a pledge of shares of a
cooperative corporation and an assignment of a proprietary lease
or occupancy agreement on a cooperative dwelling,
o loans made to finance the origination of the loans and contracts
described above and secured by the related loans or contracts,
o mortgage participation certificates evidencing participation
interests in loans that are acceptable to the nationally
recognized statistical rating agencies rating a series of
securities,
o private securities evidencing ownership interests in or secured
by loans similar to the types of loans described above;
2. All monies due under the above assets, which may be net of amounts
payable to the servicer or servicers; and
3. Funds or accounts established for the related trust fund, or one or
more forms of enhancement.
The related prospectus supplement will state if the trust fund will make one or
more REMIC elections for federal income tax purposes.
FOR A DISCUSSION OF RISKS ASSOCIATED WITH AN INVESTMENT IN THE NOTES OR
CERTIFICATES, SEE RISK FACTORS ON PAGE 1.
NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED
THE OFFERED SECURITIES OR DETERMINED IF THIS PROSPECTUS IS ACCURATE OR COMPLETE.
MAKING ANY CONTRARY REPRESENTATION IS A CRIMINAL OFFENSE.
------------------
CREDIT SUISSE FIRST BOSTON
The date of this Prospectus is October 18, 2002.
TABLE OF CONTENTS
Risk Factors................................................................1
The Trust Fund..............................................................5
The Depositor..............................................................21
Use of Proceeds............................................................21
Maturity, Prepayment and Yield Considerations..............................21
Description of the Securities..............................................26
Certain Information Regarding the Securities...............................62
Credit Support.............................................................64
Description of Insurance...................................................70
Certain Legal Aspects of the Mortgage Loans and Contracts..................80
Material Federal Income Tax Considerations.................................92
State and Other Tax Considerations........................................133
Erisa Considerations......................................................134
Legal Investment..........................................................141
Plan of Distribution......................................................143
Legal Matters.............................................................144
Prospectus Supplement.....................................................144
Additional Information....................................................145
Incorporation of Certain Information by Reference.........................145
Index of Terms............................................................147
-i-
RISK FACTORS
You should carefully consider the following risk factors prior to any
purchase of the notes or certificates.
LIMITED LIQUIDITY MAY RESULT IN DELAYS IN
YOUR ABILITY TO SELL SECURITIES OR LOWER
RETURNS ................................... There will be no market for the
notes or certificates, as
applicable, of any series prior to
their issuance, and there can be no
assurance that a secondary market
will develop. If a secondary market
does develop, there can be no
assurance that it will provide
holders with liquidity of investment
or that the market will continue for
the life of the notes or
certificates, as applicable, of the
related series. Credit Suisse First
Boston Corporation presently expects
to make a secondary market in the
notes or certificates, as
applicable, but has no obligation to
do so. Absent a secondary market for
the notes or certificates, as
applicable, you may experience a
delay if you choose to sell your
notes or certificates, as
applicable, or the price you receive
may be less than you would receive
for a comparable liquid security.
LIMITED ASSETS FOR PAYMENTS--NO RECOURSE
TO DEPOSITOR, UNAFFILIATED SELLER, MASTER
SERVICER OR SERVICER ..................... The depositor does not have, nor is
it expected to have, any significant
assets. The notes or certificates,
as applicable, of a series will be
payable solely from the assets of
the trust fund for that series.
Except for any related insurance
policies or credit support, there
will be no recourse to the depositor
or any other person for any default
on the notes or any failure to
receive distributions on the
certificates with respect to any
series. Consequently, holders of
notes or certificates, as
applicable, of each series must rely
solely upon payments with respect to
the assets constituting the trust
fund for a series of notes or
certificates, as applicable,
including, if applicable, any
amounts available pursuant to any
enhancement for that series, for the
payment of principal of and interest
on the notes or certificates, as
applicable, of that series.
The only obligations, if any, of the
depositor with respect to the notes
or certificates, as applicable, of
any series will be with respect to
its breach of specific
representations and warranties. The
depositor does not have, and is not
expected in the future to have, any
significant assets with which to
meet any obligation to repurchase
assets with respect to which there
has been a breach of any
representation or warranty. If, for
example, the depositor were required
to repurchase a mortgage loan, its
only sources of funds to make the
repurchase would be from funds
obtained from the enforcement of a
corresponding obligation, if any, on
the part of the originator of the
mortgage loan, the master servicer,
the servicer or the unaffiliated
seller, as the case may be, or from
a reserve fund established to
provide funds for repurchases. If
the depositor does not have
sufficient assets and no other party
is obligated to repurchase defective
assets, you may experience a loss.
LIMITS ON ENHANCEMENT MAY RESULT IN
LOSSES TO YOU ............................. Although we intend the enhancement
for the notes or certificates, as
applicable, to reduce the risk of
delinquent payments or losses to
holders of a series of notes or
certificates, as applicable,
entitled to the benefit of the notes
or certificates, the amount of the
enhancement will be limited, as set
forth in the related prospectus
supplement. In addition, the amount
available will decline and could be
depleted prior to the payment in
full of the related series of notes
or certificates, as applicable, and
losses on the primary assets could
result in losses to holders of those
notes or certificates, as
applicable.
DECREASE IN VALUE OF MORTGAGED PROPERTY--
RISK OF LOSS .............................. There are several factors that could
adversely affect the value of
mortgaged properties and cause the
outstanding balance of the related
mortgage loan, contract, loan
secured by a mortgage loan or
contract or of an underlying loan
relating to the private securities,
together with any senior financing,
to equal or exceed the value of the
mortgaged properties. Among the
factors that could adversely affect
the value of the mortgaged
properties are
o an overall decline in the
residential real estate market in
the areas in which the mortgaged
properties are located;
o a decline in the general
condition of the mortgaged
properties as a result of failure
of borrowers to maintain
adequately the mortgaged
properties; or
-2-
o natural disasters that are not
necessarily covered by insurance,
including earthquakes and floods.
Any decline in the value of a
mortgaged property could extinguish
the value of a junior interest in
that mortgaged property before
having any effect on the related
senior interest. If a decline in the
value of the related mortgaged
properties occurs, the actual rates
of delinquencies, foreclosure and
losses on the mortgage loans could
be higher than those currently
experienced in the mortgage lending
industry in general and you could
suffer a loss.
TIMING AND RATE OF PREPAYMENTS MAY
RESULT IN LOWER .......................... The yield to maturity experienced by
a holder of notes or certificates,
as applicable, may be affected by
the rate and timing of payments of
principal of the mortgage loans,
contracts, loans secured by mortgage
loans or contracts or of the
underlying loans relating to the
private securities. The rate and
timing of principal payments of the
notes or certificates, as
applicable, of a series will be
affected by a number of factors,
including the following:
o the extent of prepayments, which
may be influenced by a variety
of factors,
o the manner of allocating
principal payments among the
classes of notes or
certificates, as applicable, of
a series as specified in the
related prospectus supplement,
and
o the exercise of any right of
optional termination.
Prepayments may also result from
repurchases of mortgage loans or
underlying loans, as applicable, due
to material breaches of the
unaffiliated seller's or the
depositor's representations or
warranties.
Interest payable on the notes or
certificates, as applicable, of a
series on a distribution date will
include all interest accrued during
the period specified in the related
prospectus supplement. In the event
interest accrues during the calendar
month prior to a distribution date,
the effective yield to holders will
be reduced from the yield that would
otherwise be obtainable if interest
payable on the security were to
accrue through the day immediately
preceding each distribution date,
and the effective yield at par to
holders will be less than the
indicated coupon rate.
-3-
RISKS OF SUBORDINATED SECURITIES .......... To the extent specified in the
applicable prospectus supplement,
distributions of interest on and
principal of one or more classes of
notes or certificates, as
applicable, of a series may be
subordinated in priority of payment
to interest and principal due on one
or more other classes of notes or
certificates, as applicable, of the
related series. Any subordinated
securities will be affected to a
greater degree by any losses on the
mortgage loans, contracts, loans
secured by mortgage loans or
contracts or of the underlying loans
relating to the private securities.
BOOK-ENTRY REGISTRATION--BENEFICIAL
OWNERS NOT RECOGNIZED BY TRUST ............ Issuance of the notes or
certificates, as applicable, in
book-entry form may reduce the
liquidity of these notes or
certificates, as applicable, in the
secondary trading market since
investors may be unwilling to
purchase notes or certificates, as
applicable, for which they cannot
obtain physical certificates. Since
transactions in the notes or
certificates, as applicable, can be
effected only through The Depository
Trust Company and any other entities
set forth in the related prospectus
supplement, your ability to pledge a
security to persons or entities that
do not participate in The Depository
Trust Company or any other entities
or otherwise to take actions in
respect of the related notes or
certificates, as applicable, may be
limited due to lack of a physical
certificate representing the notes
or certificates, as applicable.
You may experience some delay in the
receipt of distributions of interest
and principal on the notes or
certificates, as applicable, since
the distributions will be forwarded
by the trustee to The Depository
Trust Company and The Depository
Trust Company will credit the
distributions to the accounts of its
participants which will then credit
them to your account either directly
or indirectly through indirect
participants.
-4-
THE TRUST FUND
The Depositor may offer from time to time the ABS Mortgage and Manufactured
Housing Contract Asset-Backed Certificates (the "Certificates") or the ABS
Mortgage and Manufactured Housing Contract Asset-Backed Notes (the "Notes" and,
together with the Certificates, the "Securities") offered by this prospectus and
by the related prospectus supplements which may be sold from time to time in one
or more series (each, a "Series") in amounts, at prices and on terms to be
determined at the time of sale and to be set forth in the related prospectus
supplement. Each Series of Notes or Certificates, as applicable, may include one
or more separate classes (each, a "Class") of Notes and/or Certificates, which
may be divided into one or more subclasses (each, a "Subclass"). The
Certificates will be issued by a trust (the "Trust") to be formed by the
Depositor with respect to a Series pursuant to either a Trust Agreement (each, a
"Trust Agreement") to be entered into between the Depositor and the trustee
specified in the related prospectus supplement (the "Trustee") or a Pooling and
Servicing Agreement (each, a "Pooling and Servicing Agreement") among the
Depositor, the Master Servicer and the Trustee. If a Series of Securities
includes Notes, the Notes will be issued and secured pursuant to an Indenture
(each, an "Indenture") to be entered into between any of (1) the Trust or (2) a
partnership, corporation, limited liability company or other entity formed by
the Depositor solely for the purpose of issuing Notes of a related Series and
incidental matters, as issuer (the "Issuer"), and the indenture trustee
specified in the related prospectus supplement (the "Indenture Trustee"). The
related Trust Fund will be serviced by the Master Servicer pursuant to a Sale
and Servicing Agreement (the "Sale and Servicing Agreement") among the
Depositor, the Master Servicer and the Indenture Trustee. The Certificates
represent interests in specified percentages of principal and interest (a
"Percentage Interest") with respect to the related Mortgage Pool, Warehouse Loan
Pool or Contract Pool, or have been assigned a Stated Principal Balance and an
Interest Rate, as more fully set forth in this prospectus, and will evidence the
undivided interest, beneficial interest or notional amount specified in the
related prospectus supplement in one of a number of Trusts, each to be created
by the Depositor from time to time. If a Series of Securities includes Notes,
the Notes will represent indebtedness of the related Trust Fund. The trust
property of each Trust (the "Trust Fund") will consist of the assets described
below.
Ownership of the Mortgage, Warehouse Loan or Contract Pool or Pools
included in the Trust Fund for a Series of Certificates may consist of one or
more Subclasses, as specified in the prospectus supplement for the Series. Each
Certificate will evidence the undivided interest, beneficial interest or
notional amount specified in the related prospectus supplement in one or more
Mortgage Pools containing one or more Mortgage Loans or Mortgage Certificates,
Warehouse Loan Pools or Contract Pools containing Contracts, having an aggregate
principal balance of not less than approximately $50,000,000 as of the first day
of the month of its creation (the "Cut-off Date"), unless otherwise specified in
the applicable prospectus supplement. If so specified in the related prospectus
supplement, each Class or Subclass of the Certificates of a Series will evidence
the percentage interest specified in the prospectus supplement in the payments
of principal of and interest on the Mortgage Loans or Mortgage Certificates in
the related Mortgage Pool or Pools, Warehouse Loans in the related Warehouse
Loan Pool or Pools or on the Contracts in the related Contract Pool or Pools (a
"Percentage Interest"). To the extent specified in the related prospectus
supplement, each Mortgage Pool, Warehouse Loan Pool or Contract Pool with
respect to a Series will be covered by one or more irrevocable letters of credit
(a "Letter of Credit"), a policy of mortgage pool insurance (a "Pool Insurance
Policy"), a bond or similar form of insurance coverage against particular losses
in the event of the bankruptcy of a Mortgagor (a "Mortgagor Bankruptcy Bond"),
an insurance policy (the "Special Hazard Insurance Policy") covering losses that
result from other physical risks that are not otherwise insured against,
including earthquakes and mudflows, by the subordination of the rights of the
holders of the one or more subordinate Classes or
-5-
Subclasses (the "Subordinate Notes" or the "Subordinate Certificates," and
collectively, the "Subordinate Securities") to the rights of the holders of one
or more senior Classes or Subclasses (the "Senior Notes" or the "Senior
Certificates," and collectively, the "Senior Securities") to the extent
specified in the related prospectus supplement (the "Subordinated Amount" which,
if so specified in the related prospectus supplement, may include Subordinate
Notes or Subordinate Certificates, as applicable, of one or more Class or
Subclass (a "Subordinated Class" or "Subordinated Subclass," respectively) and
the establishment of a reserve fund (a "Reserve Fund"), by the right of one or
more Classes or Subclasses of Notes or Certificates, as applicable, to receive a
disproportionate amount of particular distributions of principal, by an
insurance policy (the "Security Guarantee Insurance") issued by one or more
insurance companies or another form or forms of additional or alternative forms
of credit support, including a guarantee or surety bond ("Alternative Credit
Support") acceptable to the Rating Agency rating the Notes or Certificates, as
applicable, of a Series or by any combination of the foregoing. See "Description
of Insurance" and "Credit Support."
THE MORTGAGE POOLS
If so specified in the prospectus supplement with respect to a Series, the
Trust Fund for each Series may include
1 one or more pools ("Mortgage Pools") containing
o conventional one-to four-family residential, first and/or second
mortgage loans,
o closed-end loans (the "Closed-End Loans") and/or revolving home
equity loans or specific balances of those loans (the "Revolving
Credit Line Loans" and, together with the Closed-End Loans, the
"Home Equity Loans") secured by mortgages or deeds of trust on
residential one-to-four family properties, including townhouses
and individual units in condominiums and planned unit
developments,
o loans ("Cooperative Loans") made to finance the purchase of
particular rights relating to cooperatively owned properties
secured by the pledge of shares issued by a cooperative
corporation (the "Cooperative") and the assignment of a
proprietary lease or occupancy agreement providing the exclusive
right to occupy a particular dwelling unit (a "Cooperative
Dwelling" and, together with one- to four-family residential
properties, "Single Family Property,"
o mortgage loans secured by multifamily residential rental
properties consisting of five or more dwelling units or apartment
buildings owned by cooperative housing corporations ("Multifamily
Property"); provided that no more than 5% of the principal
balance of loans in a Mortgage Pool may consist of loans backed
by Multifamily Property,
o mortgage participation securities evidencing participation
interests in loans that are acceptable to the nationally
recognized statistical rating agency or agencies rating the
related Series of Notes or Certificates, as applicable,
(collectively, the "Rating Agency") in one of the four highest
rating categories of each Rating Agency (all the loans described
above and participation certificates being referred to
collectively in this prospectus as the "Mortgage Loans"),
acceptable to the nationally recognized Rating Agency rating the
Notes or Certificates, as applicable, of the Series for a rating
in one of the four highest rating categories of the Rating Agency
or
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o conventional mortgage pass-through certificates, collateralized
mortgage bonds or other indebtedness secured by mortgage loans or
manufactured housing contracts (the "Mortgage Certificates"), in
each case together with specific and related property issued by
one or more trusts established by one or more private entities,
2. one or more Contract Pools containing Contracts or participation Notes
or Certificates, as applicable, representing participation interests
in the Contracts purchased by the Depositor either directly or through
one or more affiliates or Unaffiliated Sellers, and related property
conveyed to the trust by the Depositor or
3. one or more Warehouse Loan Pools containing Warehouse Loans or
participation Securities representing participation interests in the
Warehouse Loans purchased by the Depositor either directly or through
one or more affiliates or Unaffiliated Sellers, and related property
conveyed to the trust by the Depositor or
A Mortgage Pool may include Mortgage Loans insured by the FHA ("FHA Loans")
and/or Mortgage Loans partially guaranteed by the Veterans Administration (the
"VA", and mortgage loans are referred to in this prospectus as "VA Loans"). All
Mortgage Loans will be evidenced by promissory notes or other evidence of
indebtedness (the "Mortgage Notes") secured by first mortgages or first or
second deeds of trust or other similar security instruments creating a first
lien or second lien, as applicable, on the Mortgaged Properties. Single Family
Property and Multifamily Property will consist of single family detached homes,
attached homes, single family units having a common wall, individual units
located in condominiums, townhouses, planned unit developments, multifamily
residential rental properties, apartment buildings owned by cooperative housing
corporations and the other types of homes or units as are set forth in the
related prospectus supplement. Unless otherwise specified in the applicable
prospectus supplement, each detached or attached home or multifamily property
will be constructed on land owned in fee simple by the borrower (the
"Mortgagor"). or on land leased by the Mortgagor for a term at least two years
greater than the term of the applicable Mortgage Loan. Attached homes may
consist of duplexes, triplexes and fourplexes, multifamily structures where each
Mortgagor owns the land upon which the unit is built with the remaining adjacent
land owned in common. Multifamily Property may include mixed commercial and
residential buildings. The Mortgaged Properties may include investment
properties and vacation and second homes. Mortgage Loans secured by Multifamily
Property may also be secured by an assignment of leases and rents and operating
or other cash flow guarantees relating to the Mortgaged Properties to the extent
specified in the related prospectus supplement.
Unless otherwise specified below or in the applicable prospectus
supplement, each Mortgage Loan in a Mortgage Pool will
o have an individual principal balance at origination of not less than
$25,000 nor more than $500,000,
o have monthly payments due on the first day of each month (the "Due Date"),
o be secured by Mortgaged Properties or relate to Cooperative Loans located
in any of the 50 states or the District of Columbia, and
o consist of fully-amortizing Mortgage Loans, each with a 10 to 40 year term
at origination, a fixed or variable rate of interest and level or variable
monthly payments over the term of the Mortgage Loan.
Unless otherwise specified in the related prospectus supplement, the
Loan-to-Value Ratio of the Mortgage Loans at origination will not exceed the
percentages set forth below.
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o 95% on any Mortgage Loan with an original principal balance of $150,000 or
less,
o 90% on any Mortgage Loan with an original principal balance of $150,001
through $200,000,
o 85% on any Mortgage Loan with an original principal balance of $200,001
through $300,000 and
o 80% on any Mortgage Loan with an original principal balance exceeding
$300,000.
If so specified in the related prospectus supplement, a Mortgage Pool may
also include fully amortizing, adjustable rate Mortgage Loans ("ARM Loans")
with, unless otherwise specified in the related prospectus supplement, 30-year
terms at origination and mortgage interest rates adjusted periodically, with
corresponding adjustments in the amount of monthly payments, to equal the sum,
which may be rounded, of a fixed margin and an index described in the related
prospectus supplement, subject to any applicable restrictions on adjustments.
The Mortgage Pools may also include other types of Mortgage Loans to the extent
set forth in the applicable prospectus supplement.
Unless otherwise specified in the applicable prospectus supplement, no
Mortgage Loan will have a Loan-to-Value Ratio at origination in excess of 95%,
regardless of its original principal balance. Except as otherwise provided in
the related prospectus supplement, the Loan-to-Value Ratio will be the ratio,
expressed as a percentage, of the principal amount of the Mortgage Loan at the
date of determination to the lesser of (1) the appraised value determined in an
appraisal obtained by the originator and (2) the sales price for the property
(the "Original Value"). Unless otherwise specified in the related prospectus
supplement, with respect to a Mortgage Loan secured by a mortgage on a vacation
or second home or an investment property, other than Multifamily Property, no
income derived from the property will be considered for underwriting purposes,
the Loan-to-Value Ratio, taking into account any secondary financing, may not
exceed 80% and the original principal balance may not exceed $250,000.
If so specified in the related prospectus supplement, a Mortgage Pool may
contain Mortgage Loans with fluctuating interest rates (the "Mortgage Rates").
These Mortgage Loan may provide that on the day on which the Mortgage Rate
adjusts, the amount of the monthly payments on the Mortgage Loan will be
adjusted to provide for the payment of the remaining principal amount of the
Mortgage Loan with level monthly payments of principal and interest at the new
Mortgage Rate to the maturity date of the Mortgage Loan. Alternatively, the
Mortgage Loan may provide that the Mortgage Rate adjusts more frequently than
the monthly payment. As a result, a greater or lesser portion of the monthly
payment will be applied to the payment of principal of the Mortgage Loan, thus
increasing or decreasing the rate at which the Mortgage Loan is repaid. See
"Maturity, Prepayment and Yield Considerations." In the event that an adjustment
to the Mortgage Rate causes the amount of interest accrued in any month to
exceed the amount of the monthly payment on the Mortgage Loan, the excess (the
"Deferred Interest") will be added to the principal balance of the Mortgage
Loan, unless otherwise paid by the Mortgagor, and will bear interest at the
Mortgage Rate in effect from time to time. The amount by which the Mortgage Rate
or monthly payment may increase or decrease and the aggregate amount of Deferred
Interest on any Mortgage Loan may be subject to limitations, as described in the
related prospectus supplement.
If so specified in the prospectus supplement for the related Series, the
Mortgage Rate on some of the ARM Loans will be convertible from an adjustable
rate to a fixed rate at the option of the Mortgagor under some circumstances.
Unless otherwise specified in the related prospectus supplement, the Agreement
will provide that the Unaffiliated Seller from which convertible ARM Loans were
acquired will be obligated to repurchase from the Trust Fund any ARM Loan as to
which the conversion option has been exercised (a "Converted Mortgage Loan"), at
a purchase price set forth in the related prospectus supplement. The amount of
the purchase price will be required to be deposited in the Certificate Account
and will be distributed to the Securityholders on the Distribution Date in the
month following the month
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of the exercise of the conversion option. The obligation of the Unaffiliated
Seller to repurchase Converted Mortgage Loans may or may not be supported by
cash, letters of credit, third party guarantees or other similar arrangements.
If provided for in the applicable prospectus supplement, a Mortgage Pool
may contain 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 on the Mortgage Loan ("Buy-Down Loans"). The
resulting difference in payment shall be compensated for from an amount
contributed by the Depositor, the seller of the related Mortgaged Property, the
Servicer or another source and placed in a custodial account (the "Buy-Down
Fund") by the Servicer, or if so specified in the related prospectus supplement,
with the Trustee. In lieu of a cash deposit, if so specified in the related
prospectus supplement, a letter of credit or guaranteed investment contract may
be delivered to the Trustee to fund the Buy-Down Fund. See "Description of the
Securities--Payments on Mortgage Loans." Buy-Down Loans included in a Mortgage
Pool will provide for a reduction in monthly interest payments by the Mortgagor
for a period of up to the first four years of the term of the Mortgage Loans.
If provided for in the applicable prospectus supplement, a Mortgage Pool
may contain Mortgage Loans pursuant to which the monthly payments by the
Mortgagor during the early years of the related Mortgage Note are less than the
amount of interest that would otherwise be payable on the Mortgage Note, with
the interest not so paid added to the outstanding principal balance of the
Mortgage Loan ("GPM Loans"). If so specified in the related prospectus
supplement, the resulting difference in payment shall be compensated for from an
amount contributed by the Depositor or another source and delivered to the
Trustee (the "GPM Fund"). In lieu of a cash deposit, the Depositor may deliver
to the Trustee a letter of credit, guaranteed investment contract or another
instrument acceptable to the Rating Agency rating the related Series to fund the
GPM Fund.
If provided for in the applicable prospectus supplement, a Mortgage Pool
may contain Mortgage Loans which are Home Equity Loans pursuant to which the
full principal amount of the Mortgage Loan is advanced at origination of the
loan and generally is repayable in equal, or substantially equal, installments
of an amount sufficient to fully amortize the loan at its stated maturity.
Interest on each Home Equity Loan may be calculated on the basis of the
outstanding principal balance of the loan multiplied by the Mortgage Rate on
each Home Equity Loan and further multiplied by a fraction, the numerator of
which is the number of days in the period elapsed since the preceding payment of
interest was made and the denominator is the number of days in the annual period
for which interest accrues on the loan. Under some circumstances, under a Home
Equity Loan, a borrower may choose an interest only payment option and is
obligated to pay only the amount of interest which accrues on the loan during
the billing cycle. Generally, an interest only payment option may be available
for a specified period before the borrower must begin paying at least the
minimum monthly payment of a specified percentage of the average outstanding
balance of the loan.
FHA Loans will be insured by the Federal Housing Administration (the "FHA")
as authorized under the National Housing Act, as amended, and the United States
Housing Act of 1937, as amended. FHA loans will be insured under various FHA
programs including the standard FHA 203-b programs to finance the acquisition of
one- to four-family housing units, the FHA 245 graduated payment mortgage
program and the FHA 221 and 223 programs to finance particular multifamily
residential rental properties. FHA Loans generally require a minimum down
payment of approximately 5% of the original principal amount of the FHA Loan. No
FHA Loan may have an interest rate or original principal amount exceeding the
applicable FHA limits at the time of origination of FHA Loan.
VA Loans will be partially guaranteed by the VA under the Servicemen's
Readjustment Act of 1944, as amended (the "Servicemen's Readjustment Act"). The
Servicemen's Readjustment Act permits
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a veteran, or in some instances the spouse of a veteran, to obtain a mortgage
loan guarantee by the VA covering mortgage financing of the purchase of a one-
to four-family dwelling unit at interest rates permitted by the VA. The program
has no mortgage loan limits, requires no down payment from the purchasers and
permits the guarantee of mortgage loans of up to 30 years' duration. However, no
VA Loan will have an original principal amount greater than five times the
partial VA guarantee for the VA Loan. The maximum guarantee that may be issued
by VA under this program is
o 50% of the principal amount of the Mortgage Loan if the principal amount of
the Mortgage Loan is $45,000 or less,
o the lesser of $36,000 and 40% of the principal amount of the Mortgage Loan
if the principal amount of the Mortgage Loan is greater than $45,000 but
less than or equal to $144,000,
o and the lesser of $46,000 and 25% of the principal amount of the Mortgage
Loan if the principal amount of the Mortgage Loan is greater than $144,000.
Unless otherwise specified in the related prospectus supplement, interest
on each Revolving Credit Line Loan, excluding introduction rates offered from
time to time during promotional periods, is computed and payable monthly on the
average daily outstanding principal balance of the Loan. Principal amounts on a
Revolving Credit Line Loan may be drawn down, up to a maximum amount as set
forth in the related prospectus supplement, or repaid under each Revolving
Credit Line Loan from time to time, but may be subject to a minimum periodic
payment. To the extent and accordingly under the terms provided in the related
prospectus supplement, the Trust Fund may include amounts borrowed under a
Revolving Credit Line Loan after the Cut-off Date. The full amount of a
Closed-End Loan is advanced at the inception of the Loan and generally is
repayable in equal, or substantially equal, installments of an amount to fully
amortize the Loan at its stated maturity. Except to the extent provided in the
related prospectus supplement, the original terms to stated maturity of
Closed-End Loans will not exceed 360 months. Under some circumstances, under
either a Revolving Credit Line Loan or a Closed-End Loan, a borrower may choose
an interest only payment option and is obligated to pay only the amount of
interest which accrues on the Loan during the billing cycle. An interest only
payment option may be available for a specified period before the borrower must
begin paying at least the minimum monthly payment of a specified percentage of
the average outstanding balance of the Loan.
The prospectus supplement, or, if information is not available in advance
of the date of the related prospectus supplement, a Current Report on Form 8-K
to be filed with the Commission, for each Series of Notes or Certificates, as
applicable, the Trust Fund with respect to which contains Mortgage Loans will
contain information as to the type of Mortgage Loans that will comprise the
related Mortgage Pool or Pools and information as to
o the aggregate principal balance of the Mortgage Loans as of the applicable
Cut-off Date,
o the type of Mortgaged Properties securing the Mortgage Loans,
o the original terms to maturity of the Mortgage Loans,
o the largest in principal balance of the Mortgage Loans,
o the earliest origination date and latest maturity date of the Mortgage
Loans,
o the aggregate principal balance of Mortgage Loans having Loan-to-Value
Ratios at origination exceeding 80%,
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o the interest rate or range of interest rates borne by the Mortgage Loans,
o the average outstanding principal balance of the Mortgage Loans,
o the geographical distribution of the Mortgage Loans,
o the number and aggregate principal balance of Buy-Down Loans or GPM Loans,
if applicable,
o with respect to ARM Loans, the adjustment dates, the highest, lowest and
weighted average margin, and the maximum Mortgage Rate variation at the
time of any periodic adjustment and over the life of ARM Loans, and
o with respect to Mortgage Loans secured by Multifamily Property or the other
Mortgage Loans as are specified in the prospectus supplement, whether the
Mortgage Loan provides for an interest only period and whether the
principal amount of the Mortgage Loan is amortized on the basis of a period
of time that extends beyond the maturity date of the Mortgage Loan.
No assurance can be given that values of the Mortgaged Properties in a
Mortgage Pool have remained or will remain at their levels on the dates of
origination of the related Mortgage Loans. If the real estate market should
experience an overall decline in property values causing the outstanding
balances of the Mortgage Loans and any secondary financing on the Mortgaged
Properties in a particular Mortgage Pool to become equal to or greater than the
value of the Mortgaged Properties, the actual rates of delinquencies,
foreclosures and losses could be higher than those now generally experienced in
the mortgage lending industry. In addition, the value of property securing
Cooperative Loans and the delinquency rate with respect to Cooperative Loans
could be adversely affected if the current favorable tax treatment of
cooperative stockholders were to become less favorable. See "Certain Legal
Aspects of the Mortgage Loans and Contracts--The Mortgage Loans." To the extent
that any of these losses are not covered by the methods of credit support or the
insurance policies described in this prospectus or by Alternative Credit
Support, they will be borne by holders of the Notes or Certificates, as
applicable, of the Series evidencing interests in, or secured by, the Mortgage
Pool.
Multifamily lending is generally viewed as exposing the lender to a greater
risk of loss than one- to four-family residential lending. Multifamily lending
typically involves larger loans to single borrowers or groups of related
borrowers than residential one- to four-family mortgage loans. Furthermore, the
repayment of loans secured by income producing properties is typically dependent
upon the successful operation of the related real estate project. If the cash
flow from the project is reduced, for example, if leases are not obtained or
renewed, the borrower's ability to repay the loan may be impaired. Multifamily
real estate can be affected significantly by supply and demand in the market for
the type of property securing the loan and, therefore, may be subject to adverse
economic conditions. Market values may vary as a result of economic events or
governmental regulations outside the control of the borrower or lender,
including rent control laws, which impact the future cash flow of the property.
Corresponding to the greater lending risk is a generally higher interest rate
applicable to multifamily mortgage loans.
The Depositor will cause the Mortgage Loans constituting each Mortgage Pool
to be assigned to the Trustee named in the applicable prospectus supplement, for
the benefit of the holders of the Certificates of the related Series (the
"Certificateholders") and, if a Series of Securities includes Notes, the
Depositor will cause the Mortgage Loans constituting the Mortgage Pool to be
pledged to the Indenture Trustee, for the benefit of the holders of the Notes of
the related Series (the "Noteholders" and, together with the Certificateholders,
the "Securityholders"). The Master Servicer, if any, named in the related
prospectus supplement will service the Mortgage Loans, either by itself or
through other mortgage servicing institutions, if any (each, a "Servicer"),
pursuant to a Pooling and Servicing Agreement or a
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Sale and Servicing Agreement, as described in this prospectus, and will receive
a fee as compensation. See "--Mortgage Loan Program" and "Description of the
Securities." As used in this prospectus, "Agreement" means, with respect to a
Series that only includes Certificates, the Pooling and Servicing Agreement, and
with respect to a Series that includes Notes, the Indenture, the Trust Agreement
and the Sale and Servicing Agreement, as the context requires. Unless otherwise
specified in the applicable prospectus supplement, with respect to those
Mortgage Loans serviced by a Servicer, the Servicer will be required to service
the related Mortgage Loans in accordance with the Pooling and Servicing
Agreement, Sale and Servicing Agreement or Seller's Warranty and Servicing
Agreement between the Servicer and the Depositor (each, a "Servicing
Agreement"), as applicable, and will receive as compensation, the fee specified
in the related Servicing Agreement; however, any Master Servicer will remain
liable for its servicing obligations under the applicable Agreement as if the
Master Servicer alone were servicing the Mortgage Loans.
The Depositor will make representations and warranties regarding the
Mortgage Loans, but its assignment of the Mortgage Loans to the Trustee will be
without recourse. See "Description of the Securities--Assignment of Mortgage
Loans." The Master Servicer's obligations with respect to the Mortgage Loans
will consist principally of its contractual servicing obligations under the
Servicing Agreement, including its obligation to enforce particular types of
purchase and other obligations of Servicers and/or Unaffiliated Sellers, as more
fully described in this prospectus under "--Mortgage Loan Program" and
"--Representations by Unaffiliated Sellers; Repurchases" and "Description of the
Securities--Assignment of Mortgage Loans" and "--Servicing by Unaffiliated
Sellers", and its obligations to make Advances in the event of delinquencies in
payments on or with respect to the Mortgage Loans or in connection with
prepayments and liquidations of the Mortgage Loans, in amounts described in this
prospectus under "Description of the Securities--Advances." Unless otherwise
specified in the related prospectus supplement, Advances with respect to
delinquencies will be limited to amounts that the Master Servicer believes
ultimately would be reimbursable under any applicable Letter of Credit, Pool
Insurance Policy, Special Hazard Insurance Policy, Mortgagor Bankruptcy Bond or
other policy of insurance, from amounts in the Reserve Fund, under any
Alternative Credit Support or out of the proceeds of liquidation of the Mortgage
Loans, cash in the Certificate Account or otherwise. See "Description of the
Securities--Advances," "Credit Support" and "Description of Insurance."
MORTGAGE LOAN PROGRAM
The Mortgage Loans will have been purchased by the Depositor either
directly or through affiliates or by the Trust formed by the Depositor, from one
or more affiliates or from sellers unaffiliated with the Depositor
("Unaffiliated Sellers"). Mortgage Loans acquired by the Depositor will have
been originated in accordance with the underwriting criteria specified below
under "Underwriting Standards" or as otherwise described in a related prospectus
supplement.
UNDERWRITING STANDARDS
Except in the case of particular Mortgage Loans originated by Unaffiliated
Sellers in accordance with their own underwriting criteria ("Closed Loans") or
other standards as may be described in the applicable prospectus supplement, all
prospective Mortgage Loans will be subject to the underwriting standards adopted
by the Depositor. See "--Closed Loan Program" below for a description of
underwriting standards applicable to Closed Loans. Unaffiliated Sellers will
represent and warrant that Mortgage Loans originated by them and purchased by
the Depositor have been originated in accordance with the applicable
underwriting standards established by the Depositor or other standards as may be
described in the applicable prospectus supplement. The following discussion
describes the underwriting standards of the Depositor with respect to any
Mortgage Loan that it purchases.
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The mortgage credit approval process for one- to four-family residential
loans follows a standard procedure that generally complies with the regulations
and guidelines of both the Federal Home Loan Mortgage Corporation ("FHLMC"), a
corporate instrumentality of the United States created under Title III of the
Emergency Home Finance Act of 1970, as amended, and the Federal National
Mortgage Association ("FNMA"), a federally chartered and privately owned
corporation organized and existing under the Federal National Mortgage
Association Charter Act (12 U.S.C. ss. 1716 et seq.), except that some Mortgage
Loans may have higher loan amount and qualifying ratios, as well as applicable
federal and state laws and regulations. The credit approval process for
Cooperative Loans follows a procedure that generally complies with applicable
FNMA regulations and guidelines, except for the loan amounts and qualifying
ratios, and applicable federal and state laws and regulations. The originator of
a Mortgage Loan (the "Originator") generally will review a detailed credit
application by the prospective mortgagor designed to provide pertinent credit
information, including a current balance sheet describing assets and liabilities
and a statement of income and expenses, as well as an authorization to apply for
a credit report that summarizes the prospective mortgagor's credit history with
local merchants and lenders and any record of bankruptcy. In addition, an
employment verification is obtained from the prospective mortgagor's employer in
which the employer reports the length of employment with that organization, the
current salary, and gives an indication as to whether it is expected that the
prospective mortgagor will continue the employment in the future. If the
prospective mortgagor is self-employed, he or she is required to submit copies
of signed tax returns. The prospective mortgagor may also be required to
authorize verification of deposits at financial institutions. In some
circumstances, other credit considerations may cause the Originator or Depositor
not to require some of the above documents, statements or proofs in connection
with the origination or purchase of particular Mortgage Loans.
Unless otherwise specified in the applicable prospectus supplement, an
appraisal generally will be required to be made on each residence to be
financed. The appraisal generally will be made by an appraiser who meets FNMA
requirements as an appraiser of one- to four-family residential properties. The
appraiser is required to inspect the property and verify that it is in good
condition and that, if new, construction has been completed. The appraisal
generally will be based on the appraiser's judgment of value, giving appropriate
weight to both the market value of comparable homes and the cost of replacing
the residence. These underwriting standards also require a search of the public
records relating to a mortgaged property for any liens and judgments.
Based on the data provided, particular verifications and the appraisal, a
determination is made by the Originator as to whether the prospective mortgagor
has sufficient monthly income available to meet the prospective mortgagor's
monthly obligations on the proposed loan and other expenses related to the
residence, including property taxes, hazard and primary mortgage insurance and,
if applicable, maintenance, and other financial obligations and monthly living
expenses. Except as may be provided in the related prospectus supplement, each
Originator's lending guidelines for conventional mortgage loans generally will
specify that mortgage payments plus taxes and insurance and all monthly payments
extending beyond one year, including those mentioned above and other fixed
obligations, or car payments, would equal no more than specified percentages of
the prospective mortgagor's gross income. These guidelines will be applied only
to the payments to be made during the first year of the loan. For FHA and VA
Loans, the Originator's lending guidelines will follow HUD and VA guidelines,
respectively. Other credit considerations may cause an Originator to depart from
these guidelines. For example, when two individuals co-sign the loan documents,
the incomes and expenses of both individuals may be included in the computation.
The Mortgaged Properties may be located in states where, in general, a
lender providing credit on a single-family property may not seek a deficiency
judgment against the Mortgagor but rather must look solely to the property for
repayment in the event of foreclosure. The Depositor's underwriting standards
applicable to all states, including anti-deficiency states, require that the
value of the property being
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financed, as indicated by the appraisal, currently supports and is anticipated
to support in the future the outstanding loan balance. Some of the types of
Mortgage Loans that may be included in the Mortgage Pools or Trust Funds may
involve additional uncertainties not present in traditional types of loans. For
example, Buy-Down Loans and GPM Loans provide for escalating or variable
payments by the Mortgagor. These types of Mortgage Loans are underwritten on the
basis of a judgment that the Mortgagor will have the ability to make larger
monthly payments in subsequent years. In some instances the Mortgagor's income
may not be sufficient to enable it to continue to make scheduled loan payments
as the payments increase.
To the extent specified in the related prospectus supplement, the Depositor
may purchase or cause the Trust to purchase Mortgage Loans for inclusion in a
Trust Fund that are underwritten under standards and procedures which vary from
and are less stringent than those described in this prospectus. For instance,
Mortgage Loans may be underwritten under a "limited documentation" program if so
specified in the related prospectus supplement. For limited documentation
Mortgage Loans, minimal investigation into the borrowers' credit history and
income profile is undertaken by the originator and the Mortgage Loans may be
underwritten primarily on the basis of an appraisal of the Mortgaged Property or
Cooperative Dwelling and the Loan-to-Value Ratio at origination. Thus, if the
Loan-to-Value Ratio is less than a percentage specified in the related
prospectus supplement, the originator may forego some aspects of the review
relating to monthly income, and traditional ratios of monthly or total expenses
to gross income may not be considered.
The underwriting standards for Mortgage Loans secured by Multifamily
Property will be described in the related prospectus supplement.
QUALIFICATIONS OF UNAFFILIATED SELLERS
Unless otherwise specified in the applicable prospectus supplement with
respect to an Unaffiliated Seller of Closed Loans secured by residential
properties, each Unaffiliated Seller must be an institution experienced in
originating conventional mortgage loans and/or FHA Loans or VA Loans in
accordance with accepted practices and prudent guidelines, and must maintain
satisfactory facilities to originate those loans. In addition, except as
otherwise specified, the Depositor requires adequate financial stability and
adequate servicing experience, where appropriate, as well as satisfaction of
other criteria.
REPRESENTATIONS BY UNAFFILIATED SELLERS; REPURCHASES
Unless otherwise specified in the related prospectus supplement, each
Unaffiliated Seller, or the Master Servicer, if the Unaffiliated Seller is also
the Master Servicer under the Agreement, will have made representations and
warranties in respect of the Mortgage Loans sold by the Unaffiliated Seller to
the Depositor. These representations and warranties will generally include,
among other things:
o with respect to each Mortgaged Property, that title insurance, or in the
case of Mortgaged Properties located in areas where policies are generally
not available, an attorney's certificate of title, and any required hazard
and primary mortgage insurance was effective at the origination of each
Mortgage Loan, and that each policy, or certificate of title, remained in
effect on the date of purchase of the Mortgage Loan from the Unaffiliated
Seller;
o that the Unaffiliated Seller had good and marketable title to each Mortgage
Loan it sold;
o with respect to each Mortgaged Property, that each mortgage constituted a
valid first lien on the Mortgaged Property, subject only to permissible
title insurance exceptions;
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o that there were no delinquent tax or assessment liens against the Mortgaged
Property; and
o that each Mortgage Loan was current as to all required payments, unless
otherwise specified in the related prospectus supplement.
With respect to a Cooperative Loan, the Unaffiliated Seller will represent
and warrant that (1) the security interest created by the cooperative security
agreements constituted a valid first lien on the collateral securing the
Cooperative Loan, subject to the right of the related Cooperative to cancel
shares and terminate the proprietary lease for unpaid assessments and to the
lien of the related Cooperative for unpaid assessments representing the
Mortgagor's pro rata share of the Cooperative's payments for its mortgage,
current and future real property taxes, maintenance charges and other
assessments to which like collateral is commonly subject, and (2) the related
cooperative apartment was free from damage and was in good repair.
All of the representations and warranties of an Unaffiliated Seller in
respect of a Mortgage Loan will have been made as of the date on which the
related Unaffiliated Seller sold the Mortgage Loan to the Depositor or its
affiliate. A substantial period of time may have elapsed between the date of
sale and the date of initial issuance of the Series of Notes or Certificates, as
applicable, evidencing an interest in, or secured by, the related Mortgage Loan.
Since the representations and warranties of an Unaffiliated Seller do not
address events that may occur following the sale of a Mortgage Loan by an
Unaffiliated Seller, the repurchase obligation described below will not arise
if, during the period commencing on the date of sale of a Mortgage Loan by the
Unaffiliated Seller to or on behalf of the Depositor, the relevant event occurs
that would have given rise to the obligation had the event occurred prior to
sale of the affected Mortgage Loan. However, the Depositor will not include any
Mortgage Loan in the Trust Fund for any Series of Notes or Certificates, as
applicable, if anything has come to the Depositor's attention that would cause
it to believe that the representations and warranties of an Unaffiliated Seller
will not be accurate and complete in all material respects in respect of the
related Mortgage Loan as of the related Cut-off Date.
The only representations and warranties to be made for the benefit of
holders of Notes or Certificates, as applicable, of a Series in respect of any
Mortgage Loan relating to the period commencing on the date of sale of the
Mortgage Loan to the Depositor or its affiliates will be limited representations
of the Depositor and of the Master Servicer described below under "Description
of the Securities--Assignment of Mortgage Loans." If the Master Servicer is also
an Unaffiliated Seller of Mortgage Loans with respect to a particular Series,
the representations will be in addition to the representations and warranties
made in its capacity as an Unaffiliated Seller.
Upon the discovery of the breach of any representation or warranty made by
an Unaffiliated Seller in respect of a Mortgage Loan that materially and
adversely affects the interests of the Securityholders of the related Series,
the related Unaffiliated Seller or the Servicer of the Mortgage Loan will be
obligated to repurchase the Mortgage Loan at a purchase price equal to 100% of
the unpaid principal balance of the Mortgage Loan at the date of repurchase or,
in the case of a Series of Notes or Certificates, as applicable, as to which the
Depositor has elected to treat the related Trust Fund as a REMIC, at that price
or such other price as may be indicated in the related prospectus supplement, in
each case together with accrued interest at the Mortgage Rate for the related
Mortgage Loan to the first day of the month following the repurchase and the
amount of any unreimbursed Advances made by the Master Servicer or the Servicer,
as applicable, in respect of the Mortgage Loan. The Master Servicer will be
required to enforce this obligation for the benefit of the Trustee and the
Securityholders, following the practices it would employ in its good faith
business judgment were it the owner of the Mortgage Loan. Unless otherwise
specified in the applicable prospectus supplement, and subject to the ability of
the Depositor, the Unaffiliated Seller or the Servicer to substitute for some of
the Mortgage Loans as
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described below, this repurchase obligation constitutes the sole remedy
available to the Securityholders of the related Series for a breach of
representation or warranty by an Unaffiliated Seller.
The obligation of the Master Servicer to purchase a Mortgage Loan if an
Unaffiliated Seller or a Servicer defaults on its obligation to do so is subject
to limitations, and no assurance can be given that Unaffiliated Sellers will
carry out their respective repurchase obligations with respect to Mortgage
Loans. However, to the extent that a breach of the representations and
warranties of an Unaffiliated Seller may also constitute a breach of the
representations and warranties made by the Depositor or by the Master Servicer
with respect to the insurability of the Mortgage Loans, the Depositor may have a
repurchase obligation, and the Master Servicer may have the limited purchase
obligation, in each case as described below under "Description of the
Securities--Assignment of Mortgage Loans."
CLOSED LOAN PROGRAM
The Depositor may also acquire Closed Loans that have been originated by
Unaffiliated Sellers in accordance with underwriting standards acceptable to the
Depositor. Unless otherwise specified in the applicable prospectus supplement,
Closed Loans for which 11 or fewer monthly payments have been received will be
further subject to the Depositor's customary underwriting standards. Unless
otherwise specified in the applicable prospectus supplement, Closed Loans for
which 12 to 60 monthly payments have been received will be subject to a review
of payment history and will conform to the Depositor's guidelines for the
related mortgage program. In the event one or two payments were over 30 days
delinquent, a letter explaining the delinquencies will be required of the
Mortgagor. Unless otherwise specified in the applicable prospectus supplement,
the Depositor will not purchase for inclusion in a Mortgage Pool a Closed Loan
for which
(1) more than two monthly payments were over 30 days delinquent,
(2) one payment was over 60 days delinquent or
(3) more than 60 monthly payments were received.
MORTGAGE CERTIFICATES
If so specified in the prospectus supplement with respect to a Series, the
Trust Fund for the Series may include conventional mortgage pass-through
certificates, collateralized mortgage bonds or other indebtedness secured by
mortgage loans or manufactured housing contracts (the "Mortgage Certificates")
issued by one or more trusts established by one or more private entities and
evidencing, unless otherwise specified in the related prospectus supplement, the
entire interest in a pool of mortgage loans. A description of the mortgage loans
and/or manufactured housing contracts underlying the Mortgage Certificates, the
related pooling and servicing arrangements and the insurance arrangements in
respect of the mortgage loans will be set forth in the applicable prospectus
supplement or in the Current Report on Form 8-K referred to below. That
prospectus supplement, or, if the applicable information is not available in
advance of the date of the prospectus supplement, a Current Report on Form 8-K
to be filed by the Depositor with the Commission within 15 days of the issuance
of the Notes or Certificates, as applicable, of the related Series, will also
set forth information with respect to the entity or entities forming the related
mortgage pool, the issuer of any credit support with respect to the Mortgage
Certificates and the aggregate outstanding principal balance and the
pass-through rate borne by each Mortgage Certificate included in the Trust Fund,
together with some additional information with respect to the Mortgage
Certificates. The inclusion of Mortgage Certificates in a Trust Fund with
respect to a Series of Notes or Certificates, as applicable, is conditioned upon
their characteristics being in form and substance satisfactory to the Rating
Agency rating the related Series of Notes or Certificates, as
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applicable. Mortgage Certificates, together with the Mortgage Loans, Warehouse
Loans and Contracts, are referred to in this prospectus as the "Trust Assets."
THE CONTRACT POOLS
If so specified in the prospectus supplement with respect to a Series, the
Trust Fund for the Series may include a pool of manufactured housing installment
or conditional sales contracts and installment loan agreements (the "Contracts")
or participation certificates representing participation interests in the
Contracts and related property (the "Contract Pool") conveyed to the Trust by
the Depositor, evidencing interests in manufactured housing installment or
conditional sales contracts and installment loan agreements originated by a
manufactured housing dealer in the ordinary course of business and purchased by
the Depositor. The Contracts may be conventional manufactured housing contracts
or contracts insured by the FHA or partially guaranteed by the VA. Each Contract
will be secured by a new or used unit of manufactured housing (a "Manufactured
Home"). Unless otherwise specified in the related prospectus supplement, the
Contracts will be fully amortizing and will bear interest at the fixed annual
percentage rates ("APRs") specified in the related prospectus supplement.
The Manufactured Homes securing the Contracts consist of manufactured homes
within the meaning of 42 United States Code, Section 5402(6), which defines a
"manufactured home" as "a structure, transportable in one or more sections,
which in the traveling mode, is eight body feet or more in width or forty body
feet or more in length, or, when erected on site, is three hundred twenty or
more square feet, and which is built on a permanent chassis and designed to be
used as a dwelling with or without a permanent foundation when connected to the
required utilities, and includes the plumbing, heating, air conditioning, and
electrical systems contained therein; except that the term shall include any
structure which meets all the requirements of [this] paragraph except the size
requirements and with respect to which the manufacturer voluntarily files a
certification required by the Secretary of Housing and Urban Development and
complies with the standards established under [this] chapter."
The Depositor will cause the Contracts constituting each Contract Pool to
be assigned and/or pledged to the related Trustee named in the related
prospectus supplement for the benefit of the related Securityholders. The Master
Servicer specified in the related prospectus supplement will service the
Contracts, either by itself or through other Servicers, pursuant to the
Agreement. See "Description of the Securities--Servicing by Unaffiliated
Sellers." With respect to those Contracts serviced by the Master Servicer
through a Servicer, the Master Servicer will remain liable for its servicing
obligations under the Agreement as if the Master Servicer alone were servicing
the Contracts. The Contract documents, if so specified in the related prospectus
supplement, may be held for the benefit of the Trustee by a Custodian (the
"Custodian") appointed pursuant to the related Pooling and Servicing Agreement
or a Custodial Agreement (the "Custodial Agreement") among the Depositor, the
Trustee and the Custodian.
Unless otherwise specified in the related prospectus supplement, each
registered holder of a Security will be entitled to receive periodic
distributions, which will be monthly unless otherwise specified in the related
prospectus supplement, of all or a portion of principal of the underlying
Contracts or interest on the principal balance of the Security at the Interest
Rate, or both. See "Description of the Securities--Payments on Contracts."
Except as otherwise specified in the related prospectus supplement, the
related prospectus supplement, or, if the information is not available in
advance of the date of the related prospectus supplement, a Current Report on
Form 8-K to be filed with the Commission, will specify, for the Contracts
contained in the related Contract Pool, among other things:
o the dates of origination of the Contracts;
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o the weighted average APR on the Contracts;
o the range of outstanding principal balances as of the Cut-off Date;
o the average outstanding principal balance of the Contracts as of the
Cut-off Date;
o the weighted average term to maturity as of the Cut-off Date; and
o the range of original maturities of the Contracts.
With respect to the Contracts included in the Contract Pool, the Depositor,
the Master Servicer or any other party specified in the related prospectus
supplement, will make or cause to be made representations and warranties as to
the types and geographical distribution of the Contracts and as to the accuracy
in all material respects of information furnished to the Trustee in respect of
each Contract. In addition, the Master Servicer or the Unaffiliated Seller of
the Contracts will represent and warrant that, as of the Cut-off Date, unless
otherwise specified in the related prospectus supplement, no Contract was more
than 30 days delinquent as to payment of principal and interest. Upon a breach
of any representation that materially and adversely affects the interest of the
related Securityholders in a Contract, the Master Servicer, the Unaffiliated
Seller or another party, as appropriate, will be obligated either to cure the
breach in all material respects or to purchase the Contract or, if so specified
in the related prospectus supplement, to substitute another Contract as
described below. This repurchase or substitution obligation constitutes the sole
remedy available to the Securityholders or the Trustee for a breach of a
representation by the Master Servicer, the Unaffiliated Seller or another party.
If so specified in the related prospectus supplement, in addition to making
particular representations and warranties regarding its authority to enter into,
and its ability to perform its obligations under, the Agreement, the Master
Servicer will make other representations and warranties, except to the extent
that another party specified in the prospectus supplement makes any
representations, to the Trustee with respect to the enforceability of coverage
under any applicable insurance policy or hazard insurance policy. See
"Description of Insurance" for information regarding the extent of coverage
under the insurance policies. Upon a breach of the insurability representation
that materially and adversely affects the interests of the Securityholders in a
Contract, the Master Servicer, the Unaffiliated Seller or any other party, as
appropriate, will be obligated either to cure the breach in all material
respects or, unless otherwise specified in the related prospectus supplement, to
purchase the Contract at a price equal to the principal balance of the Contract
as of the date of purchase plus accrued interest at the related Pass-Through
Rate to the first day of the month following the month of purchase. The Master
Servicer, if required by the Rating Agency rating the Notes or Certificates, as
applicable, will procure a surety bond, guaranty, letter of credit or other
instrument (the "Performance Bond") acceptable to the Rating Agency to support
this purchase obligation. See "Credit Support--Performance Bond." The purchase
obligation will constitute the sole remedy available to the Securityholders or
the Trustee for a breach of the Master Servicer's or seller's insurability
representation.
If provided in the related prospectus supplement, if the Depositor
discovers or receives notice of any breach of its representations and warranties
relating to a Contract within two years or another period specified in the
related prospectus supplement of the date of the initial issuance of the Notes
or Certificates, as applicable, the Depositor may remove the Contract from the
Trust Fund (each, a "Deleted Contract"), rather than repurchase the Contract as
provided above, and substitute in its place another Contract (each, a
"Substitute Contract"). Any Substitute Contract, on the date of substitution,
will
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o have an outstanding principal balance, after deduction of all scheduled
payments due in the month of substitution, not in excess of the outstanding
principal balance of the Deleted Contract, the amount of any shortfall to
be distributed to Securityholders in the month of substitution,
o have an APR not less than, and not more than 1% greater than, the APR of
the Deleted Contract,
o have a remaining term to maturity not greater than, and not more than one
year less than, that of the Deleted Contract and
o comply with all the representations and warranties set forth in the
Agreement as of the date of substitution.
This repurchase or substitution obligation constitutes the sole remedy
available to the Securityholders or the Trustee for any breach.
UNDERWRITING POLICIES
Conventional Contracts will comply with the underwriting policies of the
Originator or Unaffiliated Seller of the Contracts described in the related
prospectus supplement. Except as described below or in the related prospectus
supplement, the Depositor believes that these policies were consistent with
those utilized by mortgage lenders or manufactured home lenders generally during
the period of origination.
With respect to a Contract made in connection with the Obligor's purchase
of a Manufactured Home, the "appraised value" is the amount determined by a
professional appraiser. The appraiser must personally inspect the Manufactured
Home and prepare a report which includes market data based on recent sales of
comparable Manufactured Homes and, when deemed applicable, a replacement cost
analysis based on the current cost of a similar Manufactured Home. Unless
otherwise specified in the related prospectus supplement, the "Contract
Loan-to-Value Ratio" will be equal to the original principal amount of the
Contract divided by the lesser of the "appraised value" or the sales price for
the Manufactured Home.
THE FINANCING LOAN POOLS
If so specified in the prospectus supplement with respect to a Series, the
Trust Fund for the Series may include a pool of loans made to finance the
origination of Home Equity Loans or Contracts (the "Warehouse Loans") and
secured by Home Equity Loans or Contracts or participation certificates
representing participation interests in the Warehouse Loans and related property
(the "Warehouse Loan Pool") conveyed to the Trust by the Depositor, evidencing
interests in Warehouse Loans originated in the ordinary course of business and
purchased by the Depositor. Unless otherwise specified in the related prospectus
supplement, the Warehouse Loans will be fully amortizing and will bear interest
at the interest rates specified in the related prospectus supplement.
The Depositor will cause the Warehouse Loans constituting each Warehouse
Loan Pool to be assigned and/or pledged to the related Trustee named in the
related prospectus supplement for the benefit of the related Securityholders.
The Master Servicer specified in the related prospectus supplement will service
the Warehouse Loans, either by itself or through other Servicers, pursuant to
the Agreement. See "Description of the Securities--Servicing by Unaffiliated
Sellers." With respect to those Warehouse Loans serviced by the Master Servicer
through a Servicer, the Master Servicer will remain liable for its servicing
obligations under the Agreement as if the Master Servicer alone were servicing
the Warehouse Loans. The Warehouse Loan documents, if so specified in the
related prospectus supplement, may be
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held for the benefit of the Trustee by a Custodian appointed pursuant to the
related Pooling and Servicing Agreement or a Custodial Agreement.
Except as otherwise specified in the related prospectus supplement, the
related prospectus supplement, or, if the information is not available in
advance of the date of the related prospectus supplement, a Current Report on
Form 8-K to be filed with the Commission, will specify, for the Warehouse Loans
contained in the related Warehouse Loan Pool, among other things:
o the dates of origination of the Warehouse Loans;
o the weighted average APR on the Warehouse Loans;
o the range of outstanding principal balances as of the Cut-off Date;
o the average outstanding principal balance of the Warehouse Loans as of the
Cut-off Date;
o the weighted average term to maturity as of the Cut-off Date; and
o the range of original maturities of the Warehouse Loans.
With respect to the Warehouse Loans included in the Warehouse Loan Pool,
the Depositor, the Master Servicer or any other party specified in the related
prospectus supplement, will make or cause to be made representations and
warranties as to the types and geographical distribution of the Warehouse Loans
and as to the accuracy in all material respects of information furnished to the
Trustee in respect of each Warehouse Loan. In addition, the Master Servicer or
the Unaffiliated Seller of the Warehouse Loans will represent and warrant that,
as of the Cut-off Date, unless otherwise specified in the related prospectus
supplement, no Warehouse Loan was more than 30 days delinquent as to payment of
principal and interest. Upon a breach of any representation that materially and
adversely affects the interest of the related Securityholders in a Warehouse
Loan, the Master Servicer, the Unaffiliated Seller or another party, as
appropriate, will be obligated either to cure the breach in all material
respects or to purchase the Warehouse Loan or, if so specified in the related
prospectus supplement, to substitute another Warehouse Loan. This repurchase or
substitution obligation constitutes the sole remedy available to the
Securityholders or the Trustee for a breach of a representation by the Master
Servicer, the Unaffiliated Seller or another party.
If provided in the related prospectus supplement, if the Depositor
discovers or receives notice of any breach of its representations and warranties
relating to a Warehouse Loan within two years or another period specified in the
related prospectus supplement of the date of the initial issuance of the Notes
or Certificates, as applicable, the Depositor may remove the Warehouse Loan from
the Trust Fund (each, a "Deleted Warehouse Loan"), rather than repurchase the
Warehouse Loan as provided above, and substitute in its place another Warehouse
Loan (each, a "Substitute Warehouse Loan"). Any Substitute Warehouse Loan, on
the date of substitution, will
o have an outstanding principal balance, after deduction of all scheduled
payments due in the month of substitution, not in excess of the outstanding
principal balance of the Deleted Warehouse Loan, the amount of any
shortfall to be distributed to Securityholders in the month of
substitution,
o have an APR not less than, and not more than 1% greater than, the APR of
the Deleted Warehouse Loan,
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o have a remaining term to maturity not greater than, and not more than one
year less than, that of the Deleted Warehouse Loan and
o comply with all the representations and warranties set forth in the
Agreement as of the date of substitution.
This repurchase or substitution obligation constitutes the sole remedy available
to the Securityholders or the Trustee for any breach.
UNDERWRITING POLICIES
Warehouse Loans will comply with the underwriting policies of the
Originator or Unaffiliated Seller of the Warehouse Loans described in the
related prospectus supplement. Except as described below or in the related
prospectus supplement.
THE DEPOSITOR
Asset Backed Securities Corporation (the "Depositor") was incorporated in
the State of Delaware on December 31, 1985, and is an indirect, wholly owned
subsidiary of Credit Suisse First Boston, Inc. Credit Suisse First Boston
Corporation, which may act as an underwriter in offerings made by this
prospectus, as described in "Plan of Distribution" below, is also a wholly owned
subsidiary of Credit Suisse First Boston, Inc. The principal executive offices
of the Depositor are located at Eleven Madison Avenue, New York, NY 10010. Its
telephone number is (212) 325-2000.
The Depositor was organized, among other things, for the purposes of
establishing trusts, selling beneficial interests in those trusts and acquiring
and selling mortgage assets to trusts. Neither the Depositor, its parent nor any
of the Depositor's affiliates will ensure or guarantee distributions on the
Notes or Certificates, as applicable, of any Series.
Trust Assets will be acquired by the Depositor directly or through one or
more affiliates.
USE OF PROCEEDS
Except as otherwise provided in the related prospectus supplement, the
Depositor will apply all or substantially all of the net proceeds from the sale
of each Series offered by this prospectus and by the related prospectus
supplement to purchase the Trust Assets, to repay indebtedness which has been
incurred to obtain funds to acquire the Trust Assets, to establish the Reserve
Funds or Pre-Funding Accounts, if any, for the Series and to pay costs of
structuring and issuing the Notes or Certificates, as applicable. If so
specified in the related prospectus supplement, Notes or Certificates, as
applicable, may be exchanged by the Depositor for Trust Assets. Unless otherwise
specified in the related prospectus supplement, the Trust Assets for each Series
of Notes or Certificates, as applicable, will be acquired by the Depositor
either directly, or through one or more affiliates which will have acquired
Trust Assets from time to time either in the open market or in privately
negotiated transactions.
MATURITY, PREPAYMENT AND YIELD CONSIDERATIONS
Unless otherwise specified in the related prospectus supplement, the
scheduled maturities of all of the Mortgage Loans, or the mortgage loans
underlying the Mortgage Certificates, at origination will not be less than
approximately 10 years or exceed 40 years and all the Contracts will have
maturities at
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origination of not more than 20 years, but the Mortgage Loans, or the underlying
mortgage loans, or Contracts may be prepaid in full or in part at any time.
Unless otherwise specified in the applicable prospectus supplement, no Mortgage
Loan, or mortgage loan, or Contract will provide for a prepayment penalty and
each will contain, except in the case of FHA and VA Loans, due-on-sale clauses
permitting the mortgagee or obligee to accelerate maturity upon conveyance of
the related Mortgaged Property, Cooperative Dwelling or Manufactured Home.
The FHA has compiled statistics relating to one- to four-family, level
payment mortgage loans insured by the FHA under the National Housing Act of
1934, as amended, at various interest rates, all of which permit assumption by
the new buyer if the home is sold. The statistics indicate that while some
mortgage loans remain outstanding until their scheduled maturities, a
substantial number are paid prior to their respective stated maturities. The
Actuarial Division of HUD has prepared tables which, assuming full mortgage
prepayments at the rates experienced by FHA, set forth the percentages of the
original number of FHA Loans in pools of level payment mortgage loans of varying
maturities that will remain outstanding on each anniversary of the original date
of the mortgage loans, assuming they all have the same origination date, ("FHA
Experience"). Published information with respect to conventional residential
mortgage loans indicates that the mortgage loans have historically been prepaid
at higher rates than government-insured loans because, unlike government insured
mortgage loans, conventional mortgage loans may contain due-on-sale clauses that
allow the holder of the loans to demand payment in full of the remaining
principal balance of the mortgage loans upon sales or particular transfers of
the mortgaged property. There are no similar statistics with respect to the
prepayment rates of cooperative loans or loans secured by multifamily
properties.
It is customary in the residential mortgage industry in quoting yields on a
pool of (1) 30-year fixed-rate, level payment mortgages, to compute the yield as
if the pool were a single loan that is amortized according to a 30-year schedule
and is then prepaid in full at the end of the twelfth year and (2) 15-year
fixed-rate, level payment mortgages, to compute the yield as if the pool were a
single loan that is amortized according to a 15-year schedule and then is
prepaid in full at the end of the seventh year.
Prepayments on residential mortgage loans are also commonly measured
relative to a prepayment standard or model. If so specified in the prospectus
supplement relating to a Series of Notes or Certificates, as applicable, the
model used in a prospectus supplement will be the Standard Prepayment Assumption
("SPA"). SPA represents an assumed rate of prepayment relative to the then
outstanding principal balance of a pool of mortgages. A prepayment assumption of
100% of SPA assumes prepayment rates of 0.2% per annum of the then outstanding
principal balance of the mortgages in the first month of the life of the
mortgages and an additional 0.2% per annum in each subsequent month until the
thirtieth month and in each subsequent month during the life of the mortgages,
100% of SPA assumes a constant prepayment rate of 6% per annum each month.
Information regarding FHA Experience, other published information, SPA or
any other rate of assumed prepayments, as applicable, will be set forth in the
prospectus supplement with respect to a Series of Notes or Certificates, as
applicable. There is, however, no assurance that prepayment of the Mortgage
Loans underlying a Series of Notes or Certificates, as applicable, will conform
to FHA Experience, mortgage industry custom, any level of SPA, or any other rate
specified in the related prospectus supplement. A number of factors, including
homeowner mobility, economic conditions, enforceability of due-on-sale clauses,
mortgage market interest rates, mortgage recording taxes and the availability of
mortgage funds, may affect prepayment experience on residential mortgage loans.
The terms of the Servicing Agreement will require the Servicer or the
Master Servicer to enforce any due-on-sale clause to the extent it has knowledge
of the conveyance or the proposed conveyance of the underlying Mortgaged
Property or Cooperative Dwelling; provided, however, that any enforcement
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action that would impair or threaten to impair any recovery under any related
Insurance Policy will not be required or permitted. See "Description of the
Securities--Enforcement of `Due-On-Sale' Clauses; Realization Upon Defaulted
Mortgage Loans" and "Certain Legal Aspects of the Mortgage Loans and
Contracts--The Mortgage Loans for a description of particular provisions of each
Agreement and related legal developments that may affect the prepayment
experience on the Mortgage Loans.
At the request of the Mortgagor, the Servicer may refinance the Mortgage
Loans in any Mortgage Pool by accepting prepayments on the Mortgage Loans and
making new loans secured by a mortgage on the same property. Upon any
refinancing, the new loans will not be included in the Mortgage Pool and the
related Servicer will be required to repurchase the affected Mortgage Loan. A
Mortgagor may be legally entitled to require the Servicer to allow a
refinancing. Any repurchase will have the same effect as a prepayment in full of
the related Mortgage Loan.
There are no uniform statistics compiled for prepayments of contracts
relating to Manufactured Homes. Prepayments on the Contracts may be influenced
by a variety of economic, geographic, social and other factors, including
repossessions, aging, seasonality and interest rate fluctuations. Other factors
affecting prepayment of mortgage loans or Contracts include changes in housing
needs, job transfers, unemployment and servicing decisions. An investment in
Notes or Certificates, as applicable, evidencing interests in, or secured by,
Contracts may be affected by, among other things, a downturn in regional or
local economic conditions. These regional or local economic conditions are often
volatile, and historically have affected the delinquency, loan loss and
repossession experience of the Contracts. To the extent that losses on the
Contracts are not covered by the Subordinated Amount, if any, Letters of Credit,
applicable Insurance Policies, if any, or by any Alternative Credit Support,
holders of the Notes or Certificates, as applicable, of a Series evidencing
interests in, or secured by, Contracts will bear all risk of loss resulting from
default by Obligors and will have to look primarily to the value of the
Manufactured Homes, which generally depreciate in value, for recovery of the
outstanding principal of and unpaid interest on the defaulted Contracts. See
"The Trust Fund--The Contract Pools."
While most Contracts will contain "due-on-sale" provisions permitting the
holder of the Contract to accelerate the maturity of the Contract upon
conveyance by the borrower, to the extent provided in the related prospectus
supplement, the Master Servicer may permit proposed assumptions of Contracts
where the proposed buyer meets the underwriting standards described above. Any
assumption would have the effect of extending the average life of the Contracts.
FHA Mortgage Loans and Contracts and VA Mortgage Loans and Contracts are not
permitted to contain "due-on-sale" clauses, and are freely assumable.
Mortgage Loans made with respect to Multifamily Property may have
provisions that prevent prepayment for a number of years and may provide for
payments of interest only during a specific period followed by amortization of
principal on the basis of a schedule extending beyond the maturity of the
related Mortgage Loans. Prepayments of Mortgage Loans secured by Multifamily
Property may be affected by these and other factors, including changes in
interest rates and the relative tax benefits associated with ownership of
Multifamily Property.
If set forth in the applicable prospectus supplement, the Depositor or
other specified entity will have the option to repurchase the Trust Assets
included in the related Trust Fund under the conditions stated in the related
prospectus supplement. For any Series of Notes or Certificates, as applicable,
for which the Depositor has elected to treat the Trust Fund or particular assets
of the Trust Fund as a REMIC pursuant to the provisions or the Code, any
repurchase will be effected in compliance with the requirements of Section
860F(a)(4) of the Code so as to constitute a "qualified liquidation" under the
Code. In addition, the Depositor will be obligated, under some circumstances, to
repurchase some of the Trust Assets. The Master Servicer and Unaffiliated
Sellers will also have repurchase obligations, as more
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fully described in this prospectus and in the related prospectus supplement. In
addition, the mortgage loans underlying the Mortgage Certificates may be subject
to repurchase under circumstances similar to those described above. Repurchases
will have the same effect as prepayments in full. See "The Trust Fund--Mortgage
Loan Program" and "--Representations by Unaffiliated Sellers; Repurchases,"
"Description of the Securities--Assignment of Mortgage Loans," "-- Assignment of
Mortgage Certificates," "-- Assignment of Contracts" and "--Termination."
If so specified in the related prospectus supplement, a Mortgage Pool may
contain Mortgage Loans with fluctuating Mortgage Rates that adjust more
frequently than the monthly payment with respect to the Mortgage Loans. As a
result, the portion of each monthly payment allocated to principal may vary from
month to month. Negative amortization with respect to a Mortgage Loan will occur
if an adjustment to the Mortgage Rate causes the amount of interest accrued in
any month, calculated at the new Mortgage Rate for the period, to exceed the
amount of the monthly payment or if the allowable increase in any monthly
payment is limited to an amount that is less than the amount of interest accrued
in any month. The amount of any resulting Deferred Interest will be added to the
principal balance of the Mortgage Loan and will bear interest at the Mortgage
Rate in effect from time to time. To the extent that, as a result of the
addition of any Deferred Interest, the Mortgage Loan negatively amortizes over
its term, the weighted average life of the Notes or Certificates, as applicable,
of the related Series will be greater than would otherwise be the case. As a
result, the yield on any Mortgage Loan at any time may be less than the yields
on similar adjustable rate mortgage loans, and the rate of prepayment may be
lower or higher than would otherwise be anticipated.
Generally, when a full prepayment is made on a Mortgage Loan, Warehouse
Loan or Contract, the Mortgagor or the borrower under a Contract (the
"Obligor"), is charged interest for the number of days actually elapsed from the
due date of the preceding monthly payment up to the date of prepayment, at a
daily interest rate determined by dividing the Mortgage Rate or APR by 365 or as
otherwise specified in the related Mortgage Note. Full prepayments will reduce
the amount of interest paid by the Mortgagor or the Obligor because interest on
the principal amount of any Mortgage Loan, Warehouse Loan or Contract so prepaid
will be paid only to the date of prepayment instead of for a full month;
however, unless otherwise provided in the applicable prospectus supplement, the
Master Servicer with respect to a Series will be required to advance from its
own funds the portion of any interest at the related Mortgage Rate that is not
so received. Partial prepayments generally are applied on the first day of the
month following receipt, with no resulting reduction in interest payable for the
period in which the partial prepayment is made. Unless otherwise specified in
the related prospectus supplement, full and partial prepayments, together with
interest on the full and partial prepayments at the Mortgage Rate or APR for the
related Mortgage Loan, Warehouse Loan or Contract to the last day of the month
in which the prepayments occur, will be deposited in the Certificate Account and
will be available for distribution to Securityholders on the next succeeding
Distribution Date in the manner specified in the related prospectus supplement.
Generally, the effective yield to holders of Notes or Certificates, as
applicable, having a monthly Distribution Date will be lower than the yield
otherwise produced because, while interest will accrue on each Mortgage Loan,
Warehouse Loan or Contract, or mortgage loan underlying a Mortgage Certificate,
to the first day of the month, the distribution of interest to holders of Notes
or Certificates, as applicable, will be made no earlier than the 25th day of the
month following the month of the accrual, unless otherwise provided in the
applicable prospectus supplement. The adverse effect on yield will intensify
with any increase in the period of time by which the Distribution Date with
respect to a Series of Notes or Certificates, as applicable, succeeds the 25th
day. If so specified in the related prospectus supplement, one or more Classes
or Subclasses of Certificates within a Series (the "Multi-Class Securities") may
be assigned a principal balance (a "Stated Principal Balance" or a "Certificate
Principal Balance") based on the cash flow from the Mortgage Loans, Mortgage
Certificates, the Warehouse Loans, the Contracts
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and/or the other assets in the Trust Fund if specified in the related prospectus
supplement and a stated annual interest rate, determined in the manner set forth
in the related prospectus supplement, which may be fixed or variable (an
"Interest Rate"). With respect to the Multi-Class Securities of a Series having
other than monthly Distribution Dates, the yield to holders of the Certificates
will also be adversely affected by any increase in the period of time from the
date to which interest accrues on the Certificate to the Distribution Date on
which interest is distributed.
If so specified in the related prospectus supplement, one or more Classes
or Subclasses of Notes and/or Certificates may receive unequal amounts of the
distributions of principal of and interest on the Mortgage Loans, the Warehouse
Loans, the Contracts and the Mortgage Certificates included in the related Trust
Fund, as specified in the related prospectus supplement (any Class or Subclass
receiving the higher proportion of principal distributions being referred to in
this prospectus after as a "Principal Weighted Class" or "Principal Weighted
Subclass," respectively, and any Class or Subclass receiving the higher
proportion of interest distributions being referred to in this prospectus as an
"Interest Weighted Class" or an "Interest Weighted Subclass," respectively). If
so specified in the related prospectus supplement, the allocation of the
principal and interest distributions may involve as much as 100% of each
distribution of principal or interest being allocated to one or more Classes or
Subclasses and 0% to another. If so specified in the related prospectus
supplement, one or more Classes or Subclasses may receive disproportionate
amounts of distributions of principal, which proportions may change over time
subject to specific conditions. Payments may be applied to any one or more
Classes or Subclasses on a sequential or pro rata basis, or otherwise, as
specified in the related prospectus supplement.
In the event that the Notes or Certificates, as applicable, of a Series are
divided into two or more Classes or Subclasses and that a Class or Subclass is
an Interest Weighted Class, in the event that a Series includes Classes or
Subclasses of Certificates of a Series which evidence a residual interest in the
related Trust Fund (the "Residual Certificates"), the prospectus supplement for
the Series will indicate the manner in which the yield to Securityholders will
be affected by different rates of prepayments on the Mortgage Loans, on the
Warehouse Loans, on the Contracts or on the mortgage loans underlying the
Mortgage Certificates. In general, the yield on Notes or Certificates, as
applicable, that are offered at a premium to their principal or notional amount
("Premium Securities") is likely to be adversely affected by a higher than
anticipated level of principal prepayments on the Mortgage Loans, on the
Warehouse Loans, on the Contracts or on the mortgage loans underlying the
Mortgage Certificates. This relationship will become more sensitive as the
amount by which the Percentage Interest of the Class in each Interest
Distribution is greater than the corresponding Percentage Interest of the Class
in each Principal Distribution. If the differential is particularly wide, e.g.,
the Interest Distribution is allocated primarily or exclusively to one Class or
Subclass and the Principal Distribution primarily or exclusively to another, and
a high level of prepayments occurs, there is a possibility that Securityholders
of Premium Securities will not only suffer a lower than anticipated yield but,
in extreme cases, will fail to recoup fully their initial investment.
Conversely, a lower than anticipated level of principal prepayments, which can
be anticipated to increase the expected yield to holders of Notes or
Certificates, as applicable, that are Premium Securities, will likely result in
a lower than anticipated yield to holders of Notes or Certificates, as
applicable, that are offered at a discount to their principal amount ("Discount
Securities"). If so specified in the applicable prospectus supplement, a
disproportionately large amount of principal prepayments or other recoveries of
principal specified in the related prospectus supplement on a Mortgage Loan,
Warehouse Loan or Contract that are received in advance of their scheduled Due
Dates and are not accompanied by an amount as to interest representing scheduled
interest due on any date or dates in any month or months subsequent to the month
of prepayment (the "Principal Prepayments") may be distributed to the holders of
the Senior Notes or Senior Certificates, as applicable, at the times and under
the circumstances described in the prospectus supplement.
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In the event that the Notes or Certificates, as applicable, of a Series
include one or more Classes or Subclasses of Multi-Class Securities, the
prospectus supplement for the Series will set forth information, measured
relative to a prepayment standard or model specified in the prospectus
supplement, with respect to the projected weighted average life of each the
Class or Subclass and the percentage of the initial Stated Principal Balance of
each Subclass that would be outstanding on special Distribution Dates for the
related Series based on the assumptions stated in the prospectus supplement,
including assumptions that prepayments on the Mortgage Loans, Warehouse Loans or
Contracts or on the mortgage loans underlying the Mortgage Certificates in the
related Trust Fund are made at rates corresponding to the various percentages of
the prepayment standard or model.
DESCRIPTION OF THE SECURITIES
Each Series of Notes or Certificates, as applicable, will be issued
pursuant to either:
(1) an agreement consisting of either,
(a) a Pooling and Servicing Agreement or
(b) a Reference Agreement (the "Reference Agreement") and the
Standard Terms and Provisions of Pooling and Servicing Agreement (the
"Standard Terms"), (either the Standard Terms together with the Reference
Agreement or the Pooling and Servicing Agreement referred to in this
prospectus as the "Pooling and Servicing Agreement") among the Depositor,
the Master Servicer, if any, and the Trustee or
(2) if a Series of Securities includes Notes, a Trust Agreement or an
Indenture.
Forms of the Pooling and Servicing Agreement and the Trust Agreement have been
filed as exhibits to the Registration Statement of which this prospectus is a
part. If a Series of Securities includes Notes, the Notes will be issued and
secured pursuant to an Indenture to be entered into between the related Issuer
and the Indenture Trustee, and the related Trust Fund will be serviced by the
Master Servicer pursuant to a Sale and Servicing Agreement. Forms of the
Indenture and the Sale and Servicing Agreement have been filed as exhibits to
the Registration Statement of which this prospectus is a part. In addition, a
Series of Notes or Certificates, as applicable, may include a Warranty and
Servicing Agreement between the Master Servicer and the Servicer (the "Warranty
and Servicing Agreement"). As used in this prospectus, "Agreement" means, with
respect to a Series that only includes Certificates, the Pooling and Servicing
Agreement and, if applicable, the Warranty and Servicing Agreement, and with
respect to a Series that includes Notes, the Indenture, the Trust Agreement and
the Sale and Servicing Agreement and, if applicable, the Warranty and Servicing
Agreement, as the context requires.
The following summaries describe provisions common to each Agreement. 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 Agreement for the
applicable Series and the related prospectus supplement. Wherever defined terms
of the Agreement are referred to, the defined terms are incorporated in this
prospectus by reference.
Unless otherwise specified in the prospectus supplement with respect to a
Series, each Note or Certificate, as applicable, offered by the prospectus
supplement and by means of the related prospectus supplement will be issued in
fully registered form. Notes or Certificates, as applicable, will represent the
undivided interest or beneficial interest attributable to a Class or Subclass
in, and Notes will be secured by, the Trust Fund. The Trust Fund with respect to
a Series will consist of:
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o the Mortgage Loans, Warehouse Loans, Contracts and Mortgage Certificates
and distributions on the Mortgage Loans, Warehouse Loans, Contracts and
Mortgage Certificates as from time to time are subject to the applicable
Agreement;
o the assets as from time to time are identified as deposited in the
Certificate Account referred to below;
o property acquired by foreclosure of Mortgage Loans or deed in lieu of
foreclosure, or Manufactured Homes acquired by repossession;
o the Letter of Credit, if any, with respect to the related Series;
o the Pool Insurance Policy, if any, with respect to the related Series
(described below under "Description of Insurance");
o the Special Hazard Insurance Policy, if any, with respect to the related
Series (described below under "Description of Insurance");
o the Mortgagor Bankruptcy Bond and proceeds of the Mortgagor Bankruptcy
Bond, if any, with respect to the related Series (as described below under
"Description of Insurance");
o the Performance Bond and proceeds of the Performance Bond, if any, with
respect to the related Series;
o the Primary Mortgage Insurance Policies, if any, with respect to the
related Series (as described below under "Description of Insurance");
o the Security Guarantee Insurance, if any, with respect to the related
Series;
o the Depositor's rights under the Servicing Agreement with respect to the
Mortgage Loans, Warehouse Loans or Contracts, if any, with respect to the
related Series; and
o the GPM and Buy-Down Funds, if any, with respect to the related Series; or,
in lieu of some or all of the foregoing, the Alternative Credit Support
described in the applicable prospectus supplement.
Upon the original issuance of a Series of Notes or Certificates, as
applicable, Certificates representing the minimum undivided interest or
beneficial ownership interest in the related Trust Fund or the minimum notional
amount allocable to each Class will evidence the undivided interest, beneficial
ownership interest or percentage ownership interest specified in the related
prospectus supplement.
If so specified in the related prospectus supplement, one or more Servicers
or the Depositor may directly perform some or all of the duties of a Master
Servicer with respect to a Series.
If so specified in the prospectus supplement for a Series with respect to
which the Depositor has elected to treat the Trust Fund as a REMIC under the
Code, ownership of the Trust Fund for a Series may be evidenced by Multi-Class
Certificates and/or Notes and Residual Certificates. Distributions of principal
and interest with respect to Multi-Class Securities may be made on a sequential
or concurrent basis, as specified in the related prospectus supplement. If so
specified in the related prospectus supplement, one or more Classes or
Subclasses may be Compound Interest Securities.
The Residual Certificates, if any, included in a Series will be designated
by the Depositor as the "residual interest" in the related REMIC for purposes of
Section 860G(a)(2) of the Code, and will
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represent the right to receive distributions as specified in the prospectus
supplement for the Series. All other Classes of Notes or Certificates, as
applicable, of the Series will constitute "regular interests" in the related
REMIC. If so specified in the related prospectus supplement, the Residual
Certificates may be offered by this prospectus and by means of the related
prospectus supplement. See "Federal Income Tax Consequences."
If so specified in the prospectus supplement for a Series which includes
Multi-Class Securities, each Trust Asset in the related Trust Fund will be
assigned an initial "Asset Value." Unless otherwise specified in the related
prospectus supplement, the Asset Value of each Trust Asset in the related Trust
Fund will be the Stated Principal Balance of each Class or Classes of Notes or
Certificates, as applicable, of the Series that, based upon specific
assumptions, can be supported by distributions on the Trust Assets allocable to
a Class or Subclass, together with reinvestment income on the Trust Assets, to
the extent specified in the related prospectus supplement, and amounts available
to be withdrawn from any Buy-Down, GPM Fund or Reserve Fund for the Series. The
method of determining the Asset Value of the Trust Assets in the Trust Fund for
a Series that includes Multi-Class Securities will be specified in the related
prospectus supplement.
If so specified in the prospectus supplement with respect to a Series,
ownership of the Trust Fund for a Series may be evidenced by one or more Classes
or Subclasses of Certificates that are Senior Certificates and one or more
Classes or Subclasses of Certificates that are Subordinated Certificates, each
representing the undivided interests in the Trust Fund specified in the related
prospectus supplement. If so specified in the related prospectus supplement, one
or more Classes or Subclasses or Subordinated Notes or Subordinated
Certificates, as applicable, of a Series may be subordinated to the right of the
holders of Notes or Certificates, as applicable, of one or more Classes or
Subclasses within a Series to receive distributions with respect to the Mortgage
Loans, Warehouse Loans, Mortgage Certificates or Contracts in the related Trust
Fund, in the manner and to the extent specified in the related prospectus
supplement. If so specified in the related prospectus supplement, the holders of
each Subclass of Senior Notes or Senior Certificates, as applicable, will be
entitled to the Percentage Interests in the principal and/or interest payments
on the underlying Mortgage Loans, Warehouse Loans or Contracts specified in the
related prospectus supplement. If so specified in the related prospectus
supplement, the Subordinated Notes or Subordinated Certificates, as applicable,
of a Series will evidence the right to receive distributions with respect to a
specific pool of Mortgage Loans, Warehouse Loans, Mortgage Certificates or
Contracts, which right will be subordinated to the right of the holders of the
Senior Notes or Senior Certificates, as applicable, of the Series to receive
distributions with respect to a specific pool of Mortgage Loans, Warehouse
Loans, Mortgage Certificates or Contracts, as more fully set forth in the
related prospectus supplement. If so specified in the related prospectus
supplement, the holders of the Senior Notes or Senior Certificates, as
applicable, may have the right to receive a greater than pro rata percentage of
Principal Prepayments in the manner and under the circumstances described in the
prospectus supplement. If so specified in the related prospectus supplement, if
a Series of Securities includes Notes, one more Classes or Subclasses of Notes
may be subordinated to another Class or Subclasses of Notes in the manner and
under the circumstances described in the prospectus supplement.
If so specified in the related prospectus supplement, the Depositor may
sell some Classes or Subclasses of the Notes or Certificates, as applicable, of
a Series, including one or more Classes or Subclasses of Subordinated or
Residual Certificates, in privately negotiated transactions exempt from
registration under the Securities Act of 1933, as amended (the "Securities
Act"). These Notes or Certificates, as applicable, will be transferable only
pursuant to an effective registration statement or an applicable exemption under
the Securities Act and pursuant to any applicable state law. Alternatively, if
so specified in the related prospectus supplement, the Depositor may offer one
or more Classes or Subclasses of the Subordinated or Residual Certificates of a
Series by means of this prospectus and the related prospectus supplement.
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The Notes or Certificates, as applicable, of a Series offered by this
prospectus and by means of the related prospectus supplements will be
transferable and exchangeable at the office or agency maintained by the Trustee
for the purpose set forth in the related prospectus supplement, unless the
related prospectus supplement provides otherwise. No service charge will be made
for any transfer or exchange of Notes or Certificates, as applicable, but the
Trustee may require payment of a sum sufficient to cover any tax or other
governmental charge in connection with a transfer or exchange.
DISTRIBUTIONS OF PRINCIPAL AND INTEREST
Beginning on the date specified in the related prospectus supplement,
distributions of principal of and interest on the Notes or Certificates, as
applicable, of a Series will be made by the Master Servicer or Trustee, if so
specified in the prospectus supplement, on each Distribution Date to persons in
whose name the Notes or Certificates, as applicable, are registered at the close
of business on the day specified in the related prospectus supplement (the
"Record Date"). The "Distribution Date" will be the day specified in the
prospectus supplement with respect to each Class or Subclass of Notes or
Certificates, as applicable, of a Series, or if the day specified is not a
business day, the next succeeding business day. Distributions of interest will
be made periodically at the intervals, in the manner and at the per annum rate
specified in the related prospectus supplement, which rate may be fixed or
variable. Interest on the Notes or Certificates, as applicable, will be
calculated on the basis of a 360-day year consisting of twelve 30-day months,
unless otherwise specified in the related prospectus supplement. Distributions
of principal of the Notes or Certificates, as applicable, will be made in the
priority and manner and in the amounts specified in the related prospectus
supplement.
If so specified in the prospectus supplement with respect to a Series of
Notes or Certificates, as applicable, distributions of interest and principal to
a Certificateholder will be equal to the product of the undivided interest
evidenced by a Certificate and the payments of principal and interest, adjusted
as set forth in the prospectus supplement, on or with respect to the Mortgage
Loans, Warehouse Loans or Contracts, including any Advances, or the Mortgage
Certificates included in the Trust Fund with respect to a Series.
If so specified in the related prospectus supplement, distributions on
a Class or Subclass of Notes or Certificates, as applicable, of a Series may be
based on the Percentage Interest evidenced by a Note or a Certificate, as
applicable, of a Class or Subclass in the distributions, including any Advances,
of principal (the "Principal Distribution") and interest, adjusted as set forth
in the prospectus supplement, (the "Interest Distribution") on or with respect
to the Mortgage Loans, Warehouse Loans, the Contracts or the Mortgage
Certificates in the related Trust Fund. Unless otherwise specified in the
related prospectus supplement, on each Distribution Date, the Trustee will
distribute to each holder of a Note or Certificate, as applicable, of a Class or
Subclass an amount equal to the product of the Percentage Interest evidenced by
the Note or Certificate, as applicable, and the interest of a Class or Subclass
in the Principal Distribution and the Interest Distribution. A Note or
Certificate, as applicable, of a Class or Subclass may represent a right to
receive a percentage of both the Principal Distribution and the Interest
Distribution or a percentage of either the Principal Distribution or the
Interest Distribution, as specified in the related prospectus supplement.
If so specified in the related prospectus supplement, the holders of the
Senior Notes or Senior Certificates, as applicable, may have the right to
receive a percentage of Principal Prepayments that is greater than the
percentage of regularly scheduled payments of principal the holder is entitled
to receive. The percentages may vary from time to time, subject to the terms and
conditions specified in the prospectus supplement.
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Unless otherwise specified in the prospectus supplement relating to a
Series of Notes or Certificates, as applicable, that includes Multi-Class
Securities, distributions of interest on each Class or Subclass will be made on
the Distribution Dates, and at the Interest Rates, specified in the related
prospectus supplement. Unless otherwise specified in the prospectus supplement
relating to a Series of Notes or Certificates, as applicable, distributions of
interest on each Class or Subclass of Compound Interest Securities of the Series
will be made on each Distribution Date after the Stated Principal Balance of all
Certificates and/or Notes of the Series having a Final Scheduled Distribution
Date prior to that of a Class or Subclass of Compound Interest Securities has
been reduced to zero. Prior to that time, interest on each Class or Subclass of
Compound Interest Securities will be added to the Stated Principal Balance of
each Class or Subclass on each Distribution Date for the Series.
Unless otherwise specified in the prospectus supplement relating to a
Series of Notes or Certificates, as applicable, that includes Multi-Class
Securities, distributions in reduction of the Stated Principal Balance of the
Notes or Certificates, as applicable, will be made as described in this
prospectus. Distributions in reduction of the Stated Principal Balance of the
Notes or Certificates, as applicable, will be made on each Distribution Date for
the Series to the holders of the Notes or Certificates, as applicable, of the
Class or Subclass then entitled to receive distributions until the aggregate
amount of distributions have reduced the Stated Principal Balance of the Notes
or Certificates, as applicable, to zero. Allocation of distributions in
reduction of Stated Principal Balance will be made to each Class or Subclass of
the Notes or Certificates, as applicable, in the order specified in the related
prospectus supplement, which, if so specified in the related prospectus
supplement, may be concurrently. Unless otherwise specified in the related
prospectus supplement, distributions in reduction of the Stated Principal
Balance of each Note or Certificate, as applicable, of a Class or Subclass then
entitled to receive distributions will be made pro rata among the Notes or
Certificates, as applicable, of the Class or Subclass.
Unless otherwise specified in the prospectus supplement relating to a
Series of Notes or Certificates, as applicable, that includes Multi-Class
Securities, the maximum amount which will be distributed in reduction of Stated
Principal Balance to holders of Notes or Certificates, as applicable, of a Class
or Subclass then entitled to distribution on any Distribution Date will equal,
to the extent funds are available in the Certificate Account, the sum of
(1) the amount of the interest, if any, that has accrued but is not yet
payable on the Compound Interest Securities of a Series since the
prior Distribution Date, or since the date specified in the related
prospectus supplement in the case of the first Distribution Date, (the
"Accrual Distribution Amount");
(2) the Stated Principal Distribution Amount; and
(3) to the extent specified in the related prospectus supplement, the
applicable percentage of the Excess Cash Flow specified in the related
prospectus supplement.
Unless otherwise specified in the prospectus supplement relating to a
Series of Notes or Certificates, as applicable, that includes Multi-Class
Securities, the "Stated Principal Distribution Amount" with respect to a
Distribution Date will equal the sum of the Accrual Distribution Amount, if any,
and the amount, if any, by which the then outstanding Stated Principal Balance
of the Multi-Class Securities of a Series, before taking into account the amount
of interest accrued on any Class of Compound Interest Securities of the Series
to be added to the Stated Principal Balance of the Class on each Distribution
Date, exceeds the Asset Value of the Trust Assets in the Trust Fund underlying
the Series as of the end of a period (a "Due Period") specified in the related
prospectus supplement. For purposes of determining the Stated Principal
Distribution Amount with respect to a Distribution Date, the Asset Value of the
Trust Assets will be reduced to take into account the interest evidenced by
Classes or
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Subclasses of Notes or Certificates, as applicable, in the principal
distributions on or with respect of Trust Assets received by the Trustee during
the preceding Due Period.
Unless otherwise specified in the prospectus supplement relating to a
Series of Notes or Certificates, as applicable, that includes Multi-Class
Securities, Excess Cash Flow represents the excess of
1. the interest evidenced by Multi-Class Securities in the distributions
received on the Mortgage Loans, Warehouse Loans or Contracts underlying a Series
in the Due Period preceding a Distribution Date for the Series, and, in the case
of the first Due Period, the amount deposited in the Certificate Account on the
closing day for the sale of the Notes or Certificates, as applicable, together
with income from its reinvestment, and, to the extent specified in the related
prospectus supplement, the amount of cash withdrawn from any Reserve, GPM or
Buy-Down Fund for the Series in the Due Period preceding the Distribution Date,
over
2. the sum of all interest accrued, whether or not then distributable, on
the Multi-Class Securities since the preceding Distribution Date, or since the
date specified in the related prospectus supplement in the case of the first
Distribution Date, the Stated Principal Distribution Amount for the then current
Distribution Date and, if applicable, any payments made on any Notes or
Certificates, as applicable, of a Class or Subclass pursuant to any special
distributions in reduction of Stated Principal Balance during the related Due
Period.
The Stated Principal Balance of a Multi-Class Certificate of a Series at
any time represents the maximum specified dollar amount, exclusive of interest
at the related Interest Rate, to which the holder is entitled from the cash flow
on the Trust Assets in the Trust Fund for the Series, and will decline to the
extent distributions in reduction of Stated Principal Balance are received by
the holder. The Initial Stated Principal Balance of each Class or Subclass
within a Series that has been assigned a Stated Principal Balance will be
specified in the related prospectus supplement.
Distributions, other than the final distribution in retirement of the Notes
or Certificates, as applicable, will be made by check mailed to the address of
the person entitled to the distribution as it appears on the registers
maintained for holders of Notes (the "Note Register") or holders of Certificates
(the "Certificate Register"), as applicable, except that, with respect to any
holder of a Note or Certificate, as applicable, meeting the requirements
specified in the applicable prospectus supplement, except as otherwise provided
in the related prospectus supplement, distributions shall be made by wire
transfer in immediately available funds, provided that the Trustee shall have
been furnished with appropriate wiring instructions not less than two Business
Days prior to the related Distribution Date. The final distribution in
retirement of Notes or Certificates, as applicable, will be made only upon
presentation and surrender of the Notes or Certificates, as applicable, at the
office or agency designated by the Master Servicer, as specified in the final
distribution notice to Securityholders.
If specified in the related prospectus supplement, the Trust may issue
notes or certificates from time to time and use the proceeds of this issuance to
make principal payments with respect to a Series.
ASSIGNMENT OF MORTGAGE CERTIFICATES
Pursuant to the applicable Agreement for a Series of Notes or Certificates,
as applicable, that includes Mortgage Certificates in the related Trust Fund,
the Depositor will cause the Mortgage Certificates to be transferred to the
Trustee together with all principal and interest distributed on the Mortgage
Certificates after the Cut-off Date. Each Mortgage Certificate included in a
Trust Fund will be identified in a schedule appearing as an exhibit to the
applicable Agreement. The schedule will include
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information as to the principal balance of each Mortgage Certificate as of the
date of issuance of the Notes or Certificates, as applicable, and its coupon
rate, maturity and original principal balance. In addition, necessary steps will
be taken by the Depositor or other specified entity to cause the Trustee to
become the registered owner of each Mortgage Certificate which is included in a
Trust Fund and to provide for all distributions on each Mortgage Certificate to
be made directly to the Trustee.
In connection with each assignment, the Depositor will make particular
representations and warranties in the Agreement as to, among other things, its
ownership of the Mortgage Certificates. In the event that these representations
and warranties are breached, and the breach or breaches adversely affect the
interests of the Securityholders in the Mortgage Certificates, the Depositor
will be required to repurchase the affected Mortgage Certificates at a price
equal to the principal balance of the Mortgage Certificates as of the date of
purchase together with accrued and unpaid interest on the Mortgage Certificates
at the related pass-through rate to the distribution date for the Mortgage
Certificates or, in the case of a Series in which an election has been made to
treat the related Trust Fund as a REMIC, at the price set forth above or such
other price as may be set forth in the related prospectus supplement. The
Mortgage Certificates with respect to a Series may also be subject to
repurchase, in whole but not in part, under the circumstances and in the manner
described in the related prospectus supplement. Any amounts received in respect
of any repurchases will be distributed to Securityholders on the immediately
succeeding Distribution Date.
If so specified in the related prospectus supplement, within the specified
period following the date of issuance of a Series of Notes or Certificates, as
applicable, the Depositor may, in lieu of the repurchase obligation set forth
above, and in other circumstances, deliver to the Trustee Mortgage Certificates
("Substitute Mortgage Certificates") in substitution for any one or more of the
Mortgage Certificates ("Deleted Mortgage Certificates") initially included in
the Trust Fund. The required characteristics of any Substitute Mortgage
Certificates and any additional restrictions relating to the substitution of
Mortgage Certificates will be set forth in the related prospectus supplement.
ASSIGNMENT OF MORTGAGE LOANS
The Depositor will cause the Mortgage Loans constituting a Mortgage Pool to
be assigned to the Trustee, together with all principal and interest received on
or with respect to the Mortgage Loans after the Cut-off Date, but not including
principal and interest due on or before the Cut-off Date. The Trustee will,
concurrently with each assignment, either deliver the Notes or Certificates, as
applicable, to the Depositor in exchange for the Mortgage Loans or apply the
proceeds from the sale of the Notes or Certificates, as applicable, to the
purchase price for the Mortgage Loans. If a Series of Notes or Certificates, as
applicable, includes Notes, the Trust Fund will be pledged by the Issuer to the
Indenture Trustee as security for the Notes. Each Mortgage Loan will be
identified in a schedule appearing as an exhibit to the related Agreement. The
schedule will include information as to the adjusted principal balance of each
Mortgage Loan as of the Cut-off Date, as well as information respecting the
Mortgage Rate, the currently scheduled monthly payment of principal and
interest, the maturity of the Mortgage Note and the Loan-to-Value Ratio at
origination.
In addition, the Depositor will, as to each Mortgage Loan that is not a
Cooperative Loan, deliver or cause to be delivered to the Trustee, or to the
custodian in this prospectus after referred to, the Mortgage Note endorsed to
the order of the Trustee, the Mortgage with evidence of recording indicated on
it, except for any Mortgage not returned from the public recording office, in
which case the Depositor will deliver a copy of the Mortgage together with its
certificate that the original of the Mortgage was delivered to the recording
office, and, unless otherwise specified in the related prospectus supplement, an
assignment of the Mortgage in recordable form. Assignments of the Mortgage Loans
to the Trustee will be recorded in the appropriate public office for real
property records, except in states where, in the
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opinion of counsel acceptable to the Trustee, the recording is not required to
protect the Trustee's interest in the Mortgage Loan against the claim of any
subsequent transferee or any successor to or creditor of the Depositor or the
Originator of the Mortgage Loan.
The Depositor will cause to be delivered to the Trustee, its agent, or a
custodian, with respect to any Cooperative Loan, the related original security
agreement, the proprietary lease or occupancy agreement, the recognition
agreement, an executed financing statement and the relevant stock certificate
and related blank stock powers. The Master Servicer will file in the appropriate
office a financing statement evidencing the Trustee's security interest in each
Cooperative Loan.
The Trustee, or the custodian in this prospectus referred to, will,
generally within 60 days after receipt of the documents, review and hold the
documents in trust for the benefit of the Securityholders. Unless otherwise
specified in the applicable prospectus supplement, if any document is found to
be defective in any material respect, the Trustee will promptly notify the
Master Servicer and the Depositor, and the Master Servicer will notify the
related Servicer. If the Servicer cannot cure the defect within 60 days after
notice is given to the Master Servicer, the Servicer will be obligated either to
substitute for the related Mortgage Loan a Replacement Mortgage Loan or Loans,
or to purchase, within 90 days of the Trustee's discovery of the defect, the
related Mortgage Loan from the Trustee at a price equal to the principal balance
of the related Mortgage Loan as of the date of purchase or, in the case of a
Series as to which an election has been made to treat the related Trust Fund as
a REMIC, at that price or another price as may be set forth in the related
prospectus supplement, in each case together with accrued interest at the
applicable Mortgage Rate to the first day of the month following the repurchase,
plus the amount of any unreimbursed Advances made by the Master Servicer or the
Servicer, as applicable, in respect of the Mortgage Loan. The Master Servicer is
obligated to enforce the repurchase obligation of the Servicer, to the extent
described above under "The Trust Fund--Mortgage Loan Program" and
"--Representations by Unaffiliated Sellers; Repurchases." Unless otherwise
specified in the applicable prospectus supplement, this purchase obligation
constitutes the sole remedy available to the Securityholders or the Trustee for
a material defect in a constituent document.
Unless otherwise specified in the applicable prospectus supplement, with
respect to the Mortgage Loans in a Mortgage Pool, the Depositor will make
representations and warranties as to the types and geographical distribution of
the Mortgage Loans and as to the accuracy in all material respects of particular
information furnished to the Trustee in respect of each Mortgage Loan. In
addition, unless otherwise specified in the related prospectus supplement, the
Depositor will represent and warrant that, as of the Cut-off Date for the
related Series of Notes or Certificates, as applicable, no Mortgage Loan is more
than 30 days delinquent as to payment of principal and interest. Upon a breach
of any representation or warranty by the Depositor that materially and adversely
affects the interest of the Securityholders, the Depositor will be obligated
either to cure the breach in all material respects or to purchase the Mortgage
Loan at the purchase price set forth above. Unless otherwise specified in the
applicable prospectus supplement and subject to the ability of the Depositor, if
so specified in the applicable prospectus supplement, to substitute for specific
Mortgage Loans as described below, this repurchase obligation constitutes the
sole remedy available to the Securityholders or the Trustee for a breach of a
representation or warranty by the Depositor.
Within the period specified in the related prospectus supplement, following
the date of issuance of a Series of Notes or Certificates, as applicable, the
Depositor, the Master Servicer or the related Servicer, as the case may be, may
deliver to the Trustee Mortgage Loans ("Substitute Mortgage Loans") in
substitution for any one or more of the Mortgage Loans ("Deleted Mortgage
Loans") initially included in the Trust Fund but which do not conform in one or
more respects to the description of the Mortgage Loans contained in the related
prospectus supplement, or as to which a breach of a representation or warranty
is discovered, which breach materially and adversely affects the interests of
the Securityholders.
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The required characteristics of any Substitute Mortgage Loan and any additional
restrictions relating to the substitution of Mortgage Loans will generally be as
described under "The Trust Fund--The Contract Pools" with respect to the
substitution of Contracts.
In addition to making specific representations and warranties regarding its
authority to enter into, and its ability to perform its obligations under the
Agreement relating to a Series of Notes or Certificates, as applicable, the
Master Servicer may make representations and warranties to the Trustee in the
Agreement with respect to the enforceability of coverage under any applicable
Primary Insurance Policy, Pool Insurance Policy, Special Hazard Insurance Policy
or Mortgagor Bankruptcy Bond. See "Description of Insurance" for information
regarding the extent of coverage under some of the aforementioned insurance
policies. Unless otherwise specified in the applicable prospectus supplement,
upon a breach of any representation or warranty that materially and adversely
affects the interests of the Securityholders of a Series in a Mortgage Loan, the
Master Servicer will be obligated either to cure the breach in all material
respects or to purchase the Mortgage Loan at the price calculated as set forth
above.
To the extent described in the related prospectus supplement, the Master
Servicer will procure a surety bond, corporate guaranty or another similar form
of insurance coverage acceptable to the Rating Agency rating the related Series
of Notes or Certificates, as applicable, to support, among other things, this
purchase obligation. Unless otherwise stated in the applicable prospectus
supplement, the aforementioned purchase obligation constitutes the sole remedy
available to the Securityholders or the Trustee for a breach of the Master
Servicer's insurability representation. The Master Servicer's obligation to
purchase Mortgage Loans upon a breach is subject to limitations.
The Trustee will be authorized, with the consent of the Depositor and the
Master Servicer, to appoint a custodian pursuant to a custodial agreement to
maintain possession of documents relating to the Mortgage Loans as the agent of
the Trustee.
Pursuant to each Agreement, the Master Servicer, either directly or through
Servicers, will service and administer the Mortgage Loans assigned to the
Trustee as more fully set forth below.
ASSIGNMENT OF CONTRACTS
The Depositor will cause the Contracts constituting the Contract Pool to be
assigned to the Trustee, together with principal and interest due on or with
respect to the Contracts after the Cut-off Date, but not including principal and
interest due on or before the Cut-off Date. If the Depositor is unable to obtain
a perfected security interest in a Contract prior to transfer and assignment to
the Trustee, the Unaffiliated Seller will be obligated to repurchase the
Contract. The Trustee, concurrently with each assignment, will authenticate and
deliver the Notes or Certificates, as applicable. If a Series of Notes or
Certificates, as applicable, includes Notes, the Trust fund will be pledged by
the Issuer to the Indenture Trustee as security for the Notes. Each Contract
will be identified in a schedule appearing as an exhibit to the Agreement (the
"Contract Schedule"). The Contract Schedule will specify, with respect to each
Contract, among other things: the original principal amount and the adjusted
principal balance as of the close of business on the Cut-off Date, the APR, the
current scheduled monthly level payment of principal and interest and the
maturity of the Contract.
In addition, the Depositor, as to each Contract, will deliver or cause to
be delivered to the Trustee, or, as specified in the related prospectus
supplement, the Custodian, 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 Certificateholders to the Contracts, the Depositor
will cause a UCC-1 financing statement to be executed by the Depositor
identifying the Trustee as the secured party and identifying all Contracts as
collateral. Unless otherwise
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specified in the related prospectus supplement, the Contracts will not be
stamped or otherwise marked to reflect their assignment from the Depositor to
the Trust Fund. Therefore, if a subsequent purchaser were able to take physical
possession of the Contracts without notice of an assignment, the interest of the
Certificateholders in the Contracts could be defeated. See "Certain Legal
Aspects of Mortgage Loans and Contracts--The Contracts."
The Trustee, or the Custodian, will review and hold the documents in trust
for the benefit of the Securityholders. Unless otherwise provided in the related
prospectus supplement, if any document is found to be defective in any material
respect, the Unaffiliated Seller must cure the defect within 60 days, or within
another period specified in the related prospectus supplement, the Unaffiliated
Seller, not later than 90 days or within another period specified in the related
prospectus supplement, after the Trustee's discovery of the defect. If the
defect is not cured, the Unaffiliated Seller will repurchase the related
Contract or any property acquired in respect of the Contract from the Trustee at
a price equal to the remaining unpaid principal balance of the Contract, or, in
the case of a repossessed Manufactured Home, the unpaid principal balance of the
Contract immediately prior to the repossession, or, in the case of a Series as
to which an election has been made to treat the related Trust Fund as a REMIC,
at such price or another price as may be set forth in the related prospectus
supplement, in each case together with accrued but unpaid interest to the first
day of the month following repurchase at the related APR, plus any unreimbursed
Advances with respect to the Contract. Unless otherwise specified in the related
prospectus supplement, the repurchase obligation will constitute the sole remedy
available to the Securityholders or the Trustee for a material defect in a
Contract document.
Unless otherwise specified in the related prospectus supplement, each
Unaffiliated Seller of Contracts will have represented, among other things, that
o immediately prior to the transfer and assignment of the Contracts, the
Unaffiliated Seller had good title to, and was the sole owner of each
Contract and there had been no other sale or assignment of the relevant
Contract,
o as of the date of transfer, the Contracts are subject to no offsets,
defenses or counterclaims,
o each Contract at the time it was made complied in all material respects
with applicable state and federal laws, including usury, equal credit
opportunity and disclosure laws,
o as of the date of transfer, each Contract is a valid first lien on the
related Manufactured Home and the Manufactured Home is free of material
damage and is in good repair,
o as of the date of transfer, no Contract is more than 30 days delinquent in
payment and there are no delinquent tax or assessment liens against the
related Manufactured Home and
o with respect to each Contract, the Manufactured Home securing the Contract
is covered by a Standard Hazard Insurance Policy in the amount required in
the Agreement and that all premiums now due on insurance have been paid in
full.
All of the representations and warranties of an Unaffiliated Seller in
respect of a Contract will have been made as of the date on which the
Unaffiliated Seller sold the Contract to the Depositor or its affiliate; the
date the representations and warranties were made may be a date prior to the
date of initial issuance of the related series of Notes or Certificates, as
applicable. A substantial period of time may have elapsed between the date as of
which the representations and warranties were made and the date of initial
issuance of the related Series of Notes or Certificates, as applicable. Since
the representations and warranties referred to in the preceding paragraph are
the only representations and warranties that will be
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made by an Unaffiliated Seller, the Unaffiliated Seller's repurchase obligation
described below will not arise if, during the period commencing on the date of
sale of a Contract by the Unaffiliated Seller to the Depositor or its affiliate,
the relevant event occurs that would have given rise to the obligation had the
event occurred prior to sale of the affected Contract. Nothing, however, has
come to the Depositor's attention that would cause it to believe that the
representations and warranties referred to in the preceding paragraph will not
be accurate and complete in all material respects in respect of Contracts as of
the date of initial issuance of the related Series of Notes or Certificates, as
applicable.
The only representations and warranties to be made for the benefit of
Securityholders in respect of any Contract relating to the period commencing on
the date of sale of the Contract to the Depositor or its affiliate will be
limited representations of the Depositor and of the Master Servicer described
above under "The Trust Fund--The Contract Pools."
If an Unaffiliated Seller cannot cure a breach of any representation or
warranty made by it in respect of a Contract that materially and adversely
affects the interest of the Securityholders in the Contract within 90 days, or
another period specified in the related prospectus supplement, after notice from
the Master Servicer, the Unaffiliated Seller will be obligated to repurchase the
Contract at a price equal to, unless otherwise specified in the related
prospectus supplement, the principal balance of the Contract as of the date of
the repurchase or, in the case of a Series as to which an election has been made
to treat the related Trust Fund as a REMIC, at that price or such other price as
may be set forth in the related prospectus supplement, in each case together
with accrued and unpaid interest to the first day of the month following
repurchase at the related APR, plus the amount of any unreimbursed Advances in
respect of the Contract (the "Purchase Price"). The Master Servicer will be
required under the applicable Agreement to enforce this obligation for the
benefit of the Trustee and the Securityholders, following the practices it would
employ in its good faith business judgment were it the owner of the Contract.
Except as otherwise set forth in the related prospectus supplement, this
repurchase obligation will constitute the sole remedy available to
Securityholders or the Trustee for a breach of representation by an Unaffiliated
Seller.
Neither the Depositor nor the Master Servicer will be obligated to purchase
a Contract if an Unaffiliated Seller defaults on its obligation to do so, and no
assurance can be given that sellers will carry out their respective repurchase
obligations with respect to Contracts. However, to the extent that a breach of
the representations and warranties of an Unaffiliated Seller may also constitute
a breach of a representation made by the Depositor or the Master Servicer, the
Depositor or the Master Servicer may have a purchase obligation as described
above under "The Trust Fund--The Contract Pools."
PRE-FUNDING
If so specified in the related prospectus supplement, a portion of the
issuance proceeds of the Notes or Certificates, as applicable, of a particular
Series (the "Pre-Funded Amount") will be deposited in an account (the
"Pre-Funding Account") to be established with the Trustee, which will be used to
acquire additional Mortgage Loans, Warehouse Loans, Contracts or Mortgage
Certificates from time to time during the time period specified in the related
prospectus supplement (the "Pre-Funding Period"). Prior to the investment of the
Pre-Funded Amount in additional Mortgage Loans, Warehouse Loans, Contracts or
Mortgage Certificates, the Pre-Funded Amount may be invested in one or more
Eligible Investments. Except as otherwise provided in the applicable Agreement,
an "Eligible Investment" will be any of the following, in each case as
determined at the time of the investment or contractual commitment to invest, to
the extent the investments would not require registration of the Trust Fund as
an investment company pursuant to the Investment Company Act of 1940:
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(1) negotiable instruments or securities represented by instruments in bearer
or registered or book-entry form which evidence:
(a) obligations which have the benefit of the full faith and credit of the
United States of America, including depository receipts issued by a
bank as custodian with respect to any instrument or security held by
the custodian for the benefit of the holder of the depository receipt,
(b) demand deposits or time deposits in, or bankers' acceptances issued
by, any depositary institution or trust company incorporated under the
laws of the United States of America or any state of the United States
of America and subject to supervision and examination by Federal or
state banking or depositary institution authorities; provided that at
the time of the Trustee's investment or contractual commitment to
invest, the certificates of deposit or short-term deposits, if any, or
long-term unsecured debt obligations, other than obligations the
rating of which is based on collateral or on the credit of a Person
other than any depositary institution or trust company, of the
depositary institution or trust company has a credit rating in the
highest rating category from the Rating Agency rating the Notes or
Certificates, as applicable,
(c) certificates of deposit having a rating in the highest rating category
from the Rating Agency, or
(d) investments in money market funds which are, or which are composed of
instruments or other investments which are, rated in the highest
category from the Rating Agency;
(2) demand deposits in the name of the Trustee in any depositary institution or
trust company referred to in clause (a)(2) above;
(3) commercial paper, having original or remaining maturities of no more than
270 days, having a credit rating in the highest rating category from the
Rating Agency;
(4) Eurodollar time deposits that are obligations of institutions the time
deposits of which carry a credit rating in the highest rating category from
the Rating Agency;
(5) repurchase agreements involving any Eligible Investment described in any of
clauses (a)(1), (a)(3) or (d) above, so long as the other party to the
repurchase agreement has its long-term unsecured debt obligations rated in
the highest rating category from the Rating Agency; and
(6) any other investment with respect to which the Rating Agency indicates will
not result in the reduction or withdrawal of its then existing rating of
the Notes or Certificates, as applicable.
Except as otherwise provided in the applicable Agreement, any Eligible
Investment must mature no later than the Business Day prior to the next
Distribution Date.
During any Pre-Funding Period, the Depositor will be obligated, subject
only to their availability, to transfer to the related Trust Fund additional
Mortgage Loans, Warehouse Loans, Contracts and/or Mortgage Certificates from
time to time during the Pre-Funding Period. The additional Mortgage Loans,
Warehouse Loans or Contracts will be required to satisfy particular eligibility
criteria more fully set forth in the related prospectus supplement which
eligibility criteria will be consistent with the eligibility criteria
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of the Mortgage Loans, Warehouse Loans or Contracts included in the Trust Fund
as of the Closing Date subject to exceptions as are expressly stated in the
related prospectus supplement.
Although the specific parameters of the Pre-Funding Account with respect to
any issuance of Notes or Certificates, as applicable, will be specified in the
related prospectus supplement, it is anticipated that:
o the Pre-Funding Period will not exceed 120 days from the related Closing
Date,
o that the additional loans to be acquired during the Pre-Funding Period will
be subject to the same representations and warranties as the Mortgage
Loans, Warehouse Loans, Contracts and/or Mortgage Certificates included in
the related Trust Fund on the Closing Date, although additional criteria
may also be required to be satisfied, as described in the related
prospectus supplement, and
o that the Pre-Funded Amount will not exceed 25% of the principal amount of
Notes or Certificates, as applicable, issued pursuant to a particular
offering.
SERVICING BY UNAFFILIATED SELLERS
Each Unaffiliated Seller of a Mortgage Loan, Warehouse Loan or a Contract
may have the option to act as the Servicer, or Master Servicer, for a Mortgage
Loan, Warehouse Loan or Contract pursuant to a Servicing Agreement. A
representative form of Servicing Agreement has been filed as an exhibit to the
Registration Statement of which this prospectus is a part. The following
description does not purport to be complete and is qualified in its entirety by
reference to the form of Servicing Agreement and by the discretion of the Master
Servicer or Depositor to modify the Servicing Agreement and to enter into
different Servicing Agreements. The Agreement provides that, if for any reason
the Master Servicer for a Series of Notes or Certificates, as applicable, is no
longer the Master Servicer of the related Mortgage Loans, Warehouse Loans or
Contracts, the Trustee or any successor master servicer must recognize the
Servicer's rights and obligations under the Servicing Agreement.
A Servicer may delegate its servicing obligations to third-party servicers,
but continue to act as Servicer under the related Servicing Agreement. The
Servicer will be required to perform the customary functions of a servicer,
including collection of payments from Mortgagors and Obligors and remittance of
collections to the Master Servicer, maintenance of primary mortgage, hazard
insurance, FHA insurance and VA guarantees and filing and settlement of claims
under the FHA insurance and VA guarantees, subject in some cases to
o the right of the Master Servicer to approve in advance any settlement;
o maintenance of escrow accounts of Mortgagors and Obligors for payment of
taxes, insurance and other items required to be paid by the Mortgagor
pursuant to the terms of the related Mortgage Loan or the Obligor pursuant
to the related Warehouse Loan or Contract;
o processing of assumptions or substitutions;
o attempting to cure delinquencies;
o supervising foreclosures or repossessions;
o inspection and management of Mortgaged Properties, Cooperative Dwellings or
Manufactured Homes under some circumstances; and
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o maintaining accounting records relating to the Mortgage Loans, Warehouse
Loans and Contracts.
Except as otherwise provided in the related prospectus supplement, the Servicer
will also be obligated to make Advances in respect of delinquent installments of
principal and interest on Mortgage Loans, Warehouse Loans and Contracts (as
described more fully below under "--Payments on Mortgage Loans" and "--Payments
on Contracts"), and in respect of particular taxes and insurance premiums not
paid on a timely basis by Mortgagors and Obligors.
As compensation for its servicing duties, a Servicer will be entitled to
amounts from payments with respect to the Mortgage Loans, Warehouse Loans and
Contracts serviced by it. The Servicer will also be entitled to collect and
retain, as part of its servicing compensation, specific fees and late charges
provided in the Mortgage Notes or related instruments. The Servicer will be
reimbursed by the Master Servicer for some of the expenditures that it makes,
generally to the same extent that the Master Servicer would be reimbursed under
the applicable Agreement.
Each Servicer will be required to agree to indemnify the Master Servicer
for any liability or obligation sustained by the Master Servicer in connection
with any act or failure to act by the Servicer in its servicing capacity.
Each Servicer will be required to service each Mortgage Loan, Warehouse
Loan or Contract pursuant to the terms of the Servicing Agreement for the entire
term of the Mortgage Loan, Warehouse Loan or Contract, unless the Servicing
Agreement is earlier terminated by the Master Servicer or unless servicing is
released to the Master Servicer. Unless otherwise set forth in the prospectus
supplement, the Master Servicer may terminate a Servicing Agreement upon 30
days' written notice to the Servicer, without cause, upon payment of an amount
equal to the fair market value of the right to service the Mortgage Loans,
Warehouse Loans or Contracts serviced by any the Servicer under the Servicing
Agreement, or if the fair market value cannot be determined, a specified
percentage of the aggregate outstanding principal balance of all the Mortgage
Loans, Warehouse Loans or Contracts, or immediately upon the giving of notice
upon particular stated events, including the violation of the Servicing
Agreement by the Servicer.
The Master Servicer may agree with a Servicer to amend a Servicing
Agreement. The Master Servicer may also, at any time and from time to time,
release servicing to third-party servicers, but continue to act as Master
Servicer under the related Agreement. Upon termination of a Servicing Agreement,
the Master Servicer or Trustee may act as servicer of the related Mortgage
Loans, Warehouse Loans or Contracts or the Master Servicer may enter into one or
more new Servicing Agreements. If the Master Servicer acts as servicer, it will
not assume liability for the representations and warranties of the Servicer that
it replaces. If the Master Servicer enters into a new Servicing Agreement, each
new Servicer must be an Unaffiliated Seller or meet the standards for becoming
an Unaffiliated Seller or have servicing experience that is otherwise
satisfactory to the Master Servicer. The Master Servicer will make reasonable
efforts to have the new Servicer assume liability for the representations and
warranties of the terminated Servicer, but no assurance can be given that an
assumption will occur. In the event of an assumption, the Master Servicer may,
in the exercise of its business judgment, release the terminated Servicer from
liability in respect of the representations and warranties. Any amendments to a
Servicing Agreement or new Servicing Agreements may contain provisions different
from those described above that are in effect in the original Servicing
Agreements. However, the related Agreement will provide that any amendment or
new agreement may not be inconsistent with or violate the Agreement.
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PAYMENTS ON MORTGAGE LOANS
The Master Servicer will, unless otherwise specified in the prospectus
supplement with respect to a Series of Notes or Certificates, as applicable,
establish and maintain a separate account or accounts in the name of the
applicable Trustee (the "Certificate Account"), which must be maintained with a
depository institution and in a manner acceptable to the Rating Agency rating
the Notes or Certificates, as applicable, of a Series. If a Series of Notes or
Certificates, as applicable, includes Notes, the Master Servicer may establish
and maintain a separate account or accounts in the name of the applicable
Trustee (the "Collection Account") into which amounts received in respect of the
Trust Assets are required to be deposited and a separate account or accounts in
the name of the applicable Trustee from which distributions in respect of the
Notes (the "Note Distribution Account") and/or the Certificates (the
"Certificate Distribution Account") may be made. The Collection Account, Note
Distribution Account and Certificate Distribution Account must be established
with a depositary institution and in a manner acceptable to the Rating Agencies
rating the Notes or Certificates, as applicable, of a Series. For ease of
reference, references in this prospectus to the Certificate Account shall be
deemed to refer to the Collection Account, Note Distribution Account and
Certificate Distribution Account, as applicable.
If so specified in the applicable prospectus supplement, the Master
Servicer, in lieu of establishing a Certificate Account, may establish a
separate account or accounts in the name of the Trustee (the "Custodial
Account") meeting the requirements set forth in this prospectus for the
Certificate Account. Amounts in the Custodial Account, after making the required
deposits and withdrawals specified below, shall be remitted to the Certificate
Account maintained by the Trustee for distribution to Securityholders in the
manner set forth in this prospectus and in the related prospectus supplement.
In those cases where a Servicer is servicing a Mortgage Loan pursuant to a
Servicing Agreement, the Servicer will establish and maintain an account (the
"Servicing Account") that will comply with either the standards set forth above
or, subject to the conditions set forth in the Servicing Agreement, be
maintained with a depository, meeting the requirements of the Rating Agency
rating the Notes or Certificates, as applicable, of the related Series, and that
is otherwise acceptable to the Master Servicer. Unless otherwise specified in
the related prospectus supplement, the Servicer will be required to deposit into
the Servicing Account on a daily basis all amounts enumerated in the following
paragraph in respect of the Mortgage Loans received by the Servicer, less its
servicing compensation. On the date specified in the Servicing Agreement, the
Servicer shall remit to the Master Servicer all funds held in the Servicing
Account with respect to each Mortgage Loan. Except as otherwise provided in the
related prospectus supplement, the Servicer will also be required to advance any
monthly installment of principal and interest that was not timely received, less
its servicing fee, provided that, unless otherwise specified in the related
prospectus supplement, the requirement shall only apply to the extent the
Servicer determines in good faith any advance will be recoverable out of
Insurance Proceeds, proceeds of the liquidation of the related Mortgage Loans or
otherwise.
The Certificate Account may be maintained with a depository institution
that is an affiliate of the Master Servicer. Unless otherwise specified in the
related prospectus supplement, the Master Servicer will deposit in the
Certificate Account for each Series of Notes or Certificates, as applicable, on
a daily basis the following payments and collections received or made by it
subsequent to the Cut-off Date, other than payments due on or before the Cut-off
Date, in the manner set forth in the related prospectus supplement:
(1) all payments on account of principal, including principal prepayments,
of the Mortgage Loans, net of any portion of the payments that
represent unreimbursed or unrecoverable Advances made by the related
Servicer;
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(2) all payments on account of interest on the Mortgage Loans, net of any
portion retained by the Servicer, if any, as its servicing fee;
(3) all proceeds of:
(a) any Special Hazard Insurance Policy, Primary Mortgage
Insurance Policy, FHA Insurance, VA Guarantee, Mortgagor Bankruptcy
Bond or Pool Insurance Policy with respect to a Series of Notes or
Certificates, as applicable, and any title, hazard or other insurance
policy covering any of the Mortgage Loans included in the related
Mortgage Pool, to the extent the proceeds are not applied to the
restoration of the related property or released to the Mortgagor in
accordance with customary servicing procedures, (collectively,
"Insurance Proceeds") or any Alternative Credit Support established in
lieu of the insurance and described in the applicable prospectus
supplement; and
(b) all other cash amounts received and retained in connection
with the liquidation of defaulted Mortgage Loans, by foreclosure or
otherwise, other than Insurance Proceeds, payments under the Letter of
Credit or proceeds of any Alternative Credit Support, if any, with
respect to the Series ("Liquidation Proceeds"), net of expenses of
liquidation, unpaid servicing compensation with respect to the
Mortgage Loans and unreimbursed or unrecoverable Advances made by the
Servicers of the related Mortgage Loans;
(4) all payments under the Letter of Credit, if any, with respect to
the Series;
(5) all amounts required to be deposited in the Certificate Account
from the Reserve Fund, if any, for the Series;
(6) any Advances made by a Servicer or the Master Servicer (as
described in this prospectus under "--Advances");
(7) any Buy-Down Funds, and, if applicable, investment earnings on
the Buy-Down Funds, required to be deposited in the Certificate
Account, as described below; and
(8) all proceeds of any Mortgage Loan repurchased by the Master
Servicer, the Depositor, any Servicer or any Unaffiliated Seller
(as described under "The Trust Fund--Mortgage Loan Program," "--
Representations by Unaffiliated Sellers; Repurchases" or
"--Assignment of Mortgage Loans" above) or repurchased by the
Depositor (as described under "--Termination" below).
With respect to each Buy-Down Loan, if so specified in the related
prospectus supplement, the Master Servicer or the related Servicer will deposit
the Buy-Down Funds with respect to each Buy-Down Loan in a custodial account
complying with the requirements set forth above for the Certificate Account,
which, unless otherwise specified in the related prospectus supplement, may be
an interest-bearing account. The amount of required deposits, together with
investment earnings on the deposits at the rate specified in the applicable
prospectus supplement, will provide sufficient funds to support the full monthly
payments due on each Buy-Down Loan on a level debt service basis. Neither the
Master Servicer nor the Depositor will be obligated to add to the Buy-Down Fund
should investment earnings prove insufficient to maintain the scheduled level of
payments on the Buy-Down Loans. To the extent that any insufficiency is not
recoverable from the Mortgagor under the terms of the related Mortgage Note,
distributions to Securityholders will be affected. With respect to each Buy-Down
Loan, the Master Servicer will withdraw from the Buy-Down Fund and deposit in
the Certificate Account on or before each Distribution Date the amount, if any,
for each Buy-Down Loan that, when added to the amount due on
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that date from the Mortgagor on the Buy-Down Loan, equals the full monthly
payment that would be due on the Buy-Down Loan if it were not subject to the
buy-down plan.
If the Mortgagor on a Buy-Down Loan prepays the loan in its entirety, or
defaults on the loan and the Mortgaged Property is sold in liquidation of the
Mortgaged Property, during the period when the Mortgagor is not obligated, on
account of the buy-down plan, to pay the full monthly payment otherwise due on
the loan, the related Servicer will withdraw from the Buy-Down Fund and deposit
in the Certificate Account the amounts remaining in the Buy-Down Fund with
respect to the Buy-Down Loan. In the event of a default with respect to which a
claim, including accrued interest supplemented by amounts in the Buy-Down Fund
with respect to the related Buy-Down Loan, has been made, the Master Servicer or
the related Servicer will pay an amount equal to the remaining amounts in the
Buy-Down Fund with respect to the related Buy-Down Loan, to the extent the claim
includes accrued interest supplemented by amounts in the Buy-Down Fund, to the
related Pool Insurer or the insurer under the related Primary Insurance Policy
(the "Primary Insurer") if the Mortgaged Property is transferred to the Pool
Insurer or the Primary Insurer, as the case may be, which pays 100% of the
related claim, including accrued interest and expenses, in respect of a default,
to the L/C Bank in consideration of the payment under the related Letter of
Credit, or to the guarantor or other person which pays the same pursuant to
Alternative Credit Support described in the applicable prospectus supplement. In
the case of any prepaid or defaulted Buy-Down Loan the amounts in the Buy-Down
Fund in respect of which were supplemented by investment earnings, the Master
Servicer will withdraw from the Buy-Down Fund and remit to the Depositor or the
Mortgagor, depending on the terms of the related buy-down plan, any investment
earnings remaining in the related Buy-Down Fund.
If so specified in the prospectus supplement with respect to a Series, in
lieu of, or in addition to the foregoing, the Depositor may deliver cash, a
letter of credit or a guaranteed investment contract to the Trustee to fund the
Buy-Down Fund for the Series, which shall be drawn upon by the Trustee in the
manner and at the times specified in the related prospectus supplement.
PAYMENTS ON CONTRACTS
A Certificate Account meeting the requirements set forth under
"--Description of the Securities--Payments on Mortgage Loans" will be
established in the name of the Trustee.
Except as otherwise provided in the related prospectus supplement, there
will be deposited in the Certificate Account on a daily basis the following
payments and collections received or made by it on or after the Cut-off Date:
(1) all Obligor payments on account of principal, including principal
prepayments, of the Contracts;
(2) all Obligor payments on account of interest on the Contracts;
(3) all Liquidation Proceeds received with respect to Contracts or
property acquired in respect of the Contracts by foreclosure or
otherwise;
(4) all Insurance Proceeds received with respect to any Contract, other
than proceeds to be applied to the restoration or repair of the
Manufactured Home or released to the Obligor;
(5) any Advances made as described under "--Advances" and other amounts
required under the related Agreement to be deposited in the
Certificate Account;
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(6) all amounts received from Credit Support provided with respect to a
Series of Notes or Certificates, as applicable;
(7) all proceeds of any Contract or property acquired in respect of the
Contract repurchased by the Master Servicer, the Depositor or
otherwise as described above or under "--Termination" below; and
(8) all amounts, if any, required to be transferred to the Certificate
Account from the Reserve Fund.
COLLECTION OF PAYMENTS ON MORTGAGE CERTIFICATES
The Mortgage Certificates included in the Trust Fund with respect to a
Series of Notes or Certificates, as applicable, will be registered in the name
of the Trustee so that all distributions on the Mortgage Certificates will be
made directly to the Trustee. The related Agreement will require the Trustee, if
it has not received a distribution with respect to any Mortgage Certificate by
the second business day after the date on which a distribution was due and
payable pursuant to the terms of the Mortgage Certificate, to request the issuer
or guarantor, if any, of the Mortgage Certificate to make the payment as
promptly as possible and legally permitted and to take the legal action against
the issuer or guarantor as the Trustee deems appropriate under the
circumstances, including the prosecution of any related claims. The reasonable
legal fees and expenses incurred by the Trustee in connection with the
prosecution of any the legal action will be reimbursable to the Trustee out of
the proceeds of any action and will be retained by the Trustee prior to the
deposit of any remaining proceeds in the Certificate Account pending
distribution of the proceeds to Securityholders of the affected Series. In the
event that the Trustee has reason to believe that the proceeds of any legal
action may be insufficient to reimburse it for its projected legal fees and
expenses, the Trustee will notify the Securityholders that it is not obligated
to pursue any available remedies unless adequate indemnity for its legal fees
and expenses is provided by the Securityholders.
DISTRIBUTIONS ON SECURITIES
On each Distribution Date with respect to a Series of Notes or
Certificates, as applicable, as to which credit support is provided by means
other than the creation of a Subordinated Class or Subclasses and the
establishment of a Reserve Fund, the Master Servicer will withdraw from the
applicable Certificate Account funds on deposit in the Certificate Account and
distribute, or, if so specified in the applicable prospectus supplement, will
withdraw from the Custodial Account, funds on deposit in the Custodial Account
and remit to the Trustee, who will distribute the funds to Securityholders of
record on the applicable Record Date. The distributions shall occur in the
manner described in this prospectus under "--Description of the
Securities--Distributions of Principal and Interest" and in the related
prospectus supplement. If so specified in the applicable prospectus supplement,
the Master Servicer will withdraw from the applicable Certificate Account funds
on deposit in the Certificate Account and distribute them to the Trustee. The
funds shall consist of the aggregate of all previously undistributed payments on
account of principal, including principal prepayments, if any, and interest
received after the Cut-off Date and on or prior to the 20th day, or if the 20th
day is not a business day, the next preceding business day, of the month of the
distribution or another day specified in the related prospectus supplement (in
either case, the "Determination Date"), except:
(1) all payments that were due on or before the Cut-off Date;
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(2) all principal prepayments received during the month of distribution
and all payments of interest representing interest for the month of
distribution or any portion of the these payments;
(3) all payments which represent early receipt, other than prepayments, of
scheduled payments of principal and interest due on a date or dates
subsequent to the first day of the month of distribution;
(4) amounts received on particular Mortgage Loans, Warehouse Loans or
Contracts as late payments of principal or interest and respecting
which the Master Servicer has made an unreimbursed Advance;
(5) amounts representing reimbursement for other Advances which the Master
Servicer has determined to be otherwise nonrecoverable and amounts
representing reimbursement for particular losses and expenses incurred
or Advances made by the Master Servicer and discussed below; and
(6) that portion of each collection of interest on a particular Mortgage
Loan in the Mortgage Pool, a particular Warehouse Loan in the
Warehouse Loan Pool or on a particular Contract in the Contract Pool
that represents
(a) servicing compensation to the Master Servicer,
(b) amounts payable to the entity or entities specified in the
applicable prospectus supplement or permitted withdrawals from the
Certificate Account out of payments under the Letter of Credit, if
any, with respect to the Series,
(c) related Insurance Proceeds or Liquidation Proceeds,
(d) amounts in the Reserve Fund, if any, with respect to the
Series or
(e) proceeds of any Alternative Credit Support, each deposited in
the Certificate Account to the extent described under "Description of
the Securities--Maintenance of Insurance Policies," "-- Presentation
of Claims," "-- Enforcement of `Due-on-Sale' Clauses; Realization Upon
Defaulted Mortgage Loans" and "--Enforcement of `Due-on-Sale' Clauses;
Realization Upon Defaulted Contracts" or in the applicable prospectus
supplement.
Except as otherwise specified in the related prospectus supplement, no
later than the Business Day immediately preceding the Distribution Date for a
Series of Notes or Certificates, as applicable, the Master Servicer will furnish
a statement to the Trustee setting forth the amount to be distributed on the
next succeeding Distribution Date on account of principal of and interest on the
Mortgage Loans, Warehouse Loans or Contracts, stated separately or the
information enabling the Trustee to determine the amount of distribution to be
made on the Notes or Certificates, as applicable, and a statement setting forth
information with respect to the Mortgage Loans, Warehouse Loans or Contracts.
If so specified in the applicable prospectus supplement, the Trustee will
establish and maintain the Certificate Account for the benefit of the holders of
the Notes or Certificates, as applicable, of the related Series in which the
Trustee shall deposit, as soon as practicable after receipt, each distribution
made to the Trustee by the Master Servicer, as set forth above, with respect to
the Mortgage Loans, Warehouse Loans or Contracts, any distribution received by
the Trustee with respect to the Mortgage Certificates, if any, included in the
Trust Fund and deposits from any Reserve Fund or GPM Fund. If so
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specified in the applicable prospectus supplement, prior to making any
distributions to Securityholders, any portion of the distribution on the
Mortgage Certificates that represents servicing compensation, if any, payable to
the Trustee shall be deducted and paid to the Trustee.
Funds on deposit in the Certificate Account may be invested in Eligible
Investments maturing in general not later than the Business Day preceding the
next Distribution Date. Unless otherwise provided in the prospectus supplement,
all income and gain realized from this investment will be for the benefit of the
Master Servicer. The Master Servicer will be required to deposit the amount of
any losses incurred with respect to these investments out of its own funds, when
realized. Unless otherwise provided in the prospectus supplement, the
Certificate Account established pursuant to the Trust Agreement shall be a
non-interest bearing account or accounts.
The timing and method of distribution of funds in the Certificate Account
to Classes or Subclasses of Notes or Certificates, as applicable, having
differing terms, whether subordinated or not, to the extent not described in
this prospectus, shall be set forth in the related prospectus supplement.
REVOLVING PERIOD
The applicable prospectus supplement may provide that all or a portion of
the principal collections on any Revolving Credit Line Loans may be applied by
the Trustee to the acquisition of subsequent Revolving Credit Line Loans during
a specified period rather than used to distribute payments of principal to
Securityholders during that period. These Notes or Certificates, as applicable,
would then possess an interest only period, also commonly referred to as a
"Revolving Period", which will be followed by an "Amortization Period", during
which principal will be paid. Any interest only or revolving period may
terminate prior to the end of the specified period and result in the earlier
than expected principal repayment of the Notes or Certificates, as applicable.
SPECIAL DISTRIBUTIONS
To the extent specified in the prospectus supplement relating to a Series
of Notes or Certificates, as applicable, one or more Classes of Multi-Class
Securities that do not provide for monthly Distribution Dates may receive
Special Distributions in reduction of Stated Principal Balance ("Special
Distributions") in any month, other than a month in which a Distribution Date
occurs, if, as a result of principal prepayments on the Trust Assets in the
related Trust Fund and/or low reinvestment yields, the Trustee determines, based
on assumptions specified in the related Agreement, that the amount of cash
anticipated to be on deposit in the Certificate Account on the next Distribution
Date for the Series and available to be distributed to the holders of the Notes
or Certificates, as applicable, of a Classes or Subclasses may be less than the
sum of (1) the interest scheduled to be distributed to holders of the Notes or
Certificates, as applicable, of the Classes or Subclasses and (2) the amount to
be distributed in reduction of Stated Principal Balance or the Notes or
Certificates, as applicable, on the Distribution Date. Any Special Distributions
will be made in the same priority and manner as distributions in reduction of
Stated Principal Balance would be made on the next Distribution Date.
REPORTS TO SECURITYHOLDERS
Unless otherwise specified or modified in the related prospectus supplement
for each Series, the Master Servicer or the Trustee will include with each
distribution to Securityholders of record of the Series, or within a reasonable
time afterward, a statement generally setting forth, among other things, the
following information, if applicable, per each Security, as to (1) through (3)
or (4) through (6) below, as applicable:
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(1) to each holder of a Security, other than a Multi-Class Certificate or
Residual Certificate, the amount of the distribution allocable to
principal of the Trust Assets, separately identifying the aggregate
amount of any Principal Prepayments included in the amount, and the
portion, if any, advanced by a Servicer or the Master Servicer;
(2) to each holder of a Security, other than a Multi-Class Certificate or
Residual Certificate, the amount of the distribution allocable to
interest on the related Trust Assets and the portion, if any, advanced
by a Servicer or the Master Servicer;
(3) to each holder of a Security, the amount of servicing compensation
with respect to the related Trust Assets and other customary
information as the Master Servicer deems necessary or desirable to
enable Securityholders to prepare their tax returns;
(4) to each holder of a Multi-Class Certificate on which an interest
distribution and a distribution in reduction of Stated Principal
Balance are then being made, the amount of the interest distribution
and distribution in reduction of Stated Principal Balance, and the
Stated Principal Balance of each Class after giving effect to the
distribution in reduction of Stated Principal Balance made on the
Distribution Date or on any Special Distribution Date occurring
subsequent to the last report;
(5) to each holder of a Multi-Class Certificate on which a distribution of
interest only is then being made, the aggregate Stated Principal
Balance of Notes or Certificates, as applicable, outstanding of each
Class or Subclass after giving effect to the distribution in reduction
of Stated Principal Balance made on the Distribution Date and on any
Special Distribution Date occurring subsequent to the last report and
after including in the aggregate Stated Principal Balance the Stated
Principal Balance of the Compound Interest Securities, if any,
outstanding and the amount of any accrued interest added to the
Compound Value of the Compound Interest Securities on the Distribution
Date;
(6) to each holder of a Compound Interest Security, but only if the holder
shall not have received a distribution of interest on the Distribution
Date equal to the entire amount of interest accrued on the Certificate
with respect to the Distribution Date:
(a) the information contained in the report delivered pursuant to
clause (5) above;
(b) the interest accrued on the Class or Subclass of Compound
Interest Securities with respect to the Distribution Date and added to
the Compound Value of the Compound Interest Security; and
(c) the Stated Principal Balance of the Class or Subclass of
Compound Interest Securities after giving effect to the addition of
all interest accrued;
(7) in the case of a series of Notes or Certificates, as applicable, with
a variable Interest Rate, the Interest Rate applicable to the
distribution in question;
(8) the amount or the remaining obligations of an L/C Bank with respect to
a Letter of Credit, after giving effect to the declining amount
available and any payments and other amounts charged on the applicable
Distribution Date, expressed as a percentage of the amount reported
pursuant to (x) below, and the amount of coverage remaining under the
Pool Insurance Policy, Special Hazard Insurance Policy, Mortgagor
Bankruptcy Bond or Reserve Fund, as applicable, in each case as of the
applicable Determination Date, after
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giving effect to any amounts with respect to them to be distributed to
Securityholders on the Distribution Date;
(9) in the case of a Series of Notes or Certificates, as applicable,
benefiting from the Alternative Credit Support described in the
related prospectus supplement, the amount of coverage under the
Alternative Credit Support as of the close of business on the
applicable Determination Date, after giving effect to any amounts with
respect to the Alternative Credit Support distributed to
Securityholders on the Distribution Date;
(10) the aggregate scheduled principal balance of the Trust Assets as of a
date not earlier than the Distribution Date after giving effect to
payments of principal distributed to Securityholders on the
Distribution Date;
(11) the book value of any collateral acquired by the Mortgage Pool,
Warehouse Loan Pool or Contract Pool through foreclosure, repossession
or otherwise; and
(12) the number and aggregate principal amount of Mortgage Loans, Warehouse
Loans or Contracts one month and two months delinquent.
In addition, within a reasonable period of time after the end of each
calendar year, the Master Servicer, or the Trustee, if specified in the
applicable prospectus supplement, will cause to be furnished to each
Securityholder of record at any time during the calendar year a report as to the
aggregate of amounts reported pursuant to (1) through (3) or (4) through (6)
above and other information as in the judgment of the Master Servicer or the
Trustee, as the case may be, is needed for the Securityholder to prepare its tax
return, as applicable, for the calendar year or, in the event the person was a
Securityholder of record during a portion of the calendar year, for the
applicable portion of the year.
ADVANCES
Unless otherwise stated in the related prospectus supplement, each Servicer
and the Master Servicer, with respect to Mortgage Loans, Warehouse Loans or
Contracts serviced by it and with respect to advance delinquent installments of
principal of and interest on the Mortgage Loans, Warehouse Loans and Contracts
(the "Advances") required to be made by the Servicers that were not so made,
will be obligated to advance funds in an amount equal to the aggregate scheduled
installments of payments of principal and interest that were due on the Due Date
with respect to a Mortgage Loan, Warehouse Loan or Contract and that were
delinquent, including any payments that have been deferred by the Servicer or
the Master Servicer, as of the close of business on the date specified in the
related Servicing Agreement, to be remitted no later than the close of business
on the business day immediately preceding the Distribution Date, subject to,
unless otherwise provided in the applicable prospectus supplement, their
respective determinations that the advances are reimbursable under any Letter of
Credit, Pool Insurance Policy, Primary Mortgage Insurance Policy, Mortgagor
Bankruptcy Bond, from the proceeds of Alternative Credit Support, from cash in
the Reserve Fund, the Servicing or Certificate Accounts or otherwise. In making
the Advances, the Servicers and Master Servicer will endeavor to maintain a
regular flow of scheduled interest and principal payments to the
Securityholders, rather than to guarantee or insure against losses. Any of these
Advances are reimbursable to the Servicer or Master Servicer out of related
recoveries on the Mortgage Loans with respect to which amounts were advanced. In
addition, Advances are reimbursable from cash in the Reserve Fund, the Servicing
or Certificate Accounts to the extent that the Servicer or the Master Servicer,
as the case may be, shall determine that any Advances previously made are not
ultimately recoverable. The Servicers and the Master Servicer generally will
also be obligated to make advances in respect of particular taxes and insurance
premiums not paid by Mortgagors or Obligors on a timely basis and, to the extent
deemed recoverable, foreclosure costs, including
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reasonable attorney's fees. These funds so advanced are reimbursable out of
recoveries on the related Mortgage Loans. This right of reimbursement for any
Advance will be prior to the rights of the Securityholders to receive any
amounts recovered with respect to Mortgage Loans, Warehouse Loans or Contracts.
Unless otherwise provided in the applicable prospectus supplement, the Servicers
and the Master Servicer will also be required to advance an amount necessary to
provide a full month's interest in connection with full or partial prepayments,
liquidations, defaults and repurchases of the Mortgage Loans, Warehouse Loans or
Contracts. Any of these Advances will not be reimbursable to the Servicers or
the Master Servicer.
COLLECTION AND OTHER SERVICING PROCEDURES
The Master Servicer, directly or through the Servicers, as the case may be,
will make reasonable efforts to collect all payments called for under the
Mortgage Loans or Contracts and will, consistent with the applicable Servicing
Agreement and any applicable Letter of Credit, Pool Insurance Policy, Special
Hazard Insurance Policy, Primary Mortgage Insurance Policy, Mortgagor Bankruptcy
Bond or Alternative Credit Support, follow collection procedures as it follows
with respect to mortgage loans or contracts serviced by it that are comparable
to the Mortgage Loans or Contracts, except when, in the case of FHA or VA Loans,
applicable regulations require otherwise. Consistent with the above, if so
provided in the related prospectus supplement, the Master Servicer may, in its
discretion, waive any late payment charge or any prepayment charge or penalty
interest in connection with the prepayment of a Mortgage Loan or Contract or
extend the due dates for payments due on a Mortgage Note or Contract for a
period of not greater than 270 days, provided that the insurance coverage for
the Mortgage Loan or Contract or the coverage provided by any Letter of Credit
or any Alternative Credit Support, will not be adversely affected.
If specified in the related prospectus supplement, under the applicable
Servicing Agreement, the Master Servicer, either directly or through Servicers,
to the extent permitted by law, may establish and maintain an escrow account
(the "Escrow Account") in which Mortgages or Obligors will be required to
deposit amounts sufficient to pay taxes, assessments, mortgage and hazard
insurance premiums and other comparable items. This obligation may be satisfied
by the provision of insurance coverage against loss occasioned by the failure to
escrow insurance premiums rather than causing escrows to be made. Withdrawals
from the Escrow Account may be made to effect timely payment of taxes,
assessments, mortgage and hazard insurance, to refund to Mortgagors or Obligors
amounts determined to be overages, to pay interest to Mortgagors or Obligors on
balances in the Escrow Account, if required, and to clear and terminate the
account. The Master Servicer will be responsible for the administration of each
Escrow Account and will be obliged to make advances to the accounts when a
deficiency exists in the Escrow Account. Alternatively, in lieu of establishing
an Escrow Account, the Servicer may procure a performance bond or other form of
insurance coverage, in an amount acceptable to the Rating Agency rating the
related Series of Notes or Certificates, as applicable, covering loss occasioned
by the failure to escrow required amounts.
MAINTENANCE OF INSURANCE POLICIES
To the extent that the applicable prospectus supplement does not expressly
provide for a method of credit support described below under "Credit Support" or
for Alternative Credit Support in lieu of some or all of the insurance coverage
set forth below, the following paragraphs on insurance shall apply.
STANDARD HAZARD INSURANCE
To the extent specified in a related prospectus supplement, the terms of
each Servicing Agreement will require the Servicer to cause to be maintained for
each Mortgage Loan or Contract that it
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services, and the Master Servicer will be required to maintain for each Mortgage
Loan or Contract serviced by it directly, a policy of standard hazard insurance
(a "Standard Hazard Insurance Policy") covering the Mortgaged Property
underlying the Mortgage Loan or Manufactured Home underlying the Contract in an
amount equal to the lesser of the maximum insurable value of the improvements
securing the Mortgage Loan or Contract or the principal balance of the Mortgage
Loan or Contract. Each Servicer or the Master Servicer, as the case may be,
shall also maintain on property acquired upon foreclosure, or deed in lieu of
foreclosure, of any Mortgage Loan or Contract, a Standard Hazard Insurance
Policy in an amount that is at least equal to the maximum insurable value of the
improvements that are a part of the Mortgaged Property or Manufactured Home. Any
amounts collected by the Servicer or the Master Servicer under any the policies,
other than amounts to be applied to the restoration or repair of the Mortgaged
Property or Manufactured Home or released to the borrower in accordance with
normal servicing procedures, shall be deposited in the related Servicing Account
for deposit in the Certificate Account or, in the case of the Master Servicer,
shall be deposited directly into the Certificate Account. Any cost incurred in
maintaining any insurance shall not, for the purpose of calculating monthly
distributions to Securityholders, be added to the amount owing under the
Mortgage Loan or Contract, notwithstanding that the terms of the Mortgage Loan
or Contract may so permit. The cost shall be recoverable by the Servicer only by
withdrawal of funds from the Servicing Account or by the Master Servicer only by
withdrawal from the Certificate Account, as described in the applicable
Servicing Agreement. No earthquake or other additional insurance is to be
required of any borrower or maintained on property acquired in respect of a
Mortgage Loan or Contract, other than pursuant to applicable laws and
regulations as shall at any time be in force and as shall require additional
insurance. When the Mortgaged Property or Manufactured Home is located at the
time of origination of the Mortgage Loan or Contract in a federally designated
flood area, the related Servicer, or the Master Servicer, in the case of each
Mortgage Loan or Contract serviced by it directly, will cause flood insurance to
be maintained, to the extent available, in those areas where flood insurance is
required under the National Flood Insurance Act of 1968, as amended.
The Depositor will not require that a standard hazard or flood insurance
policy be maintained on the Cooperative Dwelling relating to any Cooperative
Loan. Generally, the cooperative corporation itself is responsible for
maintenance of hazard insurance for the property owned by the cooperative and
the tenant-stockholders of that cooperative do not maintain individual hazard
insurance policies. To the extent, however, that a Cooperative and the related
borrower on a Cooperative Loan do not maintain insurance or do not maintain
adequate coverage or any insurance proceeds are not applied to the restoration
of damaged property, any damage to the borrower's Cooperative Dwelling or the
Cooperative's building could significantly reduce the value of the collateral
securing the Cooperative Loan to the extent not covered by other credit support.
The applicable Servicing Agreement will require the Master Servicer to
perform the aforementioned obligations of the Servicer in the event the Servicer
fails to do so. In the event that the Master Servicer obtains and maintains a
blanket policy insuring against hazard losses on all of the related Mortgage
Loans or Contracts, it will conclusively be deemed to have satisfied its
obligations to cause to be maintained a Standard Hazard Insurance Policy for
each Mortgage Loan or Contract that it services. This blanket policy may contain
a deductible clause, in which case the Master Servicer will, in the event that
there has been a loss that would have been covered by the policy absent the
deductible, deposit in the Certificate Account the amount not otherwise payable
under the blanket policy because of the application of the deductible clause.
Since the amount of hazard insurance to be maintained on the improvements
securing the Mortgage Loans or Contracts may decline as the principal balances
owing on the Mortgage Loans or Contracts decrease, and since residential
properties have historically appreciated in value over time, in the event of
partial loss, hazard insurance proceeds may be insufficient to fully restore the
damaged
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Mortgaged Property or Manufactured Home. See "Description of Insurance--Special
Hazard Insurance Policies" for a description of the limited protection afforded
by a Special Hazard Insurance Policy against losses occasioned by specific
hazards that are otherwise uninsured against as well as against losses caused by
the application of the coinsurance provisions contained in the Standard Hazard
Insurance Policies.
SPECIAL HAZARD INSURANCE
If so specified in the related prospectus supplement, the Master Servicer
will be required to exercise its best reasonable efforts to maintain the Special
Hazard Insurance Policy, if any, with respect to a Series of Notes or
Certificates, as applicable, in full force and effect, unless coverage under the
policy has been exhausted through payment of claims, and will pay the premium
for the Special Hazard Insurance Policy on a timely basis; provided, however,
that the Master Servicer shall be under no obligation if coverage under the Pool
Insurance Policy with respect to the Series has been exhausted. In the event
that the Special Hazard Insurance Policy is cancelled or terminated for any
reason, other than the exhaustion of total policy coverage, the Master Servicer
will exercise its best reasonable efforts to obtain from another insurer a
replacement policy comparable to the Special Hazard Insurance Policy with a
total coverage that is equal to the then existing coverage of the Special Hazard
Insurance Policy; provided that if the cost of any replacement policy is greater
than the cost of the terminated Special Hazard Insurance Policy, the amount of
coverage under the replacement Special Hazard Insurance Policy may be reduced to
a level so that the applicable premium will not exceed the cost of the Special
Hazard Insurance Policy that was replaced. Some of the characteristics of the
Special Hazard Insurance Policy are described under "Description of
Insurance--Special Hazard Insurance Policies."
POOL INSURANCE
To the extent specified in a related prospectus supplement, the Master
Servicer will exercise its best reasonable efforts to maintain a Pool Insurance
Policy with respect to a Series of Notes or Certificates, as applicable, in
effect throughout the term of the applicable Agreement, unless coverage under
the policy has been exhausted through payment of claims, and will pay the
premiums for the Pool Insurance Policy on a timely basis. In the event that the
Pool Insurer ceases to be a qualified insurer because it is not qualified to
transact a mortgage guaranty insurance business under the laws of the state of
its principal place of business or any other state which has jurisdiction over
the Pool Insurer in connection with the Pool Insurance Policy, or if the Pool
Insurance Policy is cancelled or terminated for any reason, other than the
exhaustion of total policy coverage, the Master Servicer will exercise its best
reasonable efforts to obtain a replacement policy of pool insurance comparable
to the Pool Insurance Policy and may obtain, under the circumstances described
above with respect to the Special Hazard Insurance Policy, a replacement policy
with reduced coverage. In the event the Pool Insurer ceases to be a qualified
insurer because it is not approved as an insurer by FHLMC, FNMA or any
successors to FNMA, the Master Servicer will agree to review, not less often
than monthly, the financial condition of the Pool Insurer with a view towards
determining whether recoveries under the Pool Insurance Policy are jeopardized
and, if so, will exercise its best reasonable efforts to obtain from another
qualified insurer a replacement insurance policy under the above-stated
limitations. Some of the characteristics of the Pool Insurance Policy are
described under "Description of Insurance--Pool Insurance Policies."
PRIMARY MORTGAGE INSURANCE
To the extent specified in the related prospectus supplement, the Master
Servicer will be required to keep in force and effect for each Mortgage Loan
secured by Single Family Property serviced by it directly, and each Servicer of
a Mortgage Loan secured by Single Family Property will be required to keep in
full force and effect with respect to each Mortgage Loan serviced by it, in each
case to the extent required by the underwriting standards of the Depositor, a
Pool Insurance Policy to cover any loss, subject
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to the limitations described below, by reason of default by the Mortgagors on
the related Mortgage Loans to the extent not covered by any policy of primary
mortgage insurance (a "Primary Mortgage Insurance Policy") issued by a qualified
insurer (the "Primary Mortgage Insurer") with regard to each Mortgage Loan for
which coverage is required pursuant to the applicable Servicing Agreement and
Agreement and to act on behalf of the Trustee (the "Insured") under each Primary
Mortgage Insurance Policy. Neither the Servicer nor the Master Servicer will
cancel or refuse to renew any Primary Mortgage Insurance Policy in effect at the
date of the initial issuance of a Series of Notes or Certificates, as
applicable, that is required to be kept in force under the applicable Agreement
or Servicing Agreement unless the replacement Primary Mortgage Insurance Policy
for the cancelled or non-renewed policy is maintained with an insurer whose
claims-paying ability is acceptable to the Rating Agency rating the Notes or
Certificates, as applicable. See "Description of Insurance--Primary Mortgage
Insurance Policies." The Master Servicer, if any, or the Depositor or the
applicable Servicer will be required to use its best reasonable efforts to
maintain the Pool Insurance Policy for each related Mortgage Pool and to present
claims under the policy to the issuer of the Pool Insurance Policy (the "Pool
Insurer") on behalf of the Trustee and the Securityholders. See "Description of
the Securities--Presentation of Claims."
MORTGAGOR BANKRUPTCY BOND
If so specified in the related prospectus supplement, the Master Servicer
will exercise its best reasonable efforts to maintain a Mortgagor Bankruptcy
Bond for a Series of Notes or Certificates, as applicable, in full force and
effect throughout the term of the applicable Agreement, unless coverage under
the Mortgagor Bankruptcy Bond has been exhausted through payment of claims, and
will pay the premiums for the Mortgagor Bankruptcy Bond on a timely basis. At
the request of the Depositor, coverage under a Mortgagor Bankruptcy Bond will be
cancelled or reduced by the Master Servicer to the extent permitted by the
Rating Agency rating the related Series of Notes or Certificates, as applicable,
provided that the cancellation or reduction does not adversely affect the then
current rating of the Series. See "Description of Insurance--Mortgagor
Bankruptcy Bond."
PRESENTATION OF CLAIMS
The Master Servicer, on behalf of itself, the Trustee and the
Securityholders, will present claims to HUD, the VA, the Pool Insurer, the
Special Hazard Insurer, the issuer of the Mortgagor Bankruptcy Bond, and each
Primary Mortgage Insurer, as applicable, and take reasonable steps necessary to
permit recovery under the insurance policies or Mortgagor Bankruptcy Bond, if
any, with respect to a Series concerning defaulted Mortgage Loans or Contracts
or Mortgage Loans or Contracts that are the subject of a bankruptcy proceeding.
All collections by the Master Servicer under any FHA insurance or VA guarantee,
any Pool Insurance Policy, any Primary Mortgage Insurance Policy or any
Mortgagor Bankruptcy Bond and, where the related property has not been restored,
any Special Hazard Insurance Policy, are to be deposited in the Certificate
Account, subject to withdrawal as previously described. In those cases in which
a Mortgage Loan or Contract is serviced by a Servicer, the Servicer, on behalf
of itself, the Trustee and the Securityholders, will present claims to the
applicable Primary Mortgage Insurer and to the FHA and the VA, as applicable,
and all collections shall be deposited in the Servicing Account, subject to
withdrawal, as set forth above, for deposit in the Certificate Account.
If any property securing a defaulted Mortgage Loan or Contract is damaged
and proceeds, if any, from the related Standard Hazard Insurance Policy or the
applicable Special Hazard Insurance Policy are insufficient to restore the
damaged property to a condition sufficient to permit recovery under any Pool
Insurance Policy or any Primary Mortgage Insurance Policy, neither the related
Servicer nor the Master Servicer, as the case may be, will be required to expend
its own funds to restore the damaged property unless it determines, and, in the
case of a determination by a Servicer, the Master Servicer agrees, (1) that the
restoration will increase the proceeds to Securityholders on liquidation of the
Mortgage Loan or
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Contract after reimbursement of the expenses incurred by the Servicer or the
Master Servicer, as the case may be, and (2) that the expenses will be
recoverable through proceeds of the sale of the Mortgaged Property or proceeds
of any related Pool Insurance Policy, any related Primary Mortgage Insurance
Policy or otherwise.
If recovery under a Pool Insurance Policy or any related Primary Mortgage
Insurance Policy is not available because the related Servicer or the Master
Servicer has been unable to make the above determinations or otherwise, the
Servicer or the Master Servicer is nevertheless obligated to follow the normal
practices and procedures deemed necessary or advisable to realize upon the
defaulted Mortgage Loan. If the proceeds of any liquidation of the Mortgaged
Property or Manufactured Home are less than the principal balance of the
defaulted Mortgage Loan or Contract, respectively, plus interest accrued on the
proceeds at the Mortgage Rate, and if coverage under any other method of credit
support with respect to the Series is exhausted, the related Trust Fund will
realize a loss in the amount of the difference plus the aggregate of expenses
incurred by the Servicer or the Master Servicer in connection with the
proceedings and which are reimbursable under the related Servicing Agreement or
Agreement. In the event that any proceedings result in a total recovery that is,
after reimbursement to the Servicer or the Master Servicer of its expenses, in
excess of the principal balance of the related Mortgage Loan or Contract,
together with accrued and unpaid interest at the applicable Mortgage Rate or
APR, as the case may be, the Servicer and the Master Servicer will be entitled
to withdraw amounts representing normal servicing compensation on the Mortgage
Loan or Contract from the Servicing Account or the Certificate Account, as the
case may be.
ENFORCEMENT OF "DUE-ON-SALE" CLAUSES; REALIZATION UPON DEFAULTED MORTGAGE LOANS
Each Servicing Agreement and the applicable Agreement with respect to Notes
or Certificates, as applicable, representing interests in or secured by a
Mortgage Pool will provide that, when any Mortgaged Property has been conveyed
by the borrower, the Servicer or the Master Servicer, as the case may be, will,
to the extent it has knowledge of the conveyance, exercise its rights to
accelerate the maturity of the Mortgage Loan under any applicable "due-on-sale"
clause , if any, unless it reasonably believes that the enforcement is not
exercisable under applicable law or regulations or if the exercise would result
in loss of insurance coverage with respect to the Mortgage Loan. In either case,
where the due-on-sale clause will not be exercised, the Servicer or the Master
Servicer is authorized to take or enter into an assumption and modification
agreement from or with the person to whom the Mortgaged Property has been or is
about to be conveyed, pursuant to which the person becomes liable under the
Mortgage Note and, unless prohibited by applicable state law, the Mortgagor
remains liable on the Mortgage Note, provided that the Mortgage Loan will
continue to be covered by any Pool Insurance Policy and any related Primary
Mortgage Insurance Policy. In the case of an FHA Loan, an assumption can occur
only with HUD approval of the substitute Mortgagor. Each Servicer and the Master
Servicer will also be authorized, with the prior approval of the Insurer under
any required insurance policies, to enter into a substitution of liability
agreement with the person, pursuant to which the original Mortgagor is released
from liability and the person is substituted as Mortgagor and becomes liable
under the Mortgage Note.
Under the Servicing Agreements and the applicable Agreement, the Servicer
or the Master Servicer, as the case may be, will foreclose upon or otherwise
comparably convert the ownership of properties securing the related Mortgage
Loans that come into and continue in default and as to which no satisfactory
arrangements can be made for collection of delinquent payments. In connection
with foreclosure or other conversion, the Servicer or the Master Servicer will
follow practices and procedures deemed necessary or advisable and as shall be
normal and usual in its general mortgage servicing activities and in accordance
with FNMA guidelines, except when, in the case of FHA or VA Loans, applicable
regulations require otherwise. However, neither the Servicer nor the Master
Servicer will be required to expend its own funds in connection with any
foreclosure or towards the restoration of any
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property unless it determines and, in the case of a determination by a Servicer,
the Master Servicer agrees (1) that restoration and/or foreclosure will increase
the proceeds of liquidation of the related Mortgage Loan to Securityholders
after reimbursement to itself for expenses and (2) that expenses will be
recoverable to it either through Liquidation Proceeds, Insurance Proceeds,
payments under the Letter of Credit, or amounts in the Reserve Fund, if any,
with respect to the related Series, or otherwise.
Any prospective purchaser of a Cooperative Dwelling will generally be
required to obtain the approval of the board of directors of the related
Cooperative before purchasing the shares and acquiring rights under the
proprietary lease or occupancy agreement securing the Cooperative Loan. See
"Certain Legal Aspects of the Mortgage Loans and Contracts--The Mortgage
Loans--Foreclosure" in this prospectus. This approval is usually based on the
purchaser's income and net worth and numerous other factors. Although the
Cooperative's approval is unlikely to be unreasonably withheld or delayed, the
necessity of acquiring approval could limit the number of potential purchasers
for those shares and otherwise limit the Trust Fund's ability to sell and
realize the value of those shares.
The market value of any Multifamily Property obtained in foreclosure or by
deed in lieu of foreclosure will be based substantially on the operating income
obtained from renting the dwelling units. Since a default on a Mortgage Loan
secured by Multifamily Property is likely to have occurred because operating
income, net of expenses, is insufficient to make debt service payments on the
related Mortgage Loan, it can be anticipated that the market value of the
property will be less than was anticipated when the Mortgage Loan was
originated. To the extent that the equity in the property does not absorb the
loss in market value and the loss is not covered by other credit support, a loss
may be experienced by the related Trust Fund. With respect to Multifamily
Property consisting of an apartment building owned by a Cooperative, the
Cooperative's ability to meet debt service obligations on the Mortgage Loan, as
well as all other operating expenses, will be dependent in large part on the
receipt of maintenance payments from the tenant-stockholders, as well as any
rental income from units or commercial areas the Cooperative might control.
Unanticipated expenditures may in some cases have to be paid by special
assessments of the tenant-stockholders. The Cooperative's ability to pay the
principal amount of the Mortgage Loan at maturity may depend on its ability to
refinance the Mortgage Loan. The Depositor, the Unaffiliated Seller and the
Master Servicer will have no obligation to provide refinancing for any Mortgage
Loan.
ENFORCEMENT OF 'DUE-ON-SALE' CLAUSES; REALIZATION UPON DEFAULTED CONTRACTS
Each applicable Agreement and Servicing Agreement with respect to Notes or
Certificates, as applicable, representing interests in or secured by a Contract
Pool will provide that, when any Manufactured Home securing a Contract is about
to be conveyed by the Obligor, the Master Servicer, to the extent it has
knowledge of a prospective conveyance and prior to the time of the consummation
of the conveyance, may exercise its rights to accelerate the maturity of the
Contract under the applicable "due-on-sale" clause, if any, unless it is not
exercisable under applicable law. In that case, the Master Servicer is
authorized to take or enter into an assumption agreement from or with the person
to whom the Manufactured Home has been or is about to be conveyed, pursuant to
which the person becomes liable under the Contract and, unless determined to be
materially adverse to the interests of Securityholders, with the prior approval
of the Pool Insurer, if any, to enter into a substitution of liability agreement
with the person, pursuant to which the original Obligor is released from
liability and the person is substituted as Obligor and becomes liable under the
Contract. Where authorized by the Contract, the APR may be increased, upon
assumption, to the then-prevailing market rate, but shall not be decreased.
Under the Servicing Agreement or the applicable Agreement, the Master
Servicer will repossess or otherwise comparably convert the ownership of
properties securing the related Manufactured Homes that come into and continue
in default and as to which no satisfactory arrangements can be made for
collection of delinquent payments. In connection with repossession or other
conversion, the Servicer or
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Master Servicer will follow practices and procedures it deems necessary or
advisable and as are normal and usual in its general Contract servicing
activities. The Servicer or Master Servicer, however, will not be required to
expend its own funds in connection with any repossession or towards the
restoration of any property unless it determines (1) that the restoration or
repossession will increase the proceeds of liquidation of the related Contract
to the Certificateholders after reimbursement to itself for the expenses and (2)
that the expenses will be recoverable to it either through liquidation proceeds
or through insurance proceeds.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
Under the applicable Agreement for a Series of Notes or Certificates, as
applicable, the Depositor or the person or entity specified in the related
prospectus supplement and any Master Servicer will be entitled to receive an
amount described in the related prospectus supplement. As compensation for its
servicing duties, a Servicer will be entitled to receive a monthly servicing fee
in the amount specified in the related Servicing Agreement. The servicing
compensation shall be payable by withdrawal from the related Servicing Account
prior to deposit in the Certificate Account. Each Servicer, with respect to the
Mortgage Loans or Contracts serviced by it, and the Master Servicer will be
entitled to servicing compensation out of Insurance Proceeds, Liquidation
Proceeds, or Letter of Credit payments. Additional servicing compensation in the
form of prepayment charges, assumption fees, late payment charges or otherwise
may be retained by the Servicers and the Master Servicer to the extent not
required to be deposited in the Certificate Account.
The Servicers and the Master Servicer, unless otherwise specified in the
related prospectus supplement, will pay from their servicing compensation some
of the expenses incurred in connection with the servicing of the Mortgage Loans
or Contracts, including, without limitation, payment of the Insurance Policy
premiums and, in the case of the Master Servicer, fees or other amounts payable
for any Alternative Credit Support, payment of the fees and disbursements of the
Trustee, and any custodian selected by the Trustee, the Note Register, the
Certificate Register and independent accountants and payment of expenses
incurred in enforcing the obligations of Servicers and Unaffiliated Sellers.
Some of these expenses may be reimbursable by the Depositor pursuant to the
terms of the applicable Agreement. In addition, the Master Servicer will be
entitled to reimbursement of expenses incurred in enforcing the obligations of
Servicers and Unaffiliated Sellers under limited circumstances.
As set forth in the preceding section, the Servicers and the Master
Servicer will be entitled to reimbursement for some of the expenses incurred by
them in connection with the liquidation of defaulted Mortgage Loans or
Contracts. The related Trust Fund will suffer no loss by reason of these
expenses to the extent claims are fully paid under the Letter of Credit, if any,
the related insurance policies, from amounts in the Reserve Fund or under any
applicable Alternative Credit Support described in a prospectus supplement. In
the event, however, that claims are either not made or fully paid under the
Letter of Credit, Insurance Policies or Alternative Credit Support, or if
coverage has ceased, or if amounts in the Reserve Fund are not sufficient to
fully pay the losses, the related Trust Fund will suffer a loss to the extent
that the proceeds of the liquidation proceedings, after reimbursement of the
expenses of the Servicers or the Master Servicer, as the case may be, are less
than the principal balance of the related Mortgage Loan or Contract. In
addition, the Servicers and the Master Servicer will be entitled to
reimbursement of expenditures incurred by them in connection with the
restoration of a Mortgaged Property, Cooperative Dwelling or Manufactured Home,
the right of reimbursement being prior to the rights of the Securityholders to
receive any payments under the Letter of Credit, or from any related Insurance
Proceeds, Liquidation Proceeds, amounts in the Reserve Fund or any proceeds of
Alternative Credit Support.
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Under the Trust Agreement, the Trustee will be entitled to deduct, from
distributions of interest with respect to the Mortgage Certificates, a specified
percentage of the unpaid principal balance of each Mortgage Certificate as
servicing compensation. The Trustee shall be required to pay all expenses,
except as expressly provided in the Trust Agreement, subject to limited
reimbursement as provided in the Trust Agreement.
EVIDENCE AS TO COMPLIANCE
The Master Servicer will deliver to the Depositor and the Trustee, on or
before the date specified in the applicable Agreement or Servicing Agreement, an
Officer's Certificate stating that (1) a review of the activities of the Master
Servicer and the Servicers during the preceding calendar year and of its
performance under the Agreement or Servicing Agreement has been made under the
supervision of the officer, and (2) to the best of the officer's knowledge,
based on the review, the Master Servicer and each Servicer has fulfilled all its
obligations under the Agreement or Servicing Agreement and the applicable
Servicing Agreement throughout the year, or, if there has been a default in the
fulfillment of any obligation, specifying each default known to the officer and
the nature and status of the default. The Officer's Certificate shall be
accompanied by a statement of a firm of independent public accountants to the
effect that, on the basis of an examination of particular documents and records
relating to servicing of the Mortgage Loans or Contract, conducted in accordance
with generally accepted accounting principles in the mortgage banking industry,
the servicing of the Mortgage Loans or Contract was conducted in compliance with
the provisions of the Agreement and/or the Servicing Agreements, except for any
exceptions as the firm believes it is required to report.
CERTAIN MATTERS REGARDING THE MASTER SERVICER, THE DEPOSITOR, THE TRUSTEE AND
THE INDENTURE TRUSTEE
The Master Servicer under each Agreement will be named in the applicable
prospectus supplement. The entity acting as Master Servicer may be an
Unaffiliated Seller and have other normal business relationships with the
Depositor and/or affiliates of the Depositor and may be an affiliate of the
Depositor. In the event there is no Master Servicer under an Agreement, all
servicing of Mortgage Loans or Contracts will be performed by a Servicer
pursuant to a Servicing Agreement.
The Master Servicer may not resign from its obligations and duties under
the applicable Agreement except upon a determination that its duties under the
relevant Agreement are no longer permissible under applicable law. No the
resignation will become effective until the Trustee or a successor servicer has
assumed the Master Servicer's obligations and duties under the Agreement.
The Trustee under each Pooling and Servicing Agreement or Trust Agreement
will be named in the applicable prospectus supplement. The commercial bank or
trust company serving as Trustee may have normal banking relationships with the
Depositor and/or its affiliates and with the Master Servicer and/or its
affiliates.
The Trustee may resign from its obligations under the Pooling and Servicing
Agreement at any time, in which event a successor trustee will be appointed. In
addition, the Depositor may remove the Trustee if the Trustee ceases to be
eligible to act as Trustee under the Pooling and Servicing Agreement or if the
Trustee becomes insolvent, at which time the Depositor will become obligated to
appoint a successor Trustee. The Trustee may also be removed at any time by the
holders of Certificates evidencing voting rights aggregating not less than 50%
of the voting rights evidenced by the Certificates of the Series. Any
resignation and removal of the Trustee, and the appointment of a successor
trustee, will not become effective until acceptance of the appointment by the
successor Trustee.
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The Trustee may resign at any time from its obligations and duties under
the Trust Agreement by executing an instrument in writing resigning as Trustee,
filing the same with the Depositor, mailing a copy of a notice of resignation to
all Certificateholders then of record, and appointing a qualified successor
trustee. No resignation will become effective until the successor trustee has
assumed the Trustee's obligations and duties under the Trust Agreement.
The Indenture Trustee under the Indenture will be named in the applicable
prospectus supplement. The commercial bank or trust company serving as Indenture
Trustee may have normal banking relationships with the Depositor and/or its
affiliates and with the Master Servicer and/or its affiliates.
The Indenture Trustee may resign from its obligations under the Indenture
at any time, in which event a successor trustee will be appointed. In addition,
the Depositor may remove the Indenture Trustee if the Indenture Trustee ceases
to be eligible to act as Indenture Trustee under the Indenture or if the
Indenture Trustee becomes insolvent, at which time the Depositor will become
obligated to appoint a successor Indenture Trustee. Unless otherwise specified
in the related prospectus supplement, the Indenture Trustee may also be removed
at any time by the holders of Notes evidencing voting rights aggregating not
less than 50% of the voting rights evidenced by the Notes of the Series. Any
resignation and removal of the Trustee, and the appointment of a successor
trustee, will not become effective until acceptance of the appointment by the
successor Trustee.
Each Pooling and Servicing Agreement and Trust Agreement will also provide
that neither the Depositor nor any director, officer, employee or agent of the
Depositor or the Trustee, or any responsible officers of the Trustee will be
under any liability to the Certificateholders, for the taking of any action or
for refraining from the taking of any action in good faith pursuant to the
Pooling and Servicing Agreement, or for errors in judgment; provided, however,
that none of the Depositor or the Trustee nor any other person will be protected
against, in the case of the Depositor, any breach of representations or
warranties made by them, and in the case of the Depositor and the Trustee,
against any liability that would otherwise be imposed by reason of willful
misfeasance, bad faith or negligence in the performance of its duties or by
reason of reckless disregard of its obligations and duties under the related
Agreement. Each Pooling and Servicing Agreement and Trust Agreement will further
provide that the Depositor and the Trustee and any director, officer and
employee or agent of the Depositor or the Trustee shall be entitled to
indemnification, by the Trust Fund in the case of the Depositor and by the
Master Servicer in the case of the Trustee 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 Certificates and in the case of the Trustee,
resulting from any error in any tax or information return prepared by the Master
Servicer or from the exercise of any power of attorney granted pursuant to the
Pooling and Servicing Agreement, other than any loss, liability or expense
related to any specific Mortgage Loan, Contract or Mortgage Certificate, except
any loss, liability or expense otherwise reimbursable pursuant to the applicable
Agreement, and any loss, liability or expense incurred by reason of willful
misfeasance, bad faith or negligence in the performance of their duties under
the related Agreement or by reason of reckless disregard of their obligations
and duties under the related Agreement. In addition, each Agreement will provide
that neither the Depositor nor the Master Servicer, as the case may be, will be
under any obligation to appear in, prosecute or defend any legal action that is
not incidental to its duties under the Agreement and that in its opinion may
involve it in any expense or liability. The Depositor or the Master Servicer
may, however, in their discretion, undertake any action deemed by them necessary
or desirable with respect to the applicable Agreement and the rights and duties
of the parties to the applicable Agreement and the interests of the
Securityholders under the applicable Agreement. In this event, the legal
expenses and costs of the action and any liability resulting from the action
will be expenses, costs and liabilities of the Trust Fund, and the Master
Servicer or the Depositor, as the case may be, will be entitled to be reimbursed
for the action out of the Certificate Account.
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DEFICIENCY EVENT
To the extent a deficiency event is specified in the prospectus supplement,
a deficiency event (a "Deficiency Event") with respect to the Notes or
Certificates, as applicable, of each Series may be defined in the applicable
Agreement as being the inability of the Trustee to distribute to holders of one
or more Classes of Notes or Certificates, as applicable, of the Series, in
accordance with the terms of the Notes or Certificates, as applicable, and the
Agreement, any distribution of principal or interest on the Notes or
Certificates, as applicable, when and as distributable, in each case because of
the insufficiency for the purpose of the funds then held in the related Trust
Fund.
Except as otherwise provided in the related prospectus supplement, to the
extent a deficiency event is specified in the related prospectus supplement,
upon the occurrence of a Deficiency Event, the Trustee is required to determine
whether or not the application on a monthly basis, regardless of the frequency
of regular Distribution Dates, of all future scheduled payments on the Mortgage
Loans, Contracts and Mortgage Certificates included in the related Trust Fund
and other amount receivable with respect to the Trust Fund towards payments on
the Notes or Certificates, as applicable, in accordance with the priorities as
to distributions of principal and interest set forth in the Notes or
Certificates, as applicable, will be sufficient to make distributions of
interest at the applicable Interest Rates and to distribute in full the
principal balance of each Note or Certificate, as applicable, on or before the
latest Final Distribution Date of any outstanding Notes or Certificates, as
applicable, of the Series.
Except as otherwise provided in the related prospectus supplement, to the
extent a deficiency event is specified in the related prospectus supplement, the
Trustee will obtain and rely upon an opinion or report of a firm of independent
accountants of recognized national reputation as to the sufficiency of the
amounts receivable with respect to the Trust Fund to make distributions on the
Notes or Certificates, as applicable, which opinion or report will be conclusive
evidence as to the sufficiency. Pending the making of any determination,
distributions on the Notes or Certificates, as applicable, shall continue to be
made in accordance with their terms.
Except as otherwise provided in the related prospectus supplement, to the
extent a deficiency event is specified in the related prospectus supplement, in
the event that the Trustee makes a positive determination, the Trustee will
apply all amounts received in respect of the related Trust Fund, after payment
of fees and expenses of the Trustee and accountants for the Trust Fund, to
distributions on the Notes or Certificates, as applicable, of the Series in
accordance with their terms, except that the distributions shall be made on each
Distribution Date or on more frequent dates as specified in the related
prospectus supplement and without regard to the amount of principal that would
otherwise be distributable on the related Distribution Date. Under some
circumstances following any positive determination, the Trustee may resume
making distributions on the Notes or Certificates, as applicable, expressly in
accordance with their terms.
Except as otherwise provided in the related prospectus supplement, to the
extent a deficiency event is specified in the related prospectus supplement, if
the Trustee is unable to make the positive determination described above, the
applicable Trustee will apply all amounts received in respect of the related
Trust Fund, after payment of Trustee and accountants' fees and expenses, to
monthly distributions on Notes or Certificates, as applicable, of the Series or
on all Senior Notes or Senior Certificates, as applicable, of the Series pro
rata, without regard to the priorities as to distribution of principal set forth
in the Notes or Certificates, as applicable, and the Notes or Certificates, as
applicable, will, to the extent permitted by applicable law and specified in the
related prospectus Statement, accrue interest at the highest Interest Rate borne
by any Note or Certificate Notes or Certificates, as applicable, with the same
credit rating by the Rating Agencies of the Series, or in the event any Class of
the Series shall accrue interest at a floating rate, at the weighted average
Interest Rate, calculated on the basis of the maximum
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interest rate applicable to the Class having a floating interest rate and on the
original principal amount of the Notes or Certificates, as applicable, of that
Class. In this event, the holders of a majority in outstanding principal balance
of the Notes or Certificates, as applicable, may direct the Trustee to sell the
related Trust Fund, any direction being irrevocable and binding upon the holders
of all Notes or Certificates, as applicable, of the Series and upon the owners
of the residual interests in the Trust Fund. In the absence of a direction, the
Trustee may not sell all or any portion of the Trust Fund.
EVENTS OF DEFAULT
Except as otherwise provided in the related prospectus supplement, Events
of Default under the related Pooling and Servicing Agreement or Sale and
Servicing will consist of:
o any failure to make a specified payment which continues unremedied, in most
cases, for five business days after the giving of written notice;
o any failure by the Trustee, the Servicer or the Master Servicer, as
applicable, duly to observe or perform in any material respect any other of
its covenants or agreements in the applicable Agreement which failure shall
continue for the number of days specified in the related prospectus
supplement or any breach of any representation and warranty made by the
Master Servicer or the Servicer, if applicable, which continues unremedied
for the number of days specified in the related prospectus supplement after
the giving of written notice of the failure or breach;
o particular events of insolvency, readjustment of debt, marshalling of
assets and liabilities or similar proceedings regarding the Master Servicer
or a Servicer, as applicable; and
o any lowering, withdrawal or notice of an intended or potential lowering, of
the outstanding rating of the Notes or Certificates, as applicable, by the
Rating Agency rating the Notes or Certificates, as applicable, because the
existing or prospective financial condition or mortgage loan servicing
capability of the Master Servicer is insufficient to maintain the rating.
Unless otherwise specified in the related prospectus supplement, Events of
Default under the Indenture for each Series of Notes include:
o a default of five days or more in the payment of any principal of or
interest on any Note of the Series;
o failure to perform any other covenant of the Depositor or the Trust Fund in
the Indenture which continues for a period of thirty days after notice is
given in accordance with the procedures described in the related prospectus
supplement;
o any representation or warranty made by the Depositor or the Trust Fund in
the Indenture or in any certificate or other writing delivered or in
connection with the Indenture with respect to or affecting the Series
having been incorrect in a material respect as of the time made, and the
breach is not cured within thirty days after notice is given in accordance
with the procedures described in the related prospectus supplement;
o particular 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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RIGHTS UPON EVENT OF DEFAULT
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
Noteholders of a majority of the then aggregate outstanding amount of the Notes
of the Series may declare the principal amount of all the Notes of the Series to
be due and payable immediately. The declaration may, under some circumstances,
be rescinded and annulled by the Noteholders of a majority in aggregate
outstanding amount of the Notes of the Series.
If, following an Event of Default with respect to any Series of Notes, the
Notes of the Series have been declared to be due and payable, the Indenture
Trustee may, in its discretion, notwithstanding the acceleration, elect to
maintain possession of the collateral securing the Notes of the Series and to
continue to apply distributions on the collateral as if there had been no
declaration of acceleration if the collateral continues to provide sufficient
funds for the payment of principal of and interest on the Notes of the Series as
they would have become due if there had not been a declaration. In addition, the
Indenture Trustee may not sell or otherwise liquidate the collateral securing
the Notes of a Series following an Event of Default other than a default in the
payment of any principal of or interest on any Note of the Series for thirty
days or more, unless
o the Noteholders of 100% of the then aggregate outstanding amount of the
Notes of the Series consent to the sale,
o the proceeds of the sale or liquidation are sufficient to pay in full the
principal of and accrued interest due and unpaid on the outstanding Notes
of the Series at the date of the sale or
o the Indenture Trustee determines that the collateral would not be
sufficient on an ongoing basis to make all payments on the Notes as the
payments would have become due if the Notes had not been declared due and
payable, and the Indenture Trustee obtains the consent of the Holders of 66
2/3% of the then aggregate outstanding amount of the Notes of the Series.
In the event that the Indenture Trustee liquidates the collateral in
connection with an Event of Default involving a default for thirty days or more
in the payment of principal of or interest on the Notes of a Series, the
Indenture provides that the Indenture Trustee will have a prior lien on the
proceeds of any liquidation for unpaid fees and expenses. As a result, upon the
occurrence of this Event of Default, the amount available for distribution to
the Noteholders may be less than would otherwise be the case. However, the
Indenture Trustee may not institute a proceeding for the enforcement of its lien
except in connection with a proceeding for the enforcement of the lien of the
Indenture for the benefit of the Noteholders after the occurrence of this Event
of Default.
Unless otherwise specified 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 Noteholders of these Notes issued at a discount from par
may be entitled to receive no more than an amount equal to the unpaid principal
amount of the Notes less the amount of the discount which is unamortized.
Except as otherwise provided in the related prospectus supplement, so long
as an Event of Default with respect to a Series of Notes or Certificates, as
applicable, remains unremedied, the Depositor, the Trustee or the holders of
Notes of the Series, or, if no Notes are issued as part of the Series,
Certificate, evidencing not less than 25% of the principal amount of the Notes
or Certificates, as applicable, of the Series may terminate all of the rights
and obligations of the Master Servicer under the applicable Agreement and/or
Servicing Agreement and in and to the Mortgage Loans and Contracts and their
proceeds, whereupon, subject to applicable law regarding the Trustee's ability
to make advances, the Trustee or, if the Depositor so notifies the Trustee and
the Master Servicer, the Depositor or its designee,
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will succeed to all the responsibilities, duties and liabilities of the Master
Servicer under the Agreement and will be entitled to similar compensation
arrangements. In the event that the Trustee would be obligated to succeed the
Master Servicer but is unwilling or unable so to act, it may appoint, or
petition to a court of competent jurisdiction for the appointment of, a
successor master servicer. Pending an appointment, the Trustee, unless
prohibited by law from so acting, shall be obligated to act in this capacity.
The Trustee and the successor master servicer may agree upon the servicing
compensation to be paid to the successor, which in no event may be greater than
the compensation to the Master Servicer under the applicable Agreement.
AMENDMENT
Except as otherwise provided in the related prospectus supplement, the
Pooling and Servicing Agreement or Sale and Servicing Agreement, as applicable,
for each Series of Notes or Certificates, as applicable, may be amended by the
Depositor, the Master Servicer and the Trustee, without the consent of the
Securityholders,
o to cure any ambiguity,
o to correct or supplement any provision in the Pooling and Servicing
Agreement or Sale and Servicing Agreement, as applicable, that may be
inconsistent with any other provision in these agreements or
o to make any other provisions with respect to matters or questions arising
under the Agreement that are not inconsistent with the provisions of these
Agreements, provided that the action will not adversely affect in any
material respect the interests of any Securityholder of the related Series.
Except as otherwise provided in the related prospectus supplement, the
Pooling and Servicing Agreement or Sale and Servicing Agreement, as applicable,
for each Series of Notes or Certificates, as applicable, may also be amended by
the Depositor, the Master Servicer and the Trustee with the consent of holders
of Notes or Certificates, as applicable, evidencing not less than 66 2/3% of the
aggregate outstanding principal amount of the Notes or Certificates, as
applicable, of the Series, for the purpose of adding any provisions to or
changing in any manner or eliminating any of the provisions of the Agreement or
of modifying in any manner the rights of the Securityholders; provided, however,
that no the amendment may
(1) reduce in any manner the amount of, delay the timing of or change the
manner in which payments received on or with respect to Mortgage Loans
and Contracts are required to be distributed with respect to any Note
or Certificate, as applicable, without the consent of the holder of
the Security,
(2) adversely affect in any material respect the interests of the holders
of a Class or Subclass of the Senior Notes or Senior Certificates, as
applicable, if any, of a Series in a manner other than that set forth
in (1) above without the consent of the holders of the Senior Notes or
Senior Certificates, as applicable, of the Subclass evidencing not
less than 66 2/3% of the Class or Subclass,
(3) adversely affect in any material respect the interests of the holders
of the Subordinated Notes or Subordinated Certificates, as applicable,
of a Series in a manner other than that set forth in (1) above without
the consent of the holders of Subordinated Notes or Subordinated
Certificates, as applicable, evidencing not less than 66 2/3% of the
Class or Subclass or
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(4) reduce the aforesaid percentage of the Notes or Certificates, as
applicable, the holders of which are required to consent to the
amendment, without the consent of the holders of the Class affected by
the amendment.
The Trust Agreement for a Series may be amended by the Trustee and the
Depositor without Certificateholder consent, to cure any ambiguity, to correct
or supplement any provision in the Trust Agreement that may be inconsistent with
any other provision in the Trust Agreement, or to make any other provisions with
respect to matters or questions arising under the Trust Agreement that are not
inconsistent with any other provisions of the Trust Agreement, provided that the
action will not, as evidenced by an opinion of counsel, adversely affect the
interests of any Certificateholders of that Series in any material respect. The
Trust Agreement for each Series may also be amended by the Trustee and the
Depositor with the consent of the Holders of Notes or Certificates, as
applicable, evidencing Percentage Interests aggregating not less than 66 2/3% of
each Class of the Notes or Certificates, as applicable, of the Series affected
by the amendment for the purpose of adding any provisions to or changing in any
manner or eliminating any of the provisions of the Agreement or modifying in any
manner the rights of Certificateholders of that Series; provided, however, that
no amendment may (1) reduce in any manner the amount of, or delay the timing of,
or change the manner in which payments received on Mortgage Certificates are
required to be distributed in respect of any Certificate, without the consent of
the Holder of the Certificate or (2) reduce the aforesaid percentage of Notes or
Certificates, as applicable, the Holders of which are required to consent to any
amendment, without the consent of the Holders of all Notes or Certificates, as
applicable, of the Series then outstanding.
TERMINATION
Except as otherwise provided in the related prospectus supplement, the
obligations created by the Pooling and Servicing Agreement or Sale and Servicing
Agreement, as applicable, for a Series of Notes or Certificates, as applicable,
will terminate upon the earlier of
(1) the repurchase of all Mortgage Loans or Contracts and all property
acquired by foreclosure of the Mortgage Loan or Contract and
(2) the later of
(a) the maturity or other liquidation of the last Mortgage Loan
or Contract subject to the obligations and the disposition of all
property acquired upon foreclosure of the Mortgage Loan or Contract
and
(b) the payment to the Securityholders of all amounts held by the
Master Servicer and required to be paid to them pursuant to the
applicable Agreement.
The obligations created by the Trust Agreement for a Series of Certificates will
terminate upon the distribution to Certificateholders of all amounts required to
be distributed to them pursuant to the Trust Agreement. In no event, however,
will the Trust created by either the Agreement continue beyond the expiration of
21 years from the death of the last survivor of specific persons identified in
it. For each Series of Notes or Certificates, as applicable, the Master Servicer
will give written notice of termination of the applicable Agreement of each
Securityholder, and the final distribution will be made only upon surrender and
cancellation of the Notes or Certificates, as applicable, at an office or agency
specified in the notice of termination.
If so provided in the related prospectus supplement, the Pooling and
Servicing Agreement or Sale and Servicing Agreement for each Series of Notes or
Certificates, as applicable, will permit, but not
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require, the Depositor or another person specified in the prospectus supplement
to repurchase from the Trust Fund for the Series all remaining Mortgage Loans or
Contracts subject to the applicable Agreement at a price specified in the
related prospectus supplement. In the event that the Depositor elects to treat
the related Trust Fund as a REMIC under the Code, the repurchase will be
effected in compliance with the requirements of Section 860F(a)(4) of the Code,
in order to constitute a "qualified liquidation" under the Code. The exercise of
the right will effect early retirement of the Notes or Certificates, as
applicable, of that Series, but the right so to repurchase may be effected only
on or after the aggregate principal balance of the Mortgage Loans or Contracts
for the Series at the time of repurchase is less than a specified percentage of
the aggregate principal balance at the Cut-off Date for the Series, or on or
after the date set forth in the related prospectus supplement.
The Indenture will be discharged with respect to a Series of Notes, except
with respect to the continuing rights specified in the Indenture, upon the
delivery to the Indenture Trustee for cancellation of all the Notes of the
Series or, with some limitations, upon deposit with the Indenture Trustee of
funds sufficient for the payment in full of all the Notes of the Series.
CERTAIN INFORMATION REGARDING THE SECURITIES
BOOK-ENTRY REGISTRATION
If so specified in the related prospectus supplement, DTC will act as
securities company for each class of notes or certificates offered by this
prospectus. Each class of notes or certificates, as applicable, initially will
be represented by one or more certificates registered in the name of Cede, the
nominee of DTC. As the nominee of DTC, it is anticipated that the only
"noteholder" and/or "certificateholder" with respect to a series of notes or
certificates, as applicable, will be Cede. Beneficial owners of the notes or
certificates, as applicable ("Security Owners") will not be recognized as
"noteholders" by the related indenture trustee, as the term is used in each
Indenture, or as "certificateholders" by the related trustee, as the term is
used in each Trust Agreement or Pooling and Servicing Agreement, as applicable,
and Security Owners will be permitted to exercise the rights of noteholders or
certificateholders only indirectly through DTC and its participating members
("Participants").
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 Uniform Commercial Code (the "UCC") in effect in the
State of New York, and a "clearing agency" registered pursuant to the provisions
of Section 17A of the Exchange Act. DTC was created to hold securities for the
Participants and to facilitate the clearance and settlement of securities
transactions between Participants through electronic book-entries, thus
eliminating the need for physical movement of certificates. Participants include
securities brokers and dealers, banks, trust companies and clearing
corporations. Indirect access to the DTC system also is available to banks,
brokers, dealers and trust companies that clear through or maintain a custodial
relationship with a Participant, either directly or indirectly (the "Indirect
Participants").
Security Owners that are not Participants or Indirect Participants but
desire to purchase, sell or otherwise transfer ownership of, or an interest in,
the securities may do so only through Participants and Indirect Participants. In
addition, all Security Owners will receive all distributions of principal and
interest from the related indenture trustee or the related trustee, as
applicable, through Participants or Indirect Participants. Under a book-entry
format, Security Owners may experience some delay in their receipt of payments,
since these payments will be forwarded by the applicable trustee or indenture
trustee to DTC's nominee. DTC will then forward the payments to the
Participants, which will then forward them to Indirect Participants or Security
Owners.
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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 securities and to
receive and transmit distributions of principal of and interest on the
securities. Participants and Indirect Participants with which Security Owners
have accounts with respect to the securities similarly are required to make
book-entry transfers and to receive and transmit the payments on behalf of their
respective Security Owners. Accordingly, although Security Owners will not
possess physical certificates representing the securities, the Rules provide a
mechanism by which Participants and Indirect Participants will receive payments
and transfer or exchange interests, directly or indirectly, on behalf of
Security Owners.
Because DTC can act only on behalf of Participants, who in turn may act on
behalf of Indirect Participants, the ability of a Security Owner to pledge
securities to persons or entities that do not participate in the DTC system, or
otherwise take actions with respect to the securities, may be limited due to the
lack of a physical certificate representing the securities.
DTC has advised the company that it will take any action permitted to be
taken by a Security Owner under the Indenture, Trust Agreement or Pooling and
Servicing Agreement, as applicable, only at the direction of one or more
Participants to whose account with DTC the securities are credited. DTC may take
conflicting actions with respect to other undivided interests to the extent that
these actions are taken on behalf of Participants whose holdings include the
undivided interests.
Clearstream Banking, societe anonyme, 67 Bd Grande-Duchesse Charlotte,
L-2967 Luxembourg ("Clearstream, Luxembourg"), was incorporated in 1970 as
"Cedel S.A.", a company with limited liability under Luxembourg law (a societe
anonyme). Cedel S.A. subsequently changed its name to Cedelbank. On January 10,
2000, Cedelbank's parent company, Cedel International, societe anonyme ("CI")
merged its clearing, settlement and custody business with that of Deutsche Borse
Clearing AG ("DBC"). The merger involved the transfer by CI of substantially all
of its assets and liabilities (including its shares in CB) to a new Luxembourg
company, New Cedel International, societe anonyme ("New CI"), which is 50% owned
by CI and 50% owned by DBC's parent company Deutsche Borse AG. The shareholders
of these two entities are banks, securities dealers and financial institutions.
Cedel International currently has 92 shareholders, including U.S. financial
institutions or their subsidiaries. No single entity may own more than 5 percent
of Cedel International's stock.
Further to the merger, the Board of Directors of New Cedel International
decided to rename the companies in the group in order to give them a cohesive
brand name. The new brand name that was chosen is "Clearstream". With effect
from January 14, 2000 New CI has been renamed "Clearstream International,
societe anonyme". On January 18, 2000, Cedelbank was renamed "Clearstream
Banking, societe anonyme", and Cedel Global Services was renamed "Clearstream
Services, societe anonyme".
On January 17, 2000 DBC was renamed "Clearstream Banking AG". This means
that there are now two entities in the corporate group headed by Clearstream
International which share the name "Clearstream Banking", the entity previously
named "Cedelbank" and the entity previously named "Deutsche Brse Clearing AG".
Clearstream, Luxembourg holds securities for its customers ("Clearstream,
Luxembourg Participants") and facilitates the clearance and settlement of
securities transactions between Clearstream, Luxembourg customers through
electronic book-entry changes in accounts of Clearstream, Luxembourg customers,
thereby eliminating the need for physical movement of certificates. Transactions
may be settled by Clearstream, Luxembourg in any of 36 currencies, including
United States Dollars. Clearstream, Luxembourg provides to its customers, among
other things, services for safekeeping, administration, clearance and settlement
of internationally traded securities and securities lending and
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borrowing. Clearstream, Luxembourg also deals with domestic securities markets
in over 30 countries through established depository and custodial relationships.
Clearstream, Luxembourg is registered as a bank in Luxembourg, and as such is
subject to regulation by the Commission de Surveillance du Secteur Financier,
"CSSF", which supervises Luxembourg banks. Clearstream, Luxembourg's customers
are world-wide financial institutions including underwriters, securities brokers
and dealers, banks, trust companies and clearing corporations. Clearstream,
Luxembourg's U.S. customers are limited to securities brokers and dealers, and
banks. Currently, Clearstream, Luxembourg has approximately 2,000 customers
located in over 80 countries, including all major European countries, Canada,
and the United States. Indirect access to Clearstream, Luxembourg is available
to other institutions that clear through or maintain a custodial relationship
with an account holder of Clearstream, Luxembourg. Clearstream, Luxembourg has
established an electronic bridge with Morgan Guaranty Trust Company of New York
as the Operator of the Euroclear System (MGT/EOC) in Brussels to facilitate
settlement of trades between Clearstream, Luxembourg and MGT/EOC.
Except as required by law, none of Credit Suisse First Boston Corporation,
the company, the related seller, the related servicer, or related indenture
trustee, if any, or the related trustee will have any liability for any aspect
of the records relating to or payments made on account of beneficial ownership
interests of securities of any series held by DTC's nominee, or for maintaining,
supervising or reviewing any records relating to the beneficial ownership
interests.
CREDIT SUPPORT
Credit support for a Series of Notes or Certificates, as applicable, may be
provided by one or more Letters of Credit, the issuance of Subordinated Classes
or Subclasses of Notes or Certificates, as applicable, which may, if so
specified in the related prospectus supplement, be issued in notional amounts,
the issuance of subordinated Classes or Subclasses of Notes, the provision for
shifting interest credit enhancement, the establishment of a Reserve Fund, the
method of Alternative Credit Support specified in the applicable prospectus
supplement, or any combination of the foregoing, in addition to, or in lieu of,
the insurance arrangements set forth below under "Description of Insurance." The
amount and method of credit support will be set forth in the prospectus
supplement with respect to a Series of Notes or Certificates, as applicable.
LETTERS OF CREDIT
The Letters of Credit, if any, with respect to a Series of Notes or
Certificates, as applicable, will be issued by the bank or financial institution
specified in the related prospectus supplement (the "L/C Bank"). The maximum
obligation of the L/C Bank under the Letter of Credit will be to honor requests
for payment in an aggregate fixed dollar amount, net of unreimbursed payments,
equal to the percentage of the aggregate principal balance on the related
Cut-off Date of the Mortgage Loans or Contracts evidenced by each Series (the
"L/C Percentage") specified in the prospectus supplement for the Series. The
duration of coverage and the amount and frequency of any reduction in coverage
provided by the Letter of Credit with respect to a Series of Notes or
Certificates, as applicable, will be in compliance with the requirements
established by the Rating Agency rating the Series and will be set forth in the
prospectus supplement relating to the Series of Notes or Certificates, as
applicable. The amount available under the Letter of Credit in all cases shall
be reduced to the extent of the unreimbursed payments under the Letter of
Credit. The obligations of the L/C Bank under the Letter of Credit for each
Series of Notes or Certificates, as applicable, will expire a specified number
of days after the latest of the scheduled final maturity dates of the Mortgage
Loans or Contracts in the related Mortgage Pool or Contract Pool or the
repurchase of all Mortgage Loans or Contracts in the Mortgage Pool or Contract
Pool in the circumstances specified above. See "Description of the
Securities--Termination."
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Unless otherwise specified in the applicable prospectus supplement, under
the applicable Agreement and/or Servicing Agreement, the Master Servicer will be
required not later than three business days prior to each Distribution Date to
determine whether a payment under the Letter of Credit will be necessary on the
Distribution Date and will, no later than the third business day prior to the
Distribution Date, advise the L/C Bank and the Trustee of its determination,
setting forth the amount of any required payment. On the Distribution Date, the
L/C Bank will be required to honor the Trustee's request for payment in an
amount equal to the lesser of (A) the remaining amount available under the
Letter of Credit and (B) the outstanding principal balances of any Liquidating
Loans to be assigned on the Distribution Date, together with accrued and unpaid
interest on the Liquidating Loans at the related Mortgage Rate or APR to the
related Due Date. The proceeds of payments under the Letter of Credit will be
deposited into the Certificate Account and will be distributed to
Securityholders, in the manner specified in the related prospectus supplement,
on the Distribution Date, except to the extent of any unreimbursed Advances,
servicing compensation due to the Servicers and the Master Servicer and other
amounts payable to the Depositor or the person or entity named in the applicable
prospectus supplement. Unless otherwise provided in the related prospectus
supplement, the term "Liquidating Loan" means:
(1) each Mortgage Loan with respect to which foreclosure proceedings have
been commenced, and the Mortgagor's right of reinstatement has
expired,
(2) each Mortgage Loan with respect to which the Servicer or the Master
Servicer has agreed to accept a deed to the property in lieu of
foreclosure,
(3) each Cooperative Loan as to which the shares of the related
Cooperative and the related proprietary lease or occupancy agreement
have been sold or offered for sale or
(4) each Contract with respect to which repossession proceedings have been
commenced.
If at any time the L/C Bank makes a payment in the amount of the full
outstanding principal balance and accrued interest on a Liquidating Loan, it
will be entitled to receive an assignment by the Trustee of the Liquidating
Loan, and the L/C Bank will then own the Liquidating Loan free of any further
obligation to the Trustee or the Securityholders with respect to the Liquidating
Loan. Payments made to the Certificate Account by the L/C Bank under the Letter
of Credit with respect to a Liquidating Loan will be reimbursed to the L/C Bank
only from the proceeds, net of liquidation costs, of the Liquidating Loan. The
amount available under the Letter of Credit will be increased to the extent it
is reimbursed for the payments.
To the extent the proceeds of liquidation of a Liquidating Loan acquired by
the L/C Bank in the manner described in the preceding paragraph exceed the
amount of payments made with respect to the Liquidating Loan, the L/C Bank will
be entitled to retain the proceeds as additional compensation for issuance of
the Letter of Credit.
Prospective purchasers of Notes or Certificates, as applicable, of a Series
with respect to which credit support is provided by a Letter of Credit must look
to the credit of the L/C Bank, to the extent of its obligations under the Letter
of Credit, in the event of default by Mortgagors or Obligors. If the amount
available under the Letter of Credit is exhausted, or the L/C Bank becomes
insolvent, and amounts in the Reserve Fund, if any, with respect to the Series
are insufficient to pay the entire amount of the loss and still be maintained at
the Required Reserve, the Securityholders, in the priority specified in the
related prospectus supplement, will subsequently bear all risks of loss
resulting from default by Mortgagors or Obligors, including losses not covered
by insurance or Alternative Credit Support, and must look primarily to the value
of the properties securing defaulted Mortgage Loans or Contracts for recovery of
the outstanding principal and unpaid interest.
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If so specified in the related prospectus supplement, the Reserve Fund may
be created by the deposit, in escrow, by the Depositor, of a separate pool of
Mortgage Loans or Contracts (the "Subordinated Pool"), with the aggregate
principal balance specified in the related prospectus supplement, or by the
deposit of cash in the amount specified in the related prospectus supplement
(the "Initial Deposit"). The Reserve Fund will be funded by the retention of
specified distributions on the Trust Assets of the related Mortgage Pool or
Contract Pool, and/or on the mortgage loans, cooperative loans or Contracts in
the Subordinated Pool, until the Reserve Fund, without taking into account the
amount of any Initial Deposit, except as otherwise provided in the related
prospectus supplement, reaches an amount (the "Required Reserve") set forth in
the related prospectus supplement. Subsequently, specified distributions on the
Trust Assets of the related Mortgage Pool or Contract Pool, and/or on the
Mortgage Loans or Contracts in the Subordinated Pool, will be retained to the
extent necessary to maintain the Reserve Fund, without, except as otherwise
provided in the related prospectus supplement, taking into account the amount of
any Initial Deposit, at the related Required Reserve.
In the event that a Subordinated Class or Subclass of a Series of Notes or
Certificates, as applicable, is issued with a notional amount, the coverage
provided by the Letter of Credit with respect to the Series, and the terms and
conditions of the coverage, will be set forth in the related prospectus
supplement.
SUBORDINATED SECURITIES
To the extent specified in the prospectus supplement with respect to a
Series of Notes or Certificates, as applicable, credit support may be provided
by the subordination of the rights of the holders of one or more Classes or
Subclasses of Notes or Certificates, as applicable, to receive distributions
with respect to the Mortgage Loans or Mortgage Certificates in the Mortgage Pool
or Contracts in the Contract Pool underlying the Series, or with respect to a
Subordinated Pool of mortgage loans or contracts, to the rights of the Senior
Securityholders or holders of one or more Classes or Subclasses of Subordinated
Notes or Subordinated Certificates, as applicable, of the Series to receive
distributions, to the extent of the applicable Subordinated Amount or as
otherwise specified in the related prospectus supplement. In this case, credit
support may also be provided by the establishment of a Reserve Fund, as
described below. Except as otherwise provided in the related prospectus
supplement, the Subordinated Amount, as described below, will be reduced by an
amount equal to Aggregate Losses. Aggregate Losses will be defined in the
related Agreement for any given period as the aggregate amount of delinquencies,
losses and other deficiencies in the amounts due to the holders of the Notes or
Certificates, as applicable, of one or more Classes or Subclasses of the Series
paid or borne by the holders of one or more Classes or Subclasses of
Subordinated Notes or Subordinated Certificates, as applicable, of the Series
("payment deficiencies"), but excluding any payments of interest on any amounts
originally due to the holders of the Notes or Certificates, as applicable, of a
Class or Subclass to which the applicable Class or Subclass of Subordinated
Notes or Subordinated Certificates, as applicable, are subordinated on a
previous Distribution Date, but not paid as due, whether by way of withdrawal
from the Reserve Fund, including, prior to the time that the Subordinated Amount
is reduced to zero, any withdrawal of amounts attributable to the Initial
Deposit, if any, reduction in amounts otherwise distributable to the
Subordinated Securityholders on any Distribution Date or otherwise, less the
aggregate amount of previous payment deficiencies recovered by the related Trust
Fund during any period in respect of the Mortgage Loans or Contracts giving rise
to previous payment deficiencies, including, without limitation, recoveries
resulting from the receipt of delinquent principal and/or interest payments,
Liquidation Proceeds or Insurance Proceeds, net, in each case, of servicing
compensation, foreclosure costs and other servicing costs, expenses and
unreimbursed Advances relating to the Mortgage Loans or Contracts. The
prospectus supplement for each Series of Notes or Certificates, as applicable,
with respect to which credit support will be provided by one or more Classes or
Subclasses of Subordinated Notes or Subordinated Certificates, as applicable,
will set forth the Subordinated Amount for the Series and/or the
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manner by which one or more Classes or Subclasses of Notes or Certificates, as
applicable, may be subordinated to other Classes or Subclasses or Notes or
Certificates, as applicable. If specified in the related prospectus supplement,
the Subordinated Amount will decline over time in accordance with a schedule
which will also be set forth in the related prospectus supplement.
In addition, if so specified in the related prospectus supplement, if a
Series of Notes or Certificates, as applicable, includes Notes, one more Classes
or Subclasses of Notes may be subordinated to another Class or Subclasses of
Notes and may be entitled to receive disproportionate amounts of distributions
in respect of principal and all the Certificates of the Series will be
subordinated to all the Notes.
SHIFTING INTEREST
If specified in the prospectus supplement for a Series of Notes or
Certificates, as applicable, for which credit enhancement is provided by
shifting interest as described in this prospectus, the rights of the holders of
the Subordinated Notes or Subordinated Certificates, as applicable, of a Series
to receive distributions with respect to the Mortgage Loans, Mortgage
Certificates or Contracts in the related Trust Fund or Subsidiary Trust will be
subordinated to the right of the holders of the Senior Notes or Senior
Certificates, as applicable, of the same Series to the extent described in the
related prospectus supplement. This subordination feature is intended to enhance
the likelihood of regular receipt by holders of Senior Notes or Senior
Certificates, as applicable, of the full amount of scheduled monthly payments of
principal and interest due them and to provide limited protection to the holders
of the Senior Notes or Senior Certificates, as applicable, against losses due to
mortgagor defaults.
The protection afforded to the holders of Senior Notes or Senior
Certificates, as applicable, of a Series by the shifting interest subordination
feature will be effected by distributing to the holders of the Senior Notes or
Senior Certificates, as applicable, a disproportionately greater percentage (the
"Senior Prepayment Percentage") of Principal Prepayments. The initial Senior
Prepayment Percentage will be the percentage specified in the related prospectus
supplement and will decrease in accordance with the schedule and subject to the
conditions set forth in the prospectus supplement. This disproportionate
distribution of Principal Prepayments will have the effect of accelerating the
amortization of the Senior Notes or Senior Certificates, as applicable, while
increasing the respective interest of the Subordinated Notes or Subordinated
Certificates, as applicable, in the Mortgage Pool or Contract Pool. Increasing
the respective interest of the Subordinated Notes or Subordinated Certificates,
as applicable, relative to that of the Senior Notes or Senior Certificates, as
applicable, is intended to preserve the availability of the benefits of the
subordination provided by the Subordinated Notes or Subordinated Certificates,
as applicable.
SWAP AGREEMENT
If so specified in the prospectus supplement relating to a Series of Notes
or Certificates, as applicable, the related Trust will enter into or obtain an
assignment of a swap agreement or other similar agreement pursuant to which the
trust will have the right to receive particular payments of interest, or other
payments, as set forth or determined as described in the agreement or
agreements. The prospectus supplement relating to a Series of Notes or
Certificates, as applicable, having the benefit of an interest rate or currency
rate swap, cap or floor agreement will describe the material terms of the
agreement and the particular risks associated with the interest rate swap
feature, including market and credit risk, the effect of counterparty defaults
and other risks, if any, addressed by the rating. The prospectus supplement
relating to the Series of Notes or Certificates, as applicable, also will set
forth information relating to the corporate status, ownership and credit quality
of the counterparty or counterparties to the swap agreement in accordance with
applicable rules and regulations of the Commission.
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RESERVE FUND
If so specified in the related prospectus supplement, credit support with
respect to one or more Classes or Subclasses of Notes or Certificates, as
applicable, of a Series may be provided by the establishment and maintenance
with the Trustee for the Series of Notes or Certificates, as applicable, in
trust, of a Reserve Fund for the Series. Unless otherwise specified in the
applicable prospectus supplement, the Reserve Fund for a Series will not be
included in the Trust Fund for the Series. The Reserve Fund for each Series will
be created by the Depositor and shall be funded by the retention by the Master
Servicer of particular payments on the Mortgage Loans or Contracts, by the
deposit with the Trustee, in escrow, by the Depositor of a Subordinated Pool of
mortgage loans or Contracts with the aggregate principal balance, as of the
related Cut-off Date, set forth in the related prospectus supplement, by any
combination of the foregoing, or in another manner specified in the related
prospectus supplement. Except as otherwise provided in the related prospectus
supplement, following the initial issuance of the Notes or Certificates, as
applicable, of a Series and until the balance of the Reserve Fund first equals
or exceeds the Required Reserve, the Master Servicer will retain specified
distributions on the related Mortgage Loans or Contracts and/or on the Contracts
in the Subordinated Pool otherwise distributable to the holders of the
applicable Class or Subclasses of Subordinated Notes or Subordinated
Certificates, as applicable, and deposit the amounts in the Reserve Fund. After
the amounts in the Reserve Fund for a Series first equal or exceed the
applicable Required Reserve, the Master Servicer will retain the distributions
and deposit so much of the amounts in the Reserve Fund as may be necessary,
after the application of distributions to amounts due and unpaid on the Notes or
Certificates, as applicable, or on the Notes or Certificates, as applicable, of
the Series to which the applicable Class or Subclass of Subordinated Notes or
Subordinated Certificates, as applicable, are subordinated and the reimbursement
of unreimbursed Advances and liquidation expenses, to maintain the Reserve Fund
at the Required Reserve. Except as otherwise provided in the related prospectus
supplement, the balance in the Reserve Fund in excess of the Required Reserve
shall be paid to the applicable Class or Subclass of Subordinated Notes or
Subordinated Certificates, as applicable, or to another specified person or
entity, as set forth in the related prospectus supplement, and shall
subsequently be unavailable for future distribution to Certificateholders of
either Class. The prospectus supplement for each Series will set forth the
amount of the Required Reserve applicable from time to time. The Required
Reserve may decline over time in accordance with a schedule which will also be
set forth in the related prospectus supplement.
Except as otherwise provided in the related prospectus supplement, amounts
held in the Reserve Fund for a Series from time to time will continue to be the
property of the Subordinated Securityholders of the Classes or Subclasses
specified in the related prospectus supplement until withdrawn from the Reserve
Fund and transferred to the Certificate Account as described below. Except as
otherwise provided in the related prospectus supplement, if on any Distribution
Date the amount in the Certificate Account available to be applied to
distributions on the applicable Senior Notes or Senior Certificates, as
applicable, of the Series, after giving effect to any Advances made by the
Servicers or the Master Servicer on the Distribution Date, is less than the
amount required to be distributed to the Senior Securityholders (the "Required
Distribution") on the Distribution Date, the Master Servicer will withdraw from
the Reserve Fund and deposit into the Certificate Account the lesser of (1) the
entire amount on deposit in the Reserve Fund available for distribution to the
Senior Securityholders, which amount will not in any event exceed the Required
Reserve, or (2) the amount necessary to increase the funds in the Certificate
Account eligible for distribution to the Senior Securityholders on the
Distribution Date to the Required Distribution; provided, however, that unless
specified in the related prospectus supplement no amount representing investment
earnings on amounts held in the Reserve Fund be transferred into the Certificate
Account or otherwise used in any manner for the benefit of the Senior
Securityholders. If so specified in the applicable prospectus supplement, the
balance, if any, in the Reserve Fund in excess of the Required Reserve shall be
released to the applicable Subordinated Securityholders. Unless otherwise
specified in the related prospectus supplement, whenever the Reserve Fund is
less than the Required Reserve, holders
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of the Subordinated Notes or Subordinated Certificates, as applicable, of the
applicable Class or Subclass will not receive any distributions with respect to
the Mortgage Loans, Mortgage Certificates or Contracts other than amounts
attributable to interest on the Mortgage Loans, Mortgage Certificates or
Contracts after the initial Required Reserve has been attained and amounts
attributable to any income resulting from investment of the Reserve Fund as
described below. Except as otherwise provided in the related prospectus
supplement, whether or not the amount of the Reserve Fund exceeds the Required
Reserve on any Distribution Date, the holders of the Subordinated Notes or
Subordinated Certificates, as applicable, of the applicable Class or Subclass
are entitled to receive from the Certificate Account their share of the proceeds
of any Mortgage Loan, Mortgage Certificates or Contract, or any property
acquired for them, repurchased by reason of defective documentation or the
breach of a representation or warranty pursuant to the Pooling and Servicing
Agreement. Except as otherwise provided in the related prospectus supplement,
amounts in the Reserve Fund shall be applied in the following order:
(1) to the reimbursement of Advances determined by the Master Servicer and
the Servicers to be otherwise unrecoverable, other than Advances of
interest in connection with prepayments in full, repurchases and
liquidations, and the reimbursement of liquidation expenses incurred
by the Servicers and the Master Servicer if sufficient funds for
reimbursement are not otherwise available in the related Servicing
Accounts and Certificate Account;
(2) to the payment to the holders of the applicable Senior Notes or Senior
Certificates, as applicable, of the Series of amounts distributable to
them on the related Distribution Date in respect of scheduled payments
of principal and interest due on the related Due Date to the extent
that sufficient funds in the Certificate Account are not available;
and
(3) to the payment to the holders of the Senior Notes or Senior
Certificates, as applicable, of the Series of the principal balance or
purchase price, as applicable, of Mortgage Loans or Contracts
repurchased, liquidated or foreclosed during the period ending on the
day prior to the Due Date to which the distribution relates and
interest on these Mortgage Loans or Contracts at the related Mortgage
Rate or APR, as applicable, to the extent that sufficient funds in the
Certificate Account are not available.
Except as otherwise provided in the related prospectus supplement, amounts
in the Reserve Fund in excess of the Required Reserve, including any investment
income on amounts in the Reserve Fund, as set forth below, shall then be
released to the holders of the Subordinated Notes or Subordinated Certificates,
as applicable, or to another person specified in the applicable prospectus
supplement, as set forth above.
Funds in the Reserve Fund for a Series shall be invested as provided in the
related Agreement and/or Indenture in specific types of eligible investments.
The earnings on these investments will be withdrawn and paid to the holders of
the applicable Class or Subclass of Subordinated Notes or Subordinated
Certificates, as applicable, in accordance with their respective interests in
the Reserve Fund in the priority specified in the related prospectus supplement.
Unless otherwise specified in the related prospectus supplement, investment
income in the Reserve Fund is not available for distribution to the holders of
the Senior Notes or Senior Certificates, as applicable, of the Series or
otherwise subject to any claims or rights of the holders of the applicable Class
or Subclass of Senior Notes or Senior Certificates, as applicable. Eligible
investments for monies deposited in the Reserve Fund will be specified in the
applicable Agreement and/or Indenture for a Series of Notes or Certificates, as
applicable, for which a Reserve Fund is established and in some instances will
be limited to investments acceptable to the Rating Agency rating the Notes or
Certificates, as applicable, of the Series from time to time as being consistent
with its outstanding rating of the Notes or Certificates, as applicable. These
eligible investments will be
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limited, however, to obligations or securities that mature at various time
periods up to 30 days according to a schedule in the applicable Agreement based
on the current balance of the Reserve Fund at the time of the investment or the
contractual commitment providing for the investment.
The time necessary for the Reserve Fund of a Series to reach and maintain
the applicable Required Reserve at any time after the initial issuance of the
Notes or Certificates, as applicable, of the Series and the availability of
amounts in the Reserve Fund for distributions on the Notes or Certificates, as
applicable, will be affected by the delinquency, foreclosure and prepayment
experience of the Mortgage Loans or Contracts in the related Trust Fund and/or
in the Subordinated Pool and therefore cannot be accurately predicted.
SECURITY GUARANTEE INSURANCE
If so specified in the related prospectus supplement, Security Guarantee
Insurance, if any, with respect to a Series of Notes or Certificates, as
applicable, may be provided by one or more insurance companies. The Security
Guarantee Insurance will guarantee, with respect to one or more Classes of Notes
or Certificates, as applicable, of the related Series, timely distributions of
interest and full distributions of principal on the basis of a schedule of
principal distributions set forth in or determined in the manner specified in
the related prospectus supplement. If so specified, in the related prospectus
supplement, the Security Guarantee Insurance will also guarantee against any
payment made to a Series of Notes or Certificates, as applicable, which is
subsequently recovered as a "voidable preference" payment under the Bankruptcy
Code. A copy of the Security Guarantee Insurance for a Series, if any, will be
filed with the Commission as an exhibit to a Current Report on Form 8-K to be
filed with the Commission within 15 days of issuance of the Notes or
Certificates, as applicable, of the related Series.
PERFORMANCE BOND
If so specified in the related prospectus supplement, the Master Servicer
may be required to obtain a Performance Bond that would provide a guarantee of
the performance by the Master Servicer of one or more of its obligations under
the applicable Agreement and/or Servicing Agreement, including its obligation to
make Advances and its obligation to repurchase Mortgage Loans or Contracts in
the event of a breach by the Master Servicer of a representation or warranty
contained in the applicable Agreement. In the event that the outstanding credit
rating of the obligor of the Performance Bond is lowered by the Rating Agency,
with the result that the outstanding rating on any Class or Subclass of Notes or
Certificates, as applicable, would be reduced by the Rating Agency, the Master
Servicer will be required to secure a substitute Performance Bond issued by an
entity with a rating sufficient to maintain the outstanding rating on the Notes
or Certificates, as applicable, or to deposit and maintain with the Trustee cash
in the amount specified in the applicable prospectus supplement.
DESCRIPTION OF INSURANCE
To the extent that the applicable prospectus supplement does not expressly
provide for a form of credit support specified above or for Alternative Credit
Support in lieu of some or all of the insurance mentioned below, the following
paragraphs on insurance shall apply with respect to the Mortgage Loans included
in the related Trust Fund. To the extent specified in the related prospectus
supplement, each Manufactured Home that secures a Contract will be covered by a
standard hazard insurance policy and other insurance policies to the extent
described in the related prospectus supplement. Any material changes in the
insurance from the description that follows or the description of any
Alternative Credit Support will be set forth in the applicable prospectus
supplement.
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PRIMARY MORTGAGE INSURANCE POLICIES
To the extent specified in the related prospectus supplement, each
Servicing Agreement will require the Servicer to cause a Primary Mortgage
Insurance Policy to be maintained in full force and effect with respect to each
Mortgage Loan that is secured by a Single Family Property covered by the
Servicing Agreement requiring the insurance and to act on behalf of the Insured
with respect to all actions required to be taken by the Insured under each
Primary Mortgage Insurance Policy. Any primary mortgage insurance or primary
credit insurance policies relating to the Contracts underlying a Series of Notes
or Certificates, as applicable, will be described in the related prospectus
supplement.
Unless otherwise specified in the related prospectus supplement, the amount
of a claim for benefits under a Primary Mortgage Insurance Policy covering a
Mortgage Loan in the related Mortgage Pool (referred to in this prospectus as
the "Loss") will consist of the insured portion of the unpaid principal amount
of the covered Mortgage Loan, as described in this prospectus, and accrued and
unpaid interest on the Mortgage Loan and reimbursement of particular types of
expenses, less
o all rents or other payments collected or received by the Insured, other
than the proceeds of hazard insurance, that are derived from or in any way
related to the Mortgaged Property,
o hazard insurance proceeds in excess of the amount required to restore the
Mortgaged Property and which have not been applied to the payment of the
Mortgage Loan,
o amounts expended but not approved by the Primary Mortgage Insurer,
o claim payments previously made by the Primary Mortgage Insurer, and
o unpaid premiums.
Unless otherwise specified in the related prospectus supplement, as
conditions precedent to the filing of or payment of a claim under a Primary
Mortgage Insurance Policy covering a Mortgage Loan in the related Mortgage Pool,
the Insured will be required to, in the event of default by the Mortgagor:
(1) advance or discharge
(a) all hazard insurance premiums and
(b) as necessary and approved in advance by the Primary Mortgage
Insurer,
o real estate property taxes,
o all expenses required to preserve, repair and prevent waste
to the Mortgaged Property so as to maintain the Mortgaged
Property in at least as good a condition as existed at the
effective date of the Primary Mortgage Insurance Policy,
ordinary wear and tear excepted,
o property sales expenses,
o any outstanding liens (as defined in the Primary Mortgage
Insurance Policy) on the Mortgaged Property and
o foreclosure costs, including court costs and reasonable
attorneys' fees;
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(2) in the event of a physical loss or damage to the Mortgaged Property,
have restored and repaired the Mortgaged Property to at least as good
a condition as existed at the effective date of the Primary Mortgage
Insurance Policy, ordinary wear and tear excepted; and
(3) tender to the Primary Mortgage Insurer good and merchantable title to
and possession of the mortgaged property.
Unless otherwise specified in the related prospectus supplement, other
provisions and conditions of each Primary Mortgage Insurance Policy covering a
Mortgage Loan in the related Mortgage Pool generally will provide that:
(1) no change may be made in the terms of the Mortgage Loan without the
consent of the Primary Mortgage Insurer;
(2) written notice must be given to the Primary Mortgage Insurer within 10
days after the Insured becomes aware that a Mortgagor is delinquent in
the payment of a sum equal to the aggregate of two scheduled monthly
payments due under the Mortgage Loan or that any proceedings affecting
the Mortgagor's interest in the Mortgaged Property securing the
Mortgage Loan have commenced, and afterward the Insured must report
monthly to the Primary Mortgage Insurer the status of any the Mortgage
Loan until the Mortgage Loan is brought current, the proceedings are
terminated or a claim is filed;
(3) the Primary Mortgage Insurer will have the right to purchase the
Mortgage Loan, at any time subsequent to the 10 days' notice described
in (2) above and prior to the commencement of foreclosure proceedings,
at a price equal to the unpaid principal amount of the Mortgage Loan,
plus accrued and unpaid interest on the Mortgage Loan and reimbursable
amounts expended by the Insured for the real estate taxes and fire and
extended coverage insurance on the Mortgaged Property for a period not
exceeding 12 months, and less the sum of any claim previously paid
under the Primary Mortgage Insurance Policy and any due and unpaid
premiums with respect to the policy;
(4) the Insured must commence proceedings at the times specified in the
Primary Mortgage Insurance Policy and diligently proceed to obtain
good and merchantable title to and possession of the Mortgaged
Property;
(5) the Insured must notify the Primary Mortgage Insurer of the price
specified in (3) above at least 15 days prior to the sale of the
Mortgaged Property by foreclosure, and bid the amount unless the
Mortgage Insurer specifies a lower or higher amount; and
(6) the Insured may accept a conveyance of the Mortgaged Property in lieu
of foreclosure with written approval of the Mortgage Insurer provided
the ability of the Insured to assign specified rights to the Primary
Mortgage Insurer are not impaired by a conveyance or the specified
rights of the Primary Mortgage Insurer are not adversely affected by a
conveyance.
Unless otherwise specified in the related prospectus supplement, the
Primary Mortgage Insurer will be required to pay to the Insured either: (1) the
insured percentage of the Loss; or (2) at its option under some of the Primary
Mortgage Insurance Policies, the sum of the delinquent monthly payments plus any
advances made by the Insured, both to the date of the claim payment, and
afterward, monthly payments in the amount that would have become due under the
Mortgage Loan if it had not been discharged plus any advances made by the
Insured until the earlier of (A) the date the Mortgage Loan
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would have been discharged in full if the default had not occurred or (B) an
approved sale. Any rents or other payments collected or received by the Insured
which are derived from or are in any way related to the Mortgaged Property will
be deducted from any claim payment.
FHA INSURANCE AND VA GUARANTEES
The FHA is responsible for administering various federal programs,
including mortgage insurance, authorized under the National Housing Act, as
amended, and the United States Housing Act of 1937, as amended. Any FHA
Insurance or VA Guarantees relating to Contracts underlying a Series of Notes or
Certificates, as applicable, will be described in the related prospectus
supplement.
The insurance premiums for FHA Loans are collected by HUD approved lenders
or by the Servicers of FHA Loans and are paid to the FHA. The regulations
governing FHA single-family mortgage insurance programs provide that insurance
benefits are payable either upon foreclosure, or other acquisition of
possession, and conveyance of the mortgaged premises to HUD or upon assignment
of the defaulted FHA Loan to HUD. With respect to a defaulted FHA Loan, the
Servicer of the FHA Loan will be limited in its ability to initiate foreclosure
proceedings. When it is determined, either by the Servicer or HUD, that default
was caused by circumstances beyond the Mortgagor's control, the Servicer will be
expected to make an effort to avoid foreclosure by entering, if feasible, into
one of a number of available forms of forbearance plans with the Mortgagor. The
plans may involve the reduction or suspension of scheduled mortgage payments for
a specified period, with the payments to be made upon or before the maturity
date of the mortgage, or the recasting of payments due under the mortgage up to
or beyond the scheduled maturity date. In addition, when a default caused by
this circumstance is accompanied by other criteria, HUD may provide relief by
making payments to the Servicer of the Mortgage Loan in partial or full
satisfaction of amounts due, which payments are to be repaid by the Mortgagor to
HUD, or by accepting assignment of the Mortgage Loan from the Servicer. With
some exceptions, at least three full monthly installments must be due and unpaid
under the Mortgage Loan, and HUD must have rejected any request for relief from
the Mortgagor before the Servicer may initiate foreclosure proceedings.
HUD has the option, in most cases, to pay insurance claims in cash or in
debentures issued by HUD. Presently, claims are being paid in cash, and claims
have not been paid in debentures since 1965. HUD debentures issued in
satisfaction of FHA insurance claims bear interest at the applicable HUD
debenture interest rate. The Servicer of each FHA Loan in a Mortgage Pool will
be obligated to purchase any debenture issued in satisfaction of a defaulted FHA
Loan serviced by it for an amount equal to the principal amount of the FHA Loan.
The amount of insurance benefits generally paid by the FHA is equal to the
entire unpaid principal balance of the defaulted FHA Loan, adjusted to reimburse
the Servicer of the FHA Loan for particular costs and expenses and to deduct
specific amounts received or retained by the Servicer after default. When
entitlement to insurance benefits results from foreclosure, or other acquisition
of possession, and conveyance to HUD, the Servicer is compensated for no more
than two-thirds of its foreclosure costs, and is compensated for interest
accrued and unpaid prior to this date in general only to the extent it was
allowed pursuant to a forbearance plan approved by HUD. When entitlement to
insurance benefits results from assignment of the FHA Loan to HUD, the insurance
payment includes full compensation for interest accrued and unpaid to the
assignment date. The insurance payment itself, upon foreclosure of an FHA Loan,
bears interest from a date 30 days after the mortgagor's first uncorrected
failure to perform any obligation or make any payment due under the Mortgage
Loan and, upon assignment, from the date of assignment, to the date of payment
of the claim, in each case at the same interest rate as the applicable HUD
debenture interest rate as described above.
The maximum guarantee that may be issued by the VA under a VA Loan is
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o 50% of the principal amount of the VA Loan if the principal amount of the
Mortgage Loan is $45,000 or less,
o the lesser of $36,000 and 40% if the principal amount of the VA Loan if the
principal amount of the VA Loan is greater than $45,000 but less than or
equal to $144,000, and
o the lesser of $46,000 and 25% of the principal amount of the Mortgage Loan
if the principal amount of the Mortgage Loan is greater than $144,000.
The liability on the guarantee is reduced or increased pro rata with any
reduction or increase in the amount of indebtedness, but in no event will the
amount payable on the guarantee exceed the amount of the original guarantee. The
VA may, at its option and without regard to the guarantee, make full payment to
a mortgage holder of unsatisfied indebtedness on a Mortgage upon its assignment
to the VA.
With respect to a defaulted VA Loan, the Servicer is, absent exceptional
circumstances, authorized to announce its intention to foreclose only when the
default has continued for three months. Generally, a claim for the guarantee is
submitted after liquidation of the Mortgaged Property.
The amount payable under the guarantee will be the percentage of the VA
Loan originally guaranteed applied to indebtedness outstanding as of the
applicable date of computation specified in the VA regulations. Payments under
the guarantee will be equal to the unpaid principal amount of the VA Loan,
interest accrued on the unpaid balance of the VA Loan to the appropriate date of
computation and limited expenses of the mortgagee, but in each case only to the
extent that the amounts have not been recovered through liquidation of the
Mortgaged Property. The amount payable under the guarantee may in no event
exceed the amount of the original guarantee.
STANDARD HAZARD INSURANCE POLICIES ON MORTGAGE LOANS
Unless otherwise specified in the related prospectus supplement, any
Standard Hazard Insurance Policies covering the Mortgage Loans in a Mortgage
Pool will provide for coverage at least equal to the applicable state standard
form of fire insurance policy with extended coverage. In general, the standard
form of fire and extended coverage policy will cover physical damage to, or
destruction of, the improvements on the Mortgaged Property caused by fire,
lightning, explosion, smoke, windstorm, hail, riot, strike and civil commotion,
subject to the conditions and exclusions particularized in each policy. Because
the Standard Hazard Insurance Policies relating to the Mortgage Loans will be
underwritten by different insurers and will cover Mortgaged Properties located
in various states, the policies will not contain identical terms and conditions.
The most significant terms of the policies, however, generally will be
determined by state law and generally will be similar. Most policies typically
will not cover any physical damage resulting from the following: war,
revolution, governmental actions, floods and other water-related causes, earth
movement, including earthquakes, landslides and mudflows, nuclear reaction, wet
or dry rot, vermin, rodents, insects or domestic animals, theft and, in some
cases, vandalism. The foregoing list is merely indicative of specific kinds of
uninsured risks and is not intended to be all-inclusive.
The Standard Hazard Insurance Policies covering Mortgaged Properties
securing Mortgage Loans typically will contain a "coinsurance" clause which, in
effect, will require the insured at all times to carry insurance of a specified
percentage, generally 80% to 90%, of the full replacement value of the
dwellings, structures and other improvements on the Mortgaged Property in order
to recover the full amount of any partial loss. If the insured's coverage falls
below this specified percentage, the clause will provide that the insurer's
liability in the event of partial loss will not exceed the greater of (1) the
actual cash value, the replacement cost less physical depreciation, of the
dwellings, structures and other improvements
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damaged or destroyed or (2) the proportion of the loss, without deduction for
depreciation, as the amount of insurance carried bears to the specified
percentage of the full replacement cost of the dwellings, structures and other
improvements.
The Depositor will not require that a standard hazard or flood insurance
policy be maintained on the Cooperative Dwelling relating to any Cooperative
Loan. Generally, the cooperative corporation itself is responsible for
maintenance of hazard insurance for the property owned by the cooperative and
the tenant-stockholders of that cooperative do not maintain individual hazard
insurance policies. To the extent, however, that a Cooperative and the related
borrower on a Cooperative Loan do not maintain the insurance or do not maintain
adequate coverage or any insurance proceeds are not applied to the restoration
of damaged property, any damage to the borrower's Cooperative Dwelling or the
Cooperative's building could significantly reduce the value of the collateral
securing the Cooperative Loan to the extent not covered by other credit support.
Any losses incurred with respect to Mortgage Loans due to uninsured risks,
including earthquakes, mudflows and, with respect to Mortgaged Properties
located other than in HUD designated flood areas, floods, or insufficient hazard
insurance proceeds and any hazard losses incurred with respect to Cooperative
Loans could affect distributions to the Certificateholders.
With respect to Mortgage Loans secured by Multifamily Property, additional
insurance policies may be required with respect to the Multifamily Property; for
example, general liability insurance for bodily injury and property damage,
steam boiler coverage where a steam boiler or other pressure vessel is in
operation, and rent loss insurance to cover income losses following damage or
destruction of the Mortgaged Property. The related prospectus supplement will
specify the required types and amounts of additional insurance that may be
required in connection with Mortgage Loans secured by Multifamily Property and
will describe the general terms of the insurance and conditions to payment.
STANDARD HAZARD INSURANCE POLICIES ON THE MANUFACTURED HOMES
The applicable Pooling and Servicing Agreement or Sale and Servicing
Agreement for each Series will require the Master Servicer to cause to be
maintained with respect to each Contract one or more Standard Hazard Insurance
Policies which provide, at a minimum, the same coverage as a standard form file
and extended coverage insurance policy that is customary for manufactured
housing, issued by a company authorized to issue policies in the state in which
the Manufactured Home is located, and in an amount which is not less than the
lesser of the maximum insurable value of the Manufactured Home or the principal
balance due from the Obligor on the related Contract; provided, however, that
the amount of coverage provided by each Standard Hazard Insurance Policy shall
be sufficient to avoid the application of any co-insurance clause contained in
the policy. When a Manufactured Home's location was, at the time of origination
of the related Contract, within a federally designated flood area, the Master
Servicer also shall cause flood insurance to be maintained, which coverage shall
be at least equal to the minimum amount specified in the preceding sentence or a
lesser amount as may be available under the federal flood insurance program.
Each Standard Hazard Insurance Policy caused to be maintained by the Master
Servicer shall contain a standard loss payee clause in favor of the Master
Servicer and its successors and assigns. If any Obligor is in default in the
payment of premiums on its Standard Hazard Insurance Policy or Policies, the
Master Servicer shall pay the premiums out of its own funds, and may add
separately the premium to the Obligor's obligation as provided by the Contract,
but may not add the premium to the remaining principal balance of the Contract.
The Master Servicer may maintain, in lieu of causing individual Standard
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 Standard Hazard Insurance Policy with
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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 Standard Hazard Insurance Policies. Any
blanket policy shall be substantially in the form and in the amount carried by
the Master Servicer as of the date of the Pooling and Servicing Agreement. The
Master Servicer shall pay the premium for the policy on the basis described in
the policy and shall pay any deductible amount with respect to claims under the
policy relating to the Contracts. If the insurer shall cease to be acceptable to
the Master Servicer, the Master Servicer shall use its best reasonable efforts
to obtain from another insurer a replacement policy comparable to the policy.
If the Master Servicer shall have repossessed a Manufactured Home on behalf
of the Trustee, the Master Servicer shall either (1) maintain at its expense
hazard insurance with respect to the Manufactured Home or (2) indemnify the
Trustee against any damage to the Manufactured Home prior to resale or other
disposition.
POOL INSURANCE POLICIES
If so specified in the related prospectus supplement, the Master Servicer
will obtain a Pool Insurance Policy for a Mortgage Pool underlying Notes or
Certificates, as applicable, of the Series. The Pool Insurance Policy will be
issued by the Pool Insurer named in the applicable prospectus supplement. Any
Pool Insurance Policy for a Contract Pool underlying a Series of Notes or
Certificates, as applicable, will be described in the related prospectus
supplement. Each Pool Insurance Policy will cover any loss, subject to the
limitations described below, by reason of default to the extent the related
Mortgage Loan is not covered by any Primary Mortgage Insurance Policy, FHA
insurance or VA guarantee. The amount of the Pool Insurance Policy, if any, with
respect to a Series will be specified in the related prospectus supplement. A
Pool Insurance Policy, however, will not be a blanket policy against loss,
because claims under a Pool Insurance Policy may only be made for particular
defaulted Mortgage Loans and only upon satisfaction of particular conditions
precedent described below. The prospectus supplement will contain the financial
information regarding the Pool Insurer required by the rules and regulations of
the Commission.
Unless otherwise specified in the related prospectus supplement, the Pool
Insurance Policy will provide that as a condition precedent to the payment of
any claim the Insured will be required
(1) to advance hazard insurance premiums on the Mortgaged Property
securing the defaulted Mortgage Loan;
(2) to advance, as necessary and approved in advance by the Pool Insurer,
o real estate property taxes,
o all expenses required to preserve and repair the Mortgaged
Property, to protect the Mortgaged Property from waste, so that
the Mortgaged Property is in at least as good a condition as
existed on the date upon which coverage under the Pool Insurance
Policy with respect to the Mortgaged Property first became
effective, ordinary wear and tear excepted,
o property sales expenses,
o any outstanding liens on the Mortgaged Property and
o foreclosure costs including court costs and reasonable attorneys'
fees; and
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(3) if there has been physical loss or damage to the Mortgaged Property,
to restore the Mortgaged Property to its condition, reasonable wear
and tear excepted, as of the issue date of the Pool Insurance Policy.
It also will be a condition precedent to the payment of any claim under the Pool
Insurance Policy that the Insured maintain a Primary Mortgage Insurance Policy
that is acceptable to the Pool Insurer on all Mortgage Loans that have
Loan-to-Value Ratios at the time of origination in excess of 80%. FHA insurance
and VA guarantees will be deemed to be an acceptable Primary Mortgage Insurance
Policy under the Pool Insurance Policy. Assuming satisfaction of these
conditions, the Pool Insurer will pay to the Insured the amount of loss,
determined as follows:
(1) the amount of the unpaid principal balance of the Mortgage Loan
immediately prior to the Approved Sale (as described below) of the
Mortgaged Property,
(2) the amount of the accumulated unpaid interest on the Mortgage Loan to
the date of claim settlement at the applicable Mortgage Rate and
(3) advances as described above, less
o all rents or other payments, excluding proceeds of fire and
extended coverage insurance, collected or received by the
Insured, which are derived from or in any way related to the
Mortgaged Property,
o amounts paid under applicable fire and extended coverage policies
which are in excess of the cost of restoring and repairing the
Mortgaged Property and which have not been applied to the payment
of the Mortgage Loan,
o any claims payments previously made by the Pool Insurer on the
Mortgage Loan,
o due and unpaid premiums payable with respect to the Pool
Insurance Policy and
o all claim payments received by the Insured pursuant to any
Primary Mortgage Insurance Policy.
An "Approved Sale" is
(1) a sale of the Mortgaged Property acquired because of a default by the
Mortgagor to which the Pool Insurer has given prior approval,
(2) a foreclosure or trustee's sale of the Mortgaged Property at a price
exceeding the maximum amount specified by the Pool Insurer,
(3) the acquisition of the Mortgaged Property under the Primary Insurance
Policy by the Primary Mortgage Insurer or
(4) the acquisition of the Mortgaged Property by the Pool Insurer.
The Pool Insurer must be provided with good and merchantable title to the
Mortgaged Property as a condition precedent to the payment of any Loss. If any
Mortgaged Property securing a defaulted Mortgage Loan is damaged and the
proceeds, if any, from the related Standard Hazard Insurance Policy or the
applicable Special Hazard Insurance Policy are insufficient to restore the
Mortgaged Property to a
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condition sufficient to permit recovery under the Pool Insurance Policy, the
Master Servicer or the Servicer of the related Mortgage Loan will not be
required to expend its own funds to restore the damaged Mortgaged Property
unless it is determined (1) that the restoration will increase the proceeds to
the Securityholders of the related Series on liquidation of the Mortgage Loan,
after reimbursement of the expenses of the Master Servicer or the Servicer, as
the case may be, and (2) that the expenses will be recoverable by it through
payments under the Letter of Credit, if any, with respect to the Series,
Liquidation Proceeds, Insurance Proceeds, amounts in the Reserve Fund, if any,
or payments under any Alternative Credit Support, if any, with respect to the
Series.
No Pool Insurance Policy will insure, and many Primary Mortgage Insurance
Policies may not insure, against loss sustained by reason of a default arising
from, among other things,
(1) fraud or negligence in the origination or servicing of a Mortgage Loan,
including misrepresentation by the Mortgagor, the Unaffiliated Seller, the
Originator or other persons involved in the origination of the Mortgage Loan,
(2) the exercise by the Insured of its right to call the Mortgage Loan, or
the term of the Mortgage Loan is shorter than the amortization period and the
defaulted payment is for an amount more than twice the regular periodic payments
of principal and interest for the Mortgage Loan, or
(3) the exercise by the Insured of a "due-on-sale" clause or other similar
provision in the Mortgage Loan; provided, in either case of clause (2) or (3),
the exclusion shall not apply if the Insured offers a renewal or extension of
the Mortgage Loan or a new Mortgage Loan at the market rate in an amount not
less than the then outstanding principal balance with no decrease in the
amortization period.
A failure of coverage attributable to one of the foregoing events might result
in a breach of the Master Servicer's insurability representation described under
"Description of the Securities--Assignment of Mortgage Loans," and in this
event, subject to the limitations described, might give rise to an obligation on
the part of the Master Servicer to purchase the defaulted Mortgage Loan if the
breach materially and adversely affects the interests of the Securityholders of
the related Series and cannot be cured by the Master Servicer. Depending upon
the nature of the event, a breach of representation made by the Depositor or an
Unaffiliated Seller may also have occurred. The breach, if it materially and
adversely affects the interests of the Securityholders of the Series and cannot
be cured, would give rise to a repurchase obligation on the part of the
Unaffiliated Seller as more fully described under "The Trust Fund--Mortgage Loan
Program" and "--Representations by Unaffiliated Sellers; Repurchases" and
"Description of the Securities--Assignment of Mortgage Loans."
The original amount of coverage under the Pool Insurance Policy will be
reduced over the life of the Notes or Certificates, as applicable, of the
related Series by the aggregate dollar amount of claims paid less the aggregate
of the net amounts realized by the Pool Insurer upon disposition of all
foreclosed Mortgaged Properties covered by the policy. The amount of claims paid
will include some of the expenses incurred by the Master Servicer or by the
Servicer of the defaulted Mortgage Loan as well as accrued interest on
delinquent Mortgage Loans to the date of payment of the claim. Accordingly, if
aggregate net claims paid under a Pool Insurance Policy reach the original
policy limit, coverage under the Pool Insurance Policy will lapse and any
further losses will be borne by the holders of the Notes or Certificates, as
applicable, of the Series. In addition, unless the Master Servicer or the
related Servicer could determine that an Advance in respect of a delinquent
Mortgage Loan would be recoverable to it from the proceeds of the liquidation of
the Mortgage Loan or otherwise, neither the Servicer nor the Master Servicer
would be obligated to make an Advance respecting any this delinquency, since the
Advance would not be ultimately recoverable to it from either the Pool Insurance
Policy or from any other related source. See "Description of the
Securities--Advances."
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SPECIAL HAZARD INSURANCE POLICIES
If so specified in the related prospectus supplement, the Master Servicer
shall obtain a Special Hazard Insurance Policy for the Mortgage Pool underlying
a Series of Notes or Certificates, as applicable. Any Special Hazard Insurance
Policies for a Contract Pool underlying a Series of Notes or Certificates, as
applicable, will be described in the related prospectus supplement. The Special
Hazard Insurance Policy for the Mortgage Pool underlying the Notes or
Certificates, as applicable, of a Series will be issued by the Special Hazard
Insurer named in the applicable prospectus supplement. Each Special Hazard
Insurance Policy will, subject to the limitations described below, protect
against loss by reason of damage to Mortgaged Properties caused by particular
types of hazards, including vandalism and earthquakes and, except where the
Mortgagor is required to obtain flood insurance, floods and mudflows, not
insured against under the standard form of hazard insurance policy for the
respective states in which the Mortgaged Properties are located. See
"Description of the Securities--Maintenance of Insurance Policies" and
"--Standard Hazard Insurance." The Special Hazard Insurance Policy will not
cover losses occasioned by war, particular types of governmental actions,
nuclear reaction and other perils. Coverage under a Special Hazard Insurance
Policy will be at least equal to the amount set forth in the related prospectus
supplement.
Subject to the foregoing limitations, each Special Hazard Insurance Policy
will provide that, when there has been damage to the Mortgaged Property securing
a defaulted Mortgage Loan and to the extent the damage is not covered by the
Standard Hazard Insurance Policy, if any, maintained by the Mortgagor, the
Master Servicer or the Servicer, the Special Hazard Insurer will pay the lesser
of (1) the cost of repair or replacement of the Mortgaged Property or (2) upon
transfer of the Mortgaged Property to the Special Hazard Insurer, the unpaid
balance of the Mortgage Loan at the time of acquisition of the Mortgaged
Property by foreclosure or deed in lieu of foreclosure, plus accrued interest to
the date of claim settlement, excluding late charges and penalty interest, and
particular expenses incurred in respect of the Mortgaged Property. No claim may
be validly presented under a Special Hazard Insurance Policy unless (1) hazard
insurance on the Mortgaged Property has been kept in force and other
reimbursable protection, preservation and foreclosure expenses have been paid,
all of which must be approved in advance as necessary by the insurer, and (2)
the insured has acquired title to the Mortgaged Property as a result of default
by the Mortgagor. If the sum of the unpaid principal balance plus accrued
interest and particular expenses is paid by the Special Hazard Insurer, the
amount of further coverage under the related Special Hazard Insurance Policy
will be reduced by the amount paid less any net proceeds from the sale of the
Mortgaged Property. Any amount paid as the cost of repair of the Mortgaged
Property will further reduce coverage.
The terms of the applicable Agreement and/or Servicing Agreement will
require the Master Servicer to maintain the Special Hazard Insurance Policy in
full force and effect throughout the term of the Agreement. If a Pool Insurance
Policy is required to be maintained pursuant to the Agreement, the Special
Hazard Insurance Policy will be designed to permit full recoveries under the
Pool Insurance Policy in circumstances where recoveries would otherwise be
unavailable because Mortgaged Property has been damaged by a cause not insured
against by a Standard Hazard Insurance Policy. In this event, the Agreement
and/or Servicing Agreement will provide that, if the related Pool Insurance
Policy shall have terminated or been exhausted through payment of claims, the
Master Servicer will be under no further obligation to maintain the Special
Hazard Insurance Policy.
MORTGAGOR BANKRUPTCY BOND
In the event of a personal bankruptcy of a Mortgagor, a bankruptcy court
may establish the value of the related Mortgaged Property or Cooperative
Dwelling at an amount less than the then outstanding principal balance of the
related Mortgage Loan. The amount of the secured debt could be reduced to this
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value, and the holder of the Mortgage Loan thus would become an unsecured
creditor to the extent the outstanding principal balance of the Mortgage Loan
exceeds the value so assigned to the Mortgaged Property or Cooperative Dwelling
by the bankruptcy court. In addition, other modifications of the terms of a
Mortgage Loan can result from a bankruptcy proceeding. If so specified in the
related prospectus supplement, losses resulting from a bankruptcy proceeding
affecting the Mortgage Loans in a Mortgage Pool with respect to a Series of
Notes or Certificates, as applicable, will be covered under a Mortgagor
Bankruptcy Bond, or any other instrument that will not result in a downgrading
of the rating of the Notes or Certificates, as applicable, of a Series by the
Rating Agency that rated the Series. Any Mortgagor Bankruptcy Bond will provide
for coverage in an amount acceptable to the Rating Agency rating the Notes or
Certificates, as applicable, of the related Series, which will be set forth in
the related prospectus supplement. Subject to the terms of the Mortgagor
Bankruptcy Bond, the issuer of the Mortgagor Bankruptcy Bond may have the right
to purchase any Mortgage Loan with respect to which a payment or drawing has
been made or may be made for an amount equal to the outstanding principal amount
of the Mortgage Loan plus accrued and unpaid interest on the Mortgage Loan. The
coverage of the Mortgagor Bankruptcy Bond with respect to a Series of Notes or
Certificates, as applicable, may be reduced as long as any reduction will not
result in a reduction of the outstanding rating of the Notes or Certificates, as
applicable, of the Series by the Rating Agency rating the Series.
CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS AND CONTRACTS
The following discussion contains summaries of some of the legal aspects of
mortgage loans and manufactured housing installment or conditional sales
contracts and installment loan agreements which are general in nature. Because
these legal aspects are governed 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 or Contracts is situated. The summaries are
qualified in their entirety by reference to the applicable federal and state
laws governing the Mortgage Loans and Contracts.
THE MORTGAGE LOANS
The Mortgage Loans, other than the Cooperative Loans, comprising or
underlying the Trust Assets for a Series will be secured by either first or
second mortgages or deeds of trust, depending upon the prevailing practice in
the state in which the underlying property is located. The filing of a mortgage,
deed of trust or deed to secure debt creates a lien or title interest upon the
real property covered by the instrument and represents the security for the
repayment of an obligation that is customarily evidenced by a promissory note.
It is not prior to the lien for real estate taxes and assessments or other
charges imposed under governmental police powers. Priority with respect to the
instruments depends on their terms, the knowledge of the parties to the mortgage
and generally on the order of recording with the applicable state, county or
municipal office. There are two parties to a mortgage: the mortgagor, who is the
borrower and homeowner, and the mortgagee, who is the lender. In a mortgage
state, the mortgagor delivers to the mortgagee a note or bond evidencing the
loan and the mortgage. Although a deed of trust is similar to a mortgage, a deed
of trust has three parties: the borrower-homeowner called the trustor, similar
to a mortgagor, a lender called the beneficiary, similar to a mortgagee, and a
third-party grantee called the trustee. Under a deed of trust, the borrower
grants the property, irrevocably until the debt is paid, in trust, generally
with a power of sale, to the trustee to secure payment of the loan. The
trustee's authority under a deed of trust and the mortgagee's authority under a
mortgage are governed by the express provisions of the deed of trust or
mortgage, applicable law and, in some cases, with respect to the deed of trust,
the directions of the beneficiary.
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FORECLOSURE
Foreclosure of a mortgage is generally accomplished by judicial action.
Generally, the action is initiated by the service of legal pleadings upon all
parties having an interest of record in the real property. Delays in completion
of the foreclosure occasionally may result from difficulties in locating
necessary parties defendant. When the mortgagee's right to foreclosure is
contested, the legal proceedings necessary to resolve the issue can be
time-consuming. After the completion of a judicial foreclosure proceeding, the
court may issue a judgment of foreclosure and appoint a receiver or other
officer to conduct the sale of the property. In some states, mortgages may also
be foreclosed by advertisement, pursuant to a power of sale provided in the
mortgage. Foreclosure of a mortgage by advertisement is essentially similar to
foreclosure of a deed of trust by non-judicial power of sale.
Though a deed of trust may also be foreclosed by judicial action,
foreclosure of a deed of trust is generally accomplished by a non-judicial
trustee's sale under a specific provision in the deed of trust that authorizes
the trustee to sell the property upon a default by the borrower under the terms
of the note or deed of trust. In some states, the trustee must record a notice
of default and send a copy to the borrower-trustor and to any person who has
recorded a request for a copy of a notice of default and notice of sale. In
addition, the trustee must provide notice in some states to any other individual
having an interest in the real property, including any junior lienholders. If
the loan is not reinstated within any applicable cure period, a notice of sale
must be posted in a public place and, in most states, published for a specified
period of time in one or more newspapers. In addition, some state laws require
that a copy of the notice of sale be posted on the property and sent to all
parties having an interest of record in the property.
In some states, the borrower-trustor has the right to reinstate the loan at
any time following default until shortly before the trustee's sale. In general,
the borrower, or any other person having a junior encumbrance on the real
estate, may, during a reinstatement period, cure the default by paying the
entire amount in arrears plus the costs and expenses incurred in enforcing the
obligation. Particular state laws control the amount of foreclosure expenses and
costs, including attorneys' fees, which may be recovered by a lender.
In case of foreclosure under either a mortgage or a deed of trust, the sale
by the receiver or other designated officer, or by the trustee, is a public
sale. However, because of a number of factors, including the difficulty a
potential buyer at the sale would have in determining the exact status of title
and the fact that the physical condition of the property may have deteriorated
during the foreclosure proceedings, it is uncommon for a third party to purchase
the property at the foreclosure sale. Rather, it is common for the lender to
purchase the property from the trustee or receiver for a credit bid less than or
equal to the unpaid principal amount of the note, accrued and unpaid interest
and the expenses of foreclosure. Subsequently, subject to the right of the
borrower in some states to remain in possession during the redemption period,
the lender will assume the burdens of ownership, including obtaining hazard
insurance and making the repairs at its own expense as are necessary to render
the property suitable for sale. The lender commonly will obtain the services of
a real estate broker and pay the broker a commission in connection with the sale
of the property. Depending upon market conditions, the ultimate proceeds of the
sale of the property may not equal the lender's investment in the property. Any
loss may be reduced by the receipt of mortgage insurance proceeds.
COOPERATIVE LOANS
If specified in the prospectus supplement relating to a Series of Notes or
Certificates, as applicable, the Mortgage Loans may also contain Cooperative
Loans evidenced by promissory notes secured by security interests in shares
issued by private corporations which are entitled to be treated as housing
cooperatives under the Code and in the related proprietary leases or occupancy
agreements
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granting exclusive rights to occupy specific dwelling units in the corporations'
buildings. The security agreement will create a lien upon, or grant a title
interest in, the property that 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. This lien or
title interest is not prior to the lien for real estate taxes and assessments
and other charges imposed under governmental police powers.
A corporation that is entitled to be treated as a housing cooperative under
the Code owns all the real property or some interest sufficient to permit it to
own the building and all separate dwelling units in the real property. The
cooperative is directly responsible for property management and, in most cases,
payment of real estate taxes and hazard and liability insurance. If there is a
blanket mortgage or mortgages on the cooperative apartment building and/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, is
also responsible for meeting these mortgage or rental obligations. The interest
of the occupancy 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 (1) 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 (2) arising under its land lease, the holder of 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 the
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 agreements. A foreclosure by the holder of a blanket
mortgage could eliminate or significantly diminish the value of any collateral
held by the lender who financed an individual tenant-stockholder of cooperative
shares including, in the case of the Cooperative Loans, the collateral securing
the Cooperative Loans. Similarly, the termination of the land lease by its
holder could eliminate or significantly diminish the value of any collateral
held by the lender who financed an individual tenant-stockholder of the
cooperative shares or, in the case of the Cooperative Loans, the collateral
securing the Cooperative Loans.
Each cooperative is owned by tenant-stockholders who, through ownership of
stock or shares in the corporation, receive proprietary leases or occupancy
agreements which confer exclusive rights to occupy specific units. Generally, a
tenant-stockholder of a cooperative must make a monthly payment to the
cooperative representing the tenant-stockholder's pro rata share of the
cooperative's payments for its blanket mortgage, real property taxes,
maintenance expenses and other capital or ordinary expenses. An ownership
interest in a cooperative and accompanying occupancy rights are financed through
a cooperative share loan evidenced by a promissory note and secured by a
security interest in the occupancy agreement or proprietary lease and in the
related cooperative shares. The lender takes possession of the share certificate
and a counterpart of the proprietary lease or occupancy agreement, and a
financing statement covering the proprietary lease or occupancy agreement and
the cooperative shares is filed in the appropriate state and local offices to
perfect the lender's interest in its collateral. Subject to the limitations
discussed below, upon default of the tenant-stockholder, the lender may sue for
judgment on the promissory note, dispose of the collateral at a public or
private sale or otherwise proceed against the collateral or tenant-stockholder
as an individual as provided in the security agreement covering the assignment
of the proprietary lease or occupancy agreement and the pledge of cooperative
shares. See "--Realizing upon Cooperative Loan Security" below.
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TAX ASPECTS OF COOPERATIVE LOANS
In general, a "tenant-stockholder" (as defined in Section 216(b)(2) of the
Code) of a corporation that qualifies as a "cooperative housing corporation"
within the meaning of Section 216(b)(1) of the Code is allowed a deduction for
amounts paid or accrued within his taxable year to the corporation representing
his proportionate share of particular interest expenses and real estate taxes
allowable as a deduction under Section 216(a) of the Code to the corporation
under Sections 163 and 164 of the Code. In order for a corporation to qualify
under Section 216(b)(1) of the Code for its taxable year in which the items are
allowable as a deduction to the corporation, the section requires, among other
things, that at least 80% of the gross income of the corporation be derived from
its tenant-stockholder. By virtue of this requirement the status of a
corporation for purposes of Section 216(b)(1) of the Code must be determined on
a year-to-year basis. Consequently, there can be no assurance that cooperatives
relating to the Cooperative Loans will qualify under the section for any
particular year. In the event that a cooperative fails to qualify for one or
more years, the value of the collateral securing any related Cooperative Loans
could be significantly impaired because no deduction would be allowable to
tenant-stockholders under Section 216(a) of the Code with respect to those
years. In view of the significance of the tax benefits accorded
tenant-stockholders of a corporation that qualifies under Section 216(b)(1) of
the Code, the likelihood that a failure would be permitted to continue over a
period of years appears remote.
REALIZING UPON COOPERATIVE LOAN SECURITY
The cooperative shares and proprietary lease or occupancy agreement 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 in the proprietary lease or
occupancy agreement. The proprietary lease or occupancy agreement, even while
pledged, may be cancelled by the cooperative for failure by the
tenant-stockholder to pay rent or other obligations or charges owed by the
tenant-stockholder, including mechanics' liens against the cooperative apartment
building incurred by the tenant-stockholder. Commonly, rent and other
obligations and charges arising under a proprietary lease or occupancy agreement
which are owed to the cooperative are made liens upon the shares to which the
proprietary lease or occupancy agreement relates. In addition, the proprietary
lease or occupancy agreement generally permits the cooperative to terminate the
lease or agreement in the event the borrower defaults in the performance of
covenants under the lease or agreement. The lender and the cooperative will
typically enter into a recognition agreement which establishes the rights and
obligations of both parties in the event of a default by the tenant-stockholder
on its obligations under the proprietary lease or occupancy agreement. A default
by the tenant-stockholder under the proprietary lease or occupancy agreement
will usually constitute a default under the security agreement between the
lender and the tenant-stockholder.
The recognition agreement generally provides that, in the event that the
tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the cooperative will take no action to terminate the lease or
agreement until the lender has been provided with an opportunity to cure the
default. The recognition agreement typically provides that if the proprietary
lease or occupancy agreement is terminated, the cooperative will recognize the
lender's lien against proceeds from a sale of the cooperative apartment subject,
however, to the cooperative's right to sums due under the proprietary lease or
occupancy agreement or that have become liens on the shares relating to the
proprietary lease or occupancy agreement. The total amount owed to the
cooperative by the tenant-stockholder, which the lender generally cannot
restrict and does not monitor, could reduce the value of the collateral below
the outstanding principal balance of the cooperative loan and accrued and unpaid
interest on the cooperative loan.
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Recognition agreements also provide that in the event the lender succeeds
to the tenant-shareholder's shares and proprietary lease or occupancy agreement
as the result of realizing upon the collateral for a cooperative loan, the
lender must obtain the approval or consent of the cooperative as required by the
proprietary lease before transferring the cooperative shares or assigning the
proprietary lease. The approval or consent is usually based on the prospective
purchaser's income and net worth, among other factors, and may significantly
reduce the number of potential purchasers, which could limit the ability of the
lender to sell and realize upon the value of the collateral. Generally, the
lender is not limited in any rights it may have to dispossess the tenant-
shareholders.
The terms of the Cooperative Loans do not require either the Mortgagor or
the Cooperative to obtain title insurance of any type. Consequently, the
existence of any prior liens or other imperfections of title also may adversely
affect the marketability of the Cooperative Dwelling in the event of
foreclosure.
In New York, lenders generally realize upon the pledged shares and
proprietary lease or occupancy agreement given to secure a cooperative loan by
public sale in accordance with the provisions of Article 9 of the Uniform
Commercial Code (the "UCC") and the security agreement relating to those shares.
Article 9 of the UCC requires that a sale be conducted in a "commercially
reasonable" manner. Whether a 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 sale. Generally, a sale
conducted according to the usual practice of banks selling similar collateral
will be considered reasonably conducted.
Article 9 of the UCC provides that the proceeds of the sale will be applied
first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to reimbursement
is subject to the right of the cooperative corporation to receive sums due under
the proprietary lease or occupancy agreement. If there are proceeds remaining,
the lender must account to the tenant-stockholder for the surplus. Conversely,
if a portion of the indebtedness remains unpaid, the tenant-stockholder is
generally responsible for the deficiency. See "--Anti-Deficiency Legislation and
Other Limitations on Lenders" below.
In the case of foreclosure on a Multifamily Property that was converted
from a rental building to a building owned by a cooperative housing corporation
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 particular tenants who elected to remain in the building but not to
purchase shares in the cooperative when the building was so converted. Any
restrictions could adversely affect the number of potential purchasers for and
the value of the property.
RIGHTS OF REDEMPTION
In some states, after a sale pursuant to a deed of trust or foreclosure of
a mortgage, the borrower and particular foreclosed junior lienors are given a
statutory period in which to redeem the property from the foreclosure sale. In
other states, this right of redemption applies only to a sale following judicial
foreclosure, and not a sale pursuant to a non-judicial power of sale. In most
states where the right of redemption is available, statutory redemption may
occur upon payment of the foreclosure purchase price, accrued interest and
taxes. In some states, the right to redeem is an equitable right. The effect of
a statutory right of redemption is to diminish the ability of the lender to sell
the foreclosed property. The exercise of a right of redemption would defeat the
title of any purchaser from the lender subsequent to foreclosure or sale under a
deed of trust. Consequently, the practical effect of the redemption right is to
force the lender to retain the property and pay the expenses of ownership until
the redemption period has run.
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ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Some states have imposed statutory restrictions that limit the remedies of
a beneficiary under a deed of trust or a mortgagee under a mortgage. In some
states, statutes limit the right of the beneficiary or mortgagee to obtain a
deficiency judgment against the borrower following foreclosure or a non-judicial
sale under a deed of trust. A deficiency judgment is a personal judgment against
the former borrower equal in most cases to the difference between the amount due
to the lender and the net amount realized upon the foreclosure sale. Other
statutes prohibit a deficiency judgment where the loan proceeds were used to
purchase a dwelling occupied by the borrower.
Some state statutes may require the beneficiary or mortgagee to exhaust the
security afforded under a deed of trust or mortgage by foreclosure in an attempt
to satisfy the full debt before bringing a personal action against the borrower.
In other states, the lender has the option of bringing a personal action against
the borrower on the debt without first exhausting the security; however, in some
of these states, the lender, following judgment on the personal action, may be
deemed to have elected a remedy and may be precluded from exercising remedies
with respect to the security. Consequently, the practical effect of the election
requirement, when applicable, is that lenders will usually proceed first against
the security rather than bringing a personal action against the borrower.
Other statutory provisions may limit any deficiency judgment against the
former borrower following a foreclosure sale to the excess of the outstanding
debt over the fair market value of the property at the time of the sale. The
purpose of these statutes is to prevent a beneficiary or a mortgagee from
obtaining a large deficiency judgment against the former borrower as a result of
low or no bids at the foreclosure sale.
In some states, exceptions to the anti-deficiency statutes are provided for
in some instances where the value of the lender's security has been impaired by
acts or omissions of the borrower, for example, in the event of waste of the
property.
In the case of cooperative loans, lenders generally realize on cooperative
shares and the accompanying proprietary lease or occupancy agreement given to
secure a cooperative loan under Article 9 of the UCC. Some courts have
interpreted Section 9-504 of the UCC to prohibit a deficiency award unless the
creditor establishes that the sale of the collateral, which, in the case of a
Cooperative Loan, would be the shares of the Cooperative and the related
proprietary lease or occupancy agreement, was conducted in a commercially
reasonable manner.
In addition to anti-deficiency and related legislation, numerous other
federal and state statutory provisions, including the federal bankruptcy laws,
the federal Soldiers' and Sailors' Civil Relief Act of 1940 and state laws
affording relief to debtors, may interfere with or affect the ability of a
secured mortgage lender to realize upon its security. For example, in a Chapter
13 proceeding under the federal Bankruptcy Code, when a court determines that
the value of a home is less than the principal balance of the loan, the court
may prevent a lender from foreclosing on the home, and, as part of the
rehabilitation plan, reduce the amount of the secured indebtedness to the value
of the home as it exists at the time of the proceeding, leaving the lender as a
general unsecured creditor for the difference between that value and the amount
of outstanding indebtedness. A bankruptcy court may grant the debtor a
reasonable time to cure a payment default, and in the case of a mortgage loan
not secured by the debtor's principal residence, also may reduce the monthly
payments due under the mortgage loan, change the rate of interest and alter the
mortgage loan repayment schedule. Particular court decisions have applied the
relief to claims secured by the debtor's principal residence.
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The Code provides priority to particular tax liens over the lien of the
mortgage or deed of trust. The laws of some states provide priority to
particular tax liens over the lien of the mortgage or deed of trust. Numerous
federal and some state consumer protection laws impose substantive requirements
upon mortgage lenders in connection with the origination, servicing and the
enforcement of mortgage loans. These laws include the federal Truth in Lending
Act, Real Estate Settlement Procedures Act, Equal Credit Opportunity Act, Fair
Credit Billing Act, Fair Credit Reporting Act, and related statutes and
regulations. These federal laws and state laws impose specific statutory
liabilities upon lenders who originate or service mortgage loans and who fail to
comply with the provisions of the law. In some cases, this liability may affect
assignees of the mortgage loans.
Unless otherwise specified in the related prospectus supplement, each
Mortgage Loan secured by Multifamily Property will be a non-recourse loan to the
Mortgagor. As a result, the Mortgagor's obligation to repay the Mortgage Loan
can be enforced only against the Mortgaged Property regardless of whether the
Mortgagor has other assets from which it could repay the loan.
Unless otherwise specified in the related prospectus supplement, the
mortgage securing each Mortgage Loan relating to Multifamily Property will
contain an assignment of rents and an assignment of leases, pursuant to which
the borrower assigns its right, title and interest as landlord under each lease
and the income derived from each lease to the Depositor, while retaining a
license to collect the rents so long as there is no default. In the event the
borrower defaults, the license terminates and the Trustee, as the assignee of
the assignment, is entitled to collect the rents. The Trustee may enforce its
right to the rents by seeking the appointment of a receiver to collect the rents
immediately after giving notice to the borrower of the default.
"DUE-ON-SALE" CLAUSES
The forms of note, mortgage and deed of trust relating to conventional
Mortgage Loans may contain a "due-on-sale" clause permitting acceleration of the
maturity of a loan if the borrower transfers its interest in the property. The
enforceability of these clauses has been subject of legislation or litigation in
many states, and in some cases the enforceability of these clauses was limited
or denied. However, 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 limited
exceptions. The Garn-St Germain Act does "encourage" lenders to permit
assumption of loans at the original rate of interest or at some other rate less
than the average of the original rate and the market rate.
The Garn-St Germain Act also sets forth nine specific instances in which a
mortgage lender covered by the Garn-St Germain Act 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, particular 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 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 loan
bearing an interest rate below the current market rate being assumed by a new
home buyer rather than being paid off, which may have an impact upon the average
life of the Mortgage Loans and the number of Mortgage Loans which may be
outstanding until maturity.
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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 some states, there are
or may be specific limitations upon late charges which a lender may collect from
a borrower for delinquent payments. State and federal statutes or regulations
may also limit a lender's right to collect a prepayment penalty when the
prepayment is caused by the lender's acceleration of the loan pursuant to a
due-on-sale clause. Some states also limit the amounts that a lender may collect
from a borrower as an additional charge if the loan is prepaid. Under the
Servicing Agreements and the applicable Agreement, late charges and prepayment
fees, to the extent permitted by law and not waived by the Servicers, will be
retained by the Servicers or Master Servicer as additional servicing
compensation.
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 sometimes 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, for
example, the borrower failing to adequately maintain or insure 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 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, 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
Under the federal Comprehensive Environmental Response Compensation and
Liability Act, as amended, a secured party which takes a deed in lieu of
foreclosure or purchases a mortgaged property at a foreclosure sale may become
liable in some circumstances for the costs of remedial action ("Cleanup Costs")
if hazardous wastes or hazardous substances have been released or disposed of on
the property. The Cleanup Costs may be substantial. It is possible that the
costs could become a liability of the Trust Fund and reduce the amounts
otherwise distributable to the Securityholders if a Mortgaged Property securing
a Mortgage Loan became the property of the Trust Fund in some circumstances and
if the Cleanup Costs were incurred.
Except as otherwise specified in the related prospectus supplement, each
Unaffiliated Seller will represent, as of the date of delivery of the related
Series of Notes or Certificates, as applicable, that to the best of its
knowledge no Mortgaged Property secured by Multifamily Property is subject to an
environmental hazard that would have to be eliminated under applicable law
before the sale of, or which could otherwise affect the marketability of, the
Mortgaged Property or which would subject the owner or operator of the Mortgaged
Property or a lender secured by the Mortgaged Property to liability under law,
and that there are no liens which relate to the existence of any clean-up of a
hazardous substance, and to the best of its knowledge no circumstances are
existing that under law would give rise to any lien, affecting the Mortgaged
Property which are or may be liens prior to or on a parity with the lien of the
related mortgage. The applicable Agreement and/or Servicing Agreement will
further provide that the
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Master Servicer, acting on behalf of the Trust Fund, may not acquire title to a
Mortgaged Property or take over its operation unless the Master Servicer has
received a report from a qualified independent person selected by the Master
Servicer setting forth whether the Mortgaged Property is subject to or presents
any toxic wastes or environmental hazards and an estimate of the cost of curing
or cleaning up the hazard.
THE CONTRACTS
As a result of the Depositor's assignment of the Contract to the Trustee,
the Certificateholders will succeed collectively to all of the rights, including
the right to receive payment on the Contracts, and will assume particular
obligations of the Depositor. Each Contract evidences both (1) the obligation of
the Obligor to repay the loan and (2) the grant of a security interest in the
Manufactured Home to secure repayment of the loan. Some of the aspects of both
features of the Contracts are described more fully below.
The Contracts generally are "chattel paper" as defined in the Uniform
Commercial Code 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 and/or Servicing Agreement, the Master
Servicer or the Depositor, as the case may be, will transfer physical possession
of the Contracts to the Trustee or Indenture Trustee, or their respective
custodian, as the case may be. In addition, the Master 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 or the Indenture
Trustee's security interest in the Contracts, as the case may be. Unless
otherwise specified in the related prospectus supplement, the Contracts will not
be stamped or marked otherwise to reflect their assignment from the Depositor to
the Trustee or their pledge to the Indenture Trustee. Therefore, if a subsequent
purchaser were able to take physical possession of the Contracts without notice
of the assignment or pledge, the respective Trustees' interest in the Contracts
could be defeated.
SECURITY INTERESTS IN THE MANUFACTURED HOMES
The law governing perfection of a security interest in a Manufactured Home
varies from state to state. Security interests in manufactured homes may be
perfected either by notation of the secured party's lien on the certificate of
title or by delivery of the required documents and payment of a fee to the state
motor vehicle authority, depending on state law. In some nontitle states,
perfection pursuant to the provisions of the UCC is required. The lender or
Master Servicer may effect the 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
Master Servicer or the lender fails, due to clerical errors, to effect the
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 Securityholders 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 their sites without any apparent intention
to move them, courts in many states have held that manufactured homes, under
some 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
manufactured home is located. These filings must be made in the real estate
records office of the county where the manufactured home is located.
Substantially all of the Contracts will contain provisions prohibiting the
borrower from permanently attaching the Manufactured Home to its site. So long
as the Obligor does not
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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 seller's 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 Unaffiliated Seller and transferred to the Depositor. With respect to a
Series of Notes or Certificates, as applicable, and as described in the related
prospectus supplement, the Master Servicer may be required to perfect a security
interest in the Manufactured Home under applicable real estate laws. If the real
estate filings are not required and if any of the foregoing events were to
occur, the only recourse of the Securityholders would be against the
Unaffiliated Seller pursuant to its repurchase obligation for breach of
warranties. Based on the representations of the Unaffiliated Seller, the
Depositor, however, believes that 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 assign its security interests in the Manufactured Homes
to the Trustee on behalf of the Certificateholders and, if a Series of
Securities includes Notes, the security interest will be pledged to the
Indenture Trustee on behalf of the Noteholders. Unless otherwise specified in
the related prospectus supplement, neither the Depositor nor the Trustee or
Indenture Trustee will amend the certificates of title to identify the Trustee
or the Indenture Trustee, as applicable, as the new secured party. Accordingly,
the Depositor or another entity specified in the prospectus supplement will
continue to be named as the secured party on the certificates of title relating
to the Manufactured Homes. In most states, the assignment is an effective
conveyance of the security interest without amendment of any lien noted on the
related certificate of title and the new secured party succeeds to the
assignor's rights as the secured party. However, in some states there exists a
risk that, in the absence of an amendment to the certificate of title, the
assignment of the security interest might not be held effective against
creditors of the assignor.
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 Depositor 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 Depositor and the Certificateholders
and pledged to the Noteholders, if any, is not perfected, the 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 applicable Securityholders as the new
secured party on the certificate of title that, through fraud or negligence, the
security interest of the Securityholders could be released.
In the event that the owner of a Manufactured Home moves it to a state
other than the state in which the Manufactured Home initially is registered,
under the laws of most states the perfected security interest in the
Manufactured Home would continue for four months after the relocation and after
that time only if and after the owner re-registers the Manufactured Home in the
state. If the owner were to relocate a Manufactured Home to another state and
not re-register the Manufactured Home in the state, and if steps are not taken
to re-perfect the Trustee's security interest in the 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 Trustee or the Indenture Trustee, or the
Master Servicer as custodian for the Trustee and/or Indenture Trustee, must
surrender possession if it holds the certificate of title to the Manufactured
Home or, in the case of Manufactured Homes registered in states which provide
for notation of lien on the certificate of title, the applicable Trustee would
receive notice of surrender if the security interest in the Manufactured Home is
noted on the
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certificate of title. Accordingly, the Trustee and Indenture 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 manufactured housing installment
or conditional sales contracts and installment loan agreements, the Master
Servicer takes steps to effect the re-perfection upon receipt of notice of
re-registration or information from the Obligor as to relocation. Similarly,
when an Obligor under a Contract sells a Manufactured Home, the Trustee or the
Indenture Trustee, or the Master Servicer as custodian for the Trustee or
Indenture Trustee, must surrender possession of the certificate of title or will
receive notice as a result of its lien noted on the certificate of title and
accordingly will have an opportunity to require satisfaction of the related
Contract before release of the lien. Under the applicable Agreement, the Master
Servicer, on behalf of the Depositor, will be obligated to take the steps, at
the Master 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 take priority even over a perfected security interest. The
Depositor will represent in the applicable Agreement that it has no knowledge of
any liens with respect to any Manufactured Home securing payment on any
Contract. However, liens could arise at any time during the term of a Contract.
No notice will be given to the Trustee, Indenture Trustee or Securityholders in
the event a lien arises and the lien would not give rise to a repurchase
obligation on the part of the party specified in the applicable Agreement.
ENFORCEMENT OF SECURITY INTERESTS IN MANUFACTURED HOMES
The Master Servicer on behalf of the Trustee or the Indenture Trustee, to
the extent required by the related Agreement and/or Indenture, may take action
to enforce the applicable Trustee's security interest with respect to Contracts
in default by repossession and resale of the Manufactured Homes securing the
Defaulted Contracts. Except in Louisiana, 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 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 a resale.
In the event of a repossession and resale of a Manufactured Home, the Trustee
and/or Indenture Trustee would be entitled to be paid out of the sale proceeds
before the proceeds could be applied to the payment of the claims of unsecured
creditors or the holders of subsequently perfected security interests or,
afterward, 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 the debtor's loan. However, some states
impose prohibitions or limitations on deficiency judgments.
Under 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.
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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
particular related lenders and assignees, to transfer the contract free of
notice of claims by the debtor under the contract. The effect of this rule is to
subject the assignee of a contract to all claims and defenses which the debtor
could assert against the seller of goods. Liability under this rule is limited
to amounts paid under a Contract; however, the Obligor also may be able to
assert the rule to set off remaining amounts due as a defense against a claim
brought against the Obligor. Numerous other federal and state consumer
protection laws impose requirements applicable to the origination and lending
pursuant to the Contracts, including the Truth in Lending Act, the Federal Trade
Commission Act, the Fair Credit Billing Act, the Fair Credit Reporting Act, the
Equal Credit Opportunity Act, the Fair Debt Collection Practices Act and the
Uniform Consumer Credit Code. In the case of some of these laws, the failure to
comply with their provisions may affect the enforceability of the related
Contract.
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 Depositor or the Master Servicer
and permit the acceleration of the maturity of the Contracts by the Depositor or
the Master Servicer upon any sale or transfer that is not consented to. Unless
otherwise specified in the related prospectus supplement, the Depositor or the
Master Servicer expects that it will permit most transfers of Manufactured Homes
and not accelerate the maturity of the related Contracts. In some 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 Depositor
desires to accelerate the maturity of the related Contract, the Depositor'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 exceptions
and conditions, state laws prohibiting enforcement of "due-on-sale" clauses
applicable to the Manufactured Homes. In some states the Depositor or the Master
Servicer may be prohibited from enforcing a "due-on-sale" clause in respect of
particular Manufactured Homes.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980, as amended ("Title V"), provides that, subject to the following
conditions, state usury limitations shall not apply to any loan that is secured
by a first lien on some kinds of manufactured housing. The Contracts would be
covered if they satisfy particular 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 that expressly rejects application of the federal law. Fifteen states
adopted 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. In any
state in which application of Title V was expressly rejected or a provision
limiting discount points or other charges has been adopted, no Contract which
imposes finance charges or provides for discount points or charges in excess of
permitted levels has been included in the Trust Assets or Fund. The Depositor,
or the party specified in the related Agreement will represent that all of the
Contracts comply with applicable usury laws.
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MATERIAL FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
The following discussion represents the opinion of McKee Nelson LLP, or
other counsel specified in the related prospectus supplement ("Federal Tax
Counsel") as to the material federal income tax consequences of the purchase,
ownership and disposition of the Notes or Certificates, as applicable, offered
under this prospectus. This opinion assumes compliance with all provisions of
the Agreements pursuant to which the Notes or Certificates, as applicable, are
issued. This discussion is directed solely to securityholders that hold the
Notes or Certificates, as applicable, 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 opinions 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 in this
prospectus, potential investors should consider the state and local tax
consequences, if any, of the purchase, ownership and disposition of the Notes or
Certificates, as applicable. See "State and Other Tax Considerations." The
Depositor recommends that securityholders consult their own tax advisors
concerning the federal, state, local or other tax consequences to them of the
purchase, ownership and disposition of the Notes or Certificates, as applicable,
offered under this prospectus.
The following discussion addresses securities of five general types:
o securities ("REMIC Securities) representing interests in a Trust
Fund, or a portion of a Trust Fund, that the trustee will elect
to have treated as a real estate mortgage investment conduit
("REMIC") under Sections 860A through 860G (the "REMIC
Provisions") of the Code;
o securities ("Grantor Trust Securities") representing interests in
a Trust Fund (a "Grantor Trust Fund") as to which no election
will be made;
o securities ("Partnership Certificates") representing equity
interests in a Trust Fund (a "Partnership Trust Fund") which is
treated as a partnership for federal income tax purposes;
o securities in the form of Notes ("Debt Securities") representing
indebtedness of a Partnership Trust Fund or a Trust Fund which is
disregarded as a separate entity for federal income tax purposes;
and
o securities in the form of Certificates that, despite their form,
are intended to be treated as indebtedness for federal income tax
purposes.
The prospectus supplement for each Series of Notes or Certificates, as
applicable, will indicate which of the foregoing treatments will apply to that
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,
(1) references to a "securityholder" or a "holder" are to the beneficial
owner of a Security,
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(2) references to "REMIC Pool" are to an entity or portion thereof as to
which a REMIC election will be made and
(3) to the extent specified in the prospectus supplement, references to
"mortgage loans" include Contracts.
The following discussion is based in part upon the rules governing original
issue discount that are set forth in Sections 1271 through 1275 of the Code and
in the Treasury regulations promulgated thereunder (the "OID Regulations"), and
in part upon the REMIC Provisions and the Treasury regulations promulgated
thereunder (the "REMIC Regulations"). Investor should be aware that the OID
Regulations do not adequately address some issues relevant to, and in some
instances provide that they are not applicable to, securities such as the Notes
or Certificates, as applicable.
Taxable Mortgage Pools
Corporate income tax can be imposed on the net income of some entities
issuing non-REMIC debt obligations secured by real estate mortgages ("Taxable
Mortgage Pools"). Any entity other than a REMIC or a FASIT (as defined in
Section 860L of the Code) will be considered a Taxable Mortgage Pool if
(1) substantially all of the assets of the entity consist of debt
obligations and more than 50% of those obligations (determined by
adjusted tax basis) consist of "real estate mortgages,"
(2) that entity is the borrower under debt obligations with two or more
maturities, and
(3) under the terms of the debt obligations on which the entity is the
borrower, payments on those 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
For each Series of REMIC Securities, assuming compliance with all
provisions of the related pooling and servicing agreement, in the opinion of
McKee Nelson LLP, or other counsel specified in the related prospectus
supplement, the related Trust Fund (or each applicable portion of the Trust
Fund) 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 the
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 total adjusted
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basis of the nonqualified assets is less than 1% of the total 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 of "disqualified organizations" and must furnish applicable tax
information to transferors or agents that violate this requirement. The pooling
and servicing agreement for 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" below.
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 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 a tiered
REMIC. The REMIC Regulations 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:
(1) in exchange for any qualified mortgage within a three-month period
from the Startup Day; or
(2) in exchange for a "defective obligation" within a two-year period from
the Startup Day.
A "defective obligation" includes:
(1) a mortgage in default or as to which default is reasonably
foreseeable;
(2) a mortgage as to which a customary representation or warranty made at
the time of transfer to the REMIC Pool has been breached;
(3) a mortgage that was fraudulently procured by the borrower; and
(4) a mortgage that was not in fact principally secured by real property
(but only if the mortgage is disposed of within 90 days of discovery).
A mortgage loan that is "defective" as described in clause (4) above 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 that 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 other contingencies. The reserve fund will be
disqualified if more than 30% of the gross income from the assets in that fund
for the year is
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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 for more than three taxable years after the taxable year of
acquisition unless extensions are granted by the Secretary of the Treasury.
In addition to the foregoing requirements, the various interests in a REMIC
Pool also must meet specific requirements. All of the interests in a REMIC Pool
must be either of the following: (1) one or more classes of regular interests or
(2) a single class of residual interests on which distributions, if any, are
made pro rata.
o 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. That 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.
o 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 for that 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 interest
shortfalls. Accordingly, in the opinion of McKee Nelson LLP, or other counsel
specified in the related prospectus supplement, the Regular Securities of a
Series will constitute one or more classes of regular interests, and the
Residual Securities for that Series will constitute a single class of residual
interests for 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 that status during any taxable
year, the Code provides that the entity will not be treated as a REMIC for that
year and thereafter. In that event, that 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, none of these regulations
have been issued. Any relief provided, 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 that status are
not satisfied. The pooling and servicing agreement for 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.
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Characterization of Investments in REMIC Securities
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 these Notes or Certificates, as applicable, 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.
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 the Notes or
Certificates, as applicable, 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 in the REMIC.
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 those assets (to the extent not invested in
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 some 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 of these
Series of REMIC Securities, McKee Nelson LLP, or other counsel specified in the
related prospectus supplement, will deliver its opinion that, assuming
compliance with all provisions of the related pooling and servicing agreement,
the Tiered REMICs will each qualify as a REMIC and the respective REMIC
Securities issued by each Tiered REMIC 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 those Notes or Certificates, as applicable,
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
(1) General
Except as otherwise indicated herein, the Regular Securities will be
treated for federal income tax purposes as debt instruments that are issued by
the REMIC and not as beneficial interests in the REMIC or the REMIC's assets. In
general, interest, original issue discount, and market discount on a Regular
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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 that
Regular Securityholder.
Payments of interest on Regular Securities may be based on a fixed rate, a
variable rate as permitted by the REMIC Regulations, or may consist of a
specified portion of the interest payments on qualified mortgages where such
portion does not vary during the period the Regular Security is outstanding. The
definition of a variable rate for purposes of the REMIC Regulations is based on
the definition of a qualified floating rate for purposes of the rules governing
original issue discount set forth in the OID Regulations, with certain
modifications and permissible variations. See "--Variable Rate Regular
Securities" below for a discussion of the definition of a qualified floating
rate for purposes of the OID Regulations. A qualified floating rate, as defined
above for purposes of the REMIC Regulations (a "REMIC qualified floating rate"),
qualifies as a variable rate for purposes of the REMIC Regulations if such REMIC
qualified floating rate is set at a "current rate" as defined in the OID
Regulations. In addition, a rate equal to the highest, lowest or an average of
two or more REMIC qualified floating rates qualifies as a variable rate for
REMIC purposes. A Regular Security may also have a variable rate based on a
weighted average of the interest rates on some or all of the qualified mortgages
held by the REMIC where each qualified mortgage taken into account has a fixed
rate or a variable rate that is permissible under the REMIC Regulations.
Further, a Regular Security may have a rate that is the product of a REMIC
qualified floating rate or a weighted average rate and a fixed multiplier, is a
constant number of basis points more or less than a REMIC qualified floating
rate or a weighted average rate, or is the product, plus or minus a constant
number of basis points, of a REMIC qualified floating rate or a weighted average
rate and a fixed multiplier. An otherwise permissible variable rate for a
Regular Security, described above, will not lose its character as such because
it is subject to a floor or a cap, including a "funds available cap" as that
term is defined in the REMIC Regulations. Lastly, a Regular Security will be
considered as having a permissible variable rate if it has a fixed or otherwise
permissible variable rate during one or more payment or accrual periods and
different fixed or otherwise permissible variable rates during other payment or
accrual periods.
(2) 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 that income. The following discussion is
based in part on the "OID Regulations" and in part on the provisions of the Tax
Reform Act of 1986 (the "1986 Act"). Regular Securityholders should be aware,
however, that the OID Regulations do not adequately address some of the issues
relevant to, and in some instances provide that they are not applicable to,
securities, such as the Regular Securities. To the extent that those issues are
not addressed in the regulations, the Trust Fund intends to apply the
methodology described in the Conference Committee Report to the 1986 Act. No
assurance can be provided that the Internal Revenue Service 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 Internal Revenue Service to apply or depart from the OID Regulations where
necessary or appropriate to ensure a reasonable tax result because 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 in the
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OID Regulations and the appropriate method for reporting interest and original
issue discount for the Regular Securities.
Each Regular Security will be treated as a single installment obligation
for purposes of determining the original issue discount includible 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 that 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 before the issue date of the Regular Security, unless the Regular
Securityholder elects on its federal income tax return to exclude that 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 those 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 the 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 for 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
prospectus supplement, it is anticipated that the trustee will treat interest
for the Regular Securities as qualified stated interest. Distributions of
interest on an Accrual Security, or on other Regular Securities for which
deferred interest will accrue, will not constitute qualified stated interest, in
which case the stated redemption price at maturity of those Regular Securities
includes all distributions of interest as well as principal on the Regular
Securities. 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 the 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 those
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 for a Series of Regular Securities will be set forth in
the prospectus supplement. Holders generally must report de minimis original
issue discount pro rata as principal payments are received, and that income will
generally be capital gain if the Regular Security is held as a capital asset.
Under the OID Regulations, however, Regular Securityholders may elect to accrue
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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" below.
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. For 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:
(1) 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
(2) 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:
(a) the yield to maturity of the Regular Security at the issue
date; and
(b) 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 total amount of original issue discount for 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 those 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. For 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 for a Series of Regular Securities can result
in both a change in the priority of principal payments for some Classes of
Regular Securities and either an increase or decrease in the daily portions of
original issue discount for those Regular Securities.
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(3) 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 the
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, a subsequent purchaser may elect to treat all that acquisition
premium under the constant yield method, as described below under the heading
"--Election to Treat All Interest Under the Constant Yield Method" below.
(4) 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 qualified variable rate
if, generally, (1) the issue price does not exceed the original principal
balance by more than a specified amount, (2) it does not provide for any
principal payments that are contingent, within the meaning of the OID
Regulations, except as provided in (1), and (3) 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 than 0.65 but not more than 1.35, increased or decreased by a fixed
rate. That 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 the information is
not (1) within the control of the issuer or a related party or (2) unique to the
circumstances of the issuer or a related party. However, an objective rate does
not include a rate if it is reasonably expected that the average value of such
rate during the first half of the Regular Security's term will be either
significantly less than or significantly greater than the average value of the
rate during the final half of the Regular Security's term. 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 qualified floating
rate; 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 qualified variable rate under the
foregoing rules, for example, a Class that bears different rates at different
times during the period it is outstanding that it is considered significantly
"front-loaded" or "back-loaded" within the meaning of the OID Regulations. It is
possible that 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 for
Regular Securities apply the same principles as the OID Regulations, those
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regulations may lead to different timing of income inclusion than would be the
case under the OID Regulations. Furthermore, application of those 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 qualified variable rate as described in this
paragraph.
The amount of original issue discount for a Regular Security bearing a
qualified variable rate of interest will accrue in the manner described above
under "--Original Issue Discount," with the yield to maturity and future
payments on that 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, if the Class bears interest at a
qualified floating rate or qualified inverse floating rate, or based on a fixed
rate which reflects the reasonably expected yield for the relevant Class, if the
Class bears interest at an objective rate (other than a qualified inverse
floating rate). Unless required otherwise by applicable final regulations, it is
anticipated that the trustee will treat interest, other than variable interest
on an interest-only or super-premium Class, as qualified stated interest at the
qualified variable rate. However, the qualified stated interest allocable to an
accrual period will be increased (or decreased) if the interest actually paid
during the accrual period exceed (or is less than) the interest assumed to be
paid under the rate just described.
(5) 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 (1) is exceeded by the remaining
outstanding principal payments and interest payments other than qualified stated
interest payments due on a Regular Security, or (2) in the case of a Regular
Security having original issue discount, is exceeded by the adjusted issue price
of that Regular Security at the time of purchase. The purchaser generally will
be required to recognize ordinary income to the extent of accrued market
discount on that Regular Security as distributions includible in the stated
redemption price at maturity of the Regular Security are received, in an amount
not exceeding that distribution. The 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
these regulations are issued, the market discount would accrue either (1) on the
basis of a constant interest rate, or (2) in the ratio of stated interest
allocable to the relevant period to the sum of the interest for that period plus
the remaining interest as of the end of that 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 that period plus the remaining original issue discount as
of the end of that period. The 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. The 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 on the Regular Security. The deferred portion of the
interest expense in any taxable year generally will not exceed the accrued
market discount on the Regular Security for that year. Any 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 the
foregoing basis, the Regular Securityholder may elect to include market discount
in income currently as it accrues on all
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market discount instruments acquired by the 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 that election may be deemed to be
made. A person who purchases a Regular Security at a price lower than the
remaining amounts includible 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 for a Regular Security will be considered to be zero if the
market discount is less than 0.25% of the remaining stated redemption price at
maturity of the Regular Security (or, in the case of a Regular Security having
original issue discount, the adjusted issue price of that Regular Security)
multiplied by the weighted average maturity of the Regular Security (presumably
determined as described above in the third paragraph under "--Original Issue
Discount" above) 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.
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 particular 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 and the
elections to include market discount in income currently and to accrue market
discount on the basis of the constant yield method.
(6) 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 that Regular Security as a "capital
asset" within the meaning of Code Section 1221, the Regular Securityholder may
elect under Code Section 171 to amortize the premium under a constant yield
method that reflects compounding based on the interval between payments on the
Regular Security. The 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 Internal Revenue Service. 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 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 deductible item. 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.
(7) 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
this election, (1) "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
(2) 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
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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 this election on an
instrument by instrument basis or for a class or group of debt instruments.
However, if the holder makes this election for a debt instrument with
amortizable bond premium, the holder is deemed to have made elections to
amortize bond premium currently as it accrues under the constant yield method
for all premium bonds held by the holder in the same taxable year or thereafter.
Alternatively, if the holder makes this election for a debt instrument with
market discount, the holder is deemed to have made elections to report market
discount income currently as it accrues under the constant yield method for all
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 Internal Revenue Service. Investors should consult their own
tax advisors regarding the advisability of making this election.
(8) Treatment of Losses
Regular Securityholders will be required to report income for 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 the losses are
uncollectible. 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 uncollectible, the Internal Revenue Service 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.
To the extent the rules of Code Section 166 regarding bad debts are
applicable, 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 that loss
with respect to principal sustained during the taxable year on account of any
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 Regular Securities becoming wholly worthless. Although the
matter is not free from doubt, non-corporate Regular Securityholders should be
allowed a bad debt deduction at the time the principal balance of the Regular
Securities is reduced to reflect losses resulting from any liquidated mortgage
loans. The Internal Revenue Service, however, could take the position that
non-corporate holders will be allowed a bad debt deduction to reflect those
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 Internal Revenue Service could also assert that losses on the
Regular Securities are deductible based on some other method that may defer
those 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 that may 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 for
their 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 Internal Revenue Service 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
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holders who do not hold the Regular Securities in connection with a trade or
business. Special loss rules may be applicable to banks and thrift institutions.
These taxpayers are advised to consult their tax advisors regarding the
treatment of losses on Regular Securities.
(9) 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 for 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 regarding 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). That gain will be treated as
ordinary income
(1) 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 for
any prior disposition of property that was held as part of that
transaction;
(2) in the case of a non-corporate taxpayer, to the extent that the
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
(3) to the extent that the gain does not exceed the excess, if any, of (a)
the amount that would have been includible in the gross income of the
holder if its yield on that Regular Security were 110% of the
applicable federal rate as of the date of purchase, over (b) the
amount of income actually includible in the gross income of the holder
for that Regular Security (the "110% yield rule").
In addition, gain or loss recognized from the sale of a Regular Security by
some banks or thrift institutions will be treated as ordinary income or loss
pursuant to Code Section 582(c). Long-term capital gains of noncorporate
taxpayers generally are subject to a lower maximum tax rate than ordinary income
of those taxpayers for property held for more than one year, with further rate
reductions for property held for more than five years. Currently, the maximum
tax rate for corporations is the same for both ordinary income and capital
gains.
Taxation of Owners of Residual Securities
1. Taxation of REMIC Income
Generally, the "daily portions" of REMIC taxable income or net loss will be
includible as ordinary income or loss in determining the federal taxable income
of holders of Residual Securities ("Residual Holders"), and will not be taxed
separately to the REMIC Pool. The daily portions of REMIC
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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 that quarter and by allocating that daily portion among the Residual
Holders in proportion to their respective holdings of Residual Securities in the
REMIC Pool on that 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
(1) the limitations on deductibility of investment interest expense and
expenses for the production of income do not apply;
(2) all bad loans will be deductible as business bad debts; and
(3) 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 Notes or Certificates, as
applicable, 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 for 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. If
an interest in the mortgage loans is acquired by the REMIC Pool at a discount,
and one or more of these 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 the discount on the mortgage loans that is includible in
income may exceed the original issue discount deductions allowed with respect to
the 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
those Classes are not issued with substantial discount or are issued at a
premium. If taxable income attributable to that 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 that 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 for any particular
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 that mismatching or unrelated deductions against which
to offset that income, subject to the discussion of "excess inclusions" below
under "--Limitations on Offset or Exemption of REMIC Income." The timing of
mismatching of income and deductions described in this paragraph, if present for
a Series of Notes or
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Certificates, as applicable, may have a significant adverse effect upon a
Residual Holder's after-tax rate of return.
A portion of the income of a Residual Holder may be treated unfavorably in
three contexts:
(1) it may not be offset by current or net operating loss deductions;
(2) it will be considered unrelated business taxable income to tax-exempt
entities; and
(3) it is ineligible for any statutory or treaty reduction in the 30%
withholding tax otherwise available to a foreign Residual Holder.
See "--Limitations on Offset or Exemption of REMIC Income" below. In addition, a
Residual Holder's taxable income during some periods may exceed the income
reflected by those Residual Holders for those periods in accordance with
generally accepted accounting principles. Investors should consult their own
accountants concerning the accounting treatment of their investment in Residual
Securities.
2. 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 that Residual Security. The 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 the loss was disallowed and may be used by the 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, if, in any year, cash distributions to a Residual
Holder exceed its share of the REMIC's taxable income, the excess will
constitute a return of capital to the extent of the holder's basis in its
Residual Security. A return of capital is not treated as income for federal
income tax purposes, but will reduce the tax basis of the Residual Holder (but
not below zero). If a Residual Security's basis is reduced to zero, any cash
distributions with respect to that Residual Security in any taxable year in
excess of its share of the REMIC's income would be taxable to the holder as gain
on the sale or exchange of its interest in the REMIC.
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 the residual interest
as zero rather than the negative amount for purposes of determining the REMIC
Pool's basis in its assets. The preamble to the REMIC Regulations states that
the Internal Revenue Service may provide future guidance on the proper tax
treatment of payments made by a transferor of the 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 the basis until termination of the
REMIC Pool unless future Treasury regulations provide for periodic adjustments
to the REMIC income
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otherwise reportable by the 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.
3. 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 for 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.
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 "--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 those mortgage
loans is exceeded by their unpaid principal balances. The REMIC Pool's basis in
those mortgage loans is generally the fair market value of the mortgage loans
immediately after the transfer of the mortgage loans to the REMIC Pool. The
REMIC Regulations provide that the basis is equal to the total of the issue
prices of all regular and residual interests in the REMIC Pool. The market
discount must be recognized currently as an item of ordinary income as it
accrues, rather than being included in income upon the sale of mortgage loans or
as principal on the mortgage loans is paid. 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 of the mortgage loans, the REMIC Pool will
be considered to have acquired those mortgage loans at a premium equal to the
amount of that excess. As stated above, the REMIC Pool's basis in mortgage loans
is generally the fair market value of the mortgage loans and is based on the
total of the issue prices of the regular and residual interests in the REMIC
Pool immediately after the transfer of the mortgage loans 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 borrowers on the mortgage loans are
expected to be individuals, Code Section 171 will not be available for premium
on mortgage loans originated on or before September 27, 1985. Premium for those
mortgage loans may be deductible in accordance with a reasonable method
regularly employed by the holder of those mortgage loans. The allocation of that
premium pro rata among principal payments should be considered a reasonable
method; however, the Internal Revenue Service may argue that the premium should
be allocated in a different manner, such as allocating the premium entirely to
the final payment of principal.
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4. Limitations on Offset or Exemption of REMIC Income
A portion (or all) of the REMIC taxable income includible 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 that quarterly period of (1) 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 (2) the adjusted issue price of the Residual Security at
the beginning of the 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 those daily accruals of REMIC income
described in this paragraph for all prior quarters, decreased by any
distributions made with respect to the Residual Security before the beginning of
that quarterly period.
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 the 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 be treated as unrelated business taxable income of the
Residual Holder for purposes of Code Section 511. In addition, REMIC taxable
income is subject to 30% withholding tax for 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 persons who are not U.S. Persons.
Provisions governing the relationship between excess inclusions and the
alternative minimum tax provide that (i) 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, (ii) a
Residual Holder's alternative minimum taxable income for a taxable year cannot
be less than the excess inclusions for the year, and (iii) the amount of any
alternative minimum tax net operating loss deduction must be computed without
regard to any excess inclusions.
The Internal Revenue Service has authority to promulgate regulations
providing that if the aggregate value of the Residual Securities is not
considered to be "significant," then the entire share of REMIC taxable income of
a Residual Holder may be treated as excess inclusions subject to the foregoing
limitations. This authority has not been exercised to date.
5. 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 (1) the
present value of the total anticipated excess inclusions for that Residual
Security for periods after the transfer and (2) 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.
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That 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.
That tax generally would be imposed on the transferor of the Residual Security,
except that where the transfer is through an agent (including a broker, nominee,
or other middleman) for a Disqualified Organization, the tax would instead be
imposed on the agent. However, a transferor of a Residual Security would in no
event be liable for the tax for 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 the affidavit is false. Under the REMIC Regulations, an
affidavit will be sufficient if the transferee furnishes (A) a social security
number, and states under penalties of perjury that the social security number is
that of the transferee, or (B) a statement under penalties of perjury that it is
not a disqualified organization.
"Disqualified Organization" means the United States, any state or political
subdivision of the United States, any foreign government, any international
organization, any agency or instrumentality of any of the foregoing (provided,
that the 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
governmental entity), any cooperative organization furnishing electric energy or
providing telephone service to 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 the organization is subject to the tax on unrelated business income
imposed by Code Section 511.
In addition, if a "Pass-Through Entity" (as defined below) has excess
inclusion income for a Residual Security during a taxable year and a
Disqualified Organization is the record holder of an equity interest in that
entity, then a tax is imposed on the entity equal to the product of (1) the
amount of excess inclusions that are allocable to the interest in the
Pass-Through Entity during the period that interest is held by the Disqualified
Organization, and (2) the highest marginal federal corporate income tax rate.
That tax would be deductible from the ordinary gross income of the Pass-Through
Entity for the taxable year. The Pass-Through Entity would not be liable for the
tax if (1) it has received an affidavit from the record holder stating, under
penalties of perjury, that it is not a Disqualified Organization, or providing
the holder's taxpayer identification number and stating, under penalties of
perjury, that the social security number is that of the record owner, and (2)
during the period that person is the record holder of the Residual Security, the
Pass-Through Entity does not have actual knowledge that the affidavit is false.
"Pass-Through Entity" means any regulated investment company, real estate
investment trust, common Trust Fund, partnership, trust or estate and
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 that interest, be treated as a
Pass-Through Entity.
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. The exception to this tax, otherwise available to a
Pass-Through Entity that is furnished particular affidavits by record holders of
interests in the entity and that does not know those affidavits are false, is
not available to an electing large partnership.
The pooling and servicing agreement for a Series will provide that no legal
or beneficial interest in a Residual Security may be transferred or registered
unless (1) the proposed transferee furnished to the transferor and the trustee
an affidavit providing its taxpayer identification number and stating that the
transferee is the beneficial owner of the Residual Security and is not a
Disqualified Organization and is not purchasing the Residual Security on behalf
of a Disqualified Organization (i.e., as a broker, nominee or middleman) and (2)
the transferor provides a statement in writing to the trustee that it has no
actual knowledge that the 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
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vest no rights in any purported transferee. Each Residual Security for a Series
will bear a legend referring to those restrictions on transfer, and each
Residual Holder will be deemed to have agreed, as a condition of ownership of
the Residual Security, 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 Internal Revenue Service and to
the requesting party within 60 days of the request, and the requesting party may
be charged a fee for the computation and provision of that information.
Noneconomic Residual Interests. The REMIC Regulations would disregard some
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 a REMIC
(including a residual interest with a positive value at issuance) is a
"noneconomic residual interest" unless, at the time of the transfer, (1) the
present value of the expected future distributions on the residual interest at
least equals the product of 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 (2) 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 known
that the transferee would be unwilling or unable to pay taxes due on its share
of the taxable income of the REMIC. A safe harbor is provided if (1) 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 came due in the future, (2) 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 intends to pay taxes associated with
holding the residual interest as they become due, (3) the transferee represents
that it will not cause income from the noneconomic residual interest to be
attributable to a foreign permanent establishment or fixed based (within the
meaning of an applicable income tax treaty of the transferee or another U.S.
taxpayer) and (4) either the formula test or the asset test (each as described
below) is satisfied.
The formula test is satisfied if the present value of the anticipated tax
liabilities associated with holding the Residual Security does not exceed the
sum of the present values of (1) any consideration given to the transferee to
the acquire the Residual Security, (2) the expected future distributions on the
Residual Security, and (3) the anticipated tax savings associated with holding
the Residual Security as the REMIC generates losses. For purposes of this
calculation, the present values generally are calculated using a discount rate
equal to the short term federal rate for the month of transfer, and the
transferee is assumed to pay tax at the highest corporate rate of tax, except a
transferee may use the alternative minimum tax rate if it was subject to
alternative minimum tax in the preceding two years and will compute its tax in
the current year using the alternative minimum tax rate.
The asset test is satisfied if
1. at the time of the transfer of the Residual Security, and at the close
of each of the transferee's two fiscal years preceding the year of
transfer, the transferee's gross assets
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for financial reporting purposes exceed $100 million and its net
assets for financial reporting purposes exceed $10 million,
2. the transferee is a taxable domestic C corporation, other than a RIC,
REIT, REMIC or Subchapter T cooperative (an "Eligible Corporation"),
that makes a written agreement that any subsequent transfer of the
Residual Security will be to another Eligible Corporation in a
transaction that satisfies the safe harbor described above, and the
transferor does not know, or have reason to know, that the transferee
will not honor such agreement, and
3. the facts and circumstances known to the transferor on or before the
date of transfer do not reasonably indicate that the taxes associated
with the Residual Security will not be paid.
For purposes of requirement (1), the gross and net assets of a transferee do not
include any obligations of a person related to the transferee or any other asset
if a principal purpose for holding or acquiring the asset is to permit the
transferee to satisfy the asset test. Further, the direct or indirect transfer
to a foreign permanent establishment of a United States person that is a
corporation will not qualify under the asset test and such a transfer to a
foreign permanent establishment or fixed base of any United States person will
not qualify under the formula test.
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. This rule appears intended to apply
to a transferee who is not a "U.S. Person" (as defined below), unless the
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, the transferor
reasonably expects that (1) the future distributions on the Residual Security
will equal at least 30% of the anticipated excess inclusions after the transfer,
and (2) such amounts will be distributed at or after the time at which the
excess inclusions accrue and before the end of the next succeeding taxable year.
A safe harbor in the REMIC Regulations provides that the reasonable expectation
requirement will be satisfied if the above test would be met at all assumed
prepayment rates for the mortgage loans from 50 percent to 200 percent of the
Prepayment Assumption. 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 the transfer may be made. The term "U.S. Person"
means a citizen or resident of the United States, a corporation or partnership
(or other entity properly treated as a partnership or as a corporation for
federal income tax purposes) created or organized in or under the laws of the
United States or of any state (including, for this purpose, the District of
Columbia), 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 the trust and one or
more U.S. Persons have the authority to control all substantial decisions of the
trust (or, to the extent provided in applicable Treasury regulations, trusts in
existence on August 20, 1996, which are eligible to elect and do elect to be
treated as U.S. Persons).
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6. 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 the Residual Holder in the Residual Security
at the time of the sale or exchange.
Further, as described above under "--Taxation of Owners of Residual
Securities--Basis and Losses", if a Residual Security's basis is reduced to
zero, any cash distributions with respect to that Residual Security in any
taxable year in excess of its share of the REMIC's income for that year would be
taxable to the holder as gain on the sale or exchange of its interest in the
REMIC. If a Residual Holder has an adjusted basis in its Residual Security when
its interest in the REMIC Pool terminates, then it will recognize a capital loss
(assuming the Residual Security was held as a capital asset) at that time in an
amount equal to the remaining adjusted basis.
Any gain on the sale of a Residual Security will be treated as ordinary
income (1) 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 for any prior disposition of property that was held as a part of
that transaction or (2) in the case of a non-corporate taxpayer, to the extent
that the 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 some banks or
thrift institutions will be treated as ordinary income or loss pursuant to Code
Section 582(c).
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 the 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.
7. Mark to Market Regulations
Treasury regulations provide that a Residual Security acquired on or
after January 4, 1995 is not treated as a security and thus may not be marked to
market pursuant to Section 475 of the Code.
Taxes That May Be Imposed on the REMIC Pool
1. Prohibited Transactions
Income from transactions by the REMIC Pool, called prohibited transactions,
will not be part of the calculation of income or loss includible 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:
(1) the disposition of a qualified mortgages other than for
(a) substitution for a defective (including a defaulted) obligation
within two years of the Startup Day (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;
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(b) foreclosure, default, or imminent default of a qualified mortgage;
(c) bankruptcy or insolvency of the REMIC Pool; or
(d) a qualified (complete) liquidation;
(2) the receipt of income from assets that are not the type of mortgages
or investments that the REMIC Pool is permitted to hold;
(3) the receipt of compensation for services; or
(4) the receipt of gain from disposition of cash flow investments other
than pursuant to a qualified liquidation.
Notwithstanding (1) and (4) 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 Notes
or Certificates, as applicable, 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 borrower
pursuant to the terms of a convertible adjustable rate mortgage loan.
2. 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
(1) during the three months following the Startup Day,
(2) made to a qualified reserve fund by a Residual Holder,
(3) in the nature of a guarantee,
(4) made to facilitate a qualified liquidation or clean-up call, and
(5) as otherwise permitted in Treasury regulations yet to be issued.
It is not anticipated that there will be any contributions to the REMIC
Pool after the Startup Day.
3. 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" until the close of the third calendar year after the year
in which the REMIC Pool acquired that property, with possible extensions. Net
income from foreclosure property generally means gain from the sale of a
foreclosure property that is inventory property and gross income from
foreclosure
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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.
4. 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 that adoption is deemed to
occur, and sells all of its assets (other than cash) within a 90-day period
beginning on that 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.
5. 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 the 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 Internal Revenue Service 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, for 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 the Residual Holder, the Residual Holder or any 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 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 those proceedings
in appropriate circumstances.
6. Limitations on Deduction of Certain Expenses
An investor who is an individual, estate, or trust will be subject to
limitation with respect to some itemized deductions described in Code Section
67, to the extent that those itemized deductions, in total, do not exceed 2% of
the investor's adjusted gross income. In the case of a partnership that has 100
or more partners and elects to be treated as an "electing large partnership,"
70% of that partnership's miscellaneous itemized deductions will be disallowed,
although the remaining deductions will generally be allowed at the partnership
level and will not be subject to the 2% floor that would otherwise be applicable
to individual partners. 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 (1) 3% of the excess of adjusted gross income in
excess of a specified threshold amount (which is adjusted annually for
inflation), or (2) 80% of the amount of itemized deductions otherwise allowable
for that year. In the case of a REMIC Pool, those deductions may include
deductions under Code Section 212 for the Servicing Fee and all administrative
and other expenses relating to the REMIC Pool, or any similar expenses allocated
to the REMIC Pool for a regular interest it holds in another REMIC. Those
investors who hold REMIC Securities either directly or indirectly through
pass-through entities may have their pro rata share of those expenses allocated
to them as additional gross income, but may be subject to that limitation on
deductions. In addition, those expenses are not deductible at all for purposes
of computing
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the alternative minimum tax, and may cause those 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. For 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 those 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. The prospectus supplement will indicate if all those expenses
will not be allocable to the Residual Securities.
Taxation of Certain Foreign Investors
1. 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 (1) the interest is not effectively connected
with the conduct of a trade or business in the United States of the
securityholder, (2) the 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 (3) that Non-U.S. Person complies to
the extent necessary with certain certification requirements, which generally
relate to the identity of the beneficial owner and the status of the beneficial
owner as a person that is a Non-U.S. person. Each Regular Securityholder should
consult its tax advisors regarding the tax documentation and certifications that
must be provided to secure the exemption from United States withholding taxes
including certain more extensive documentation and certification requirements
which may apply to a beneficial owner claiming exemption through an
intermediary.
Any capital gain realized on the sale, redemption, retirement or other
taxable disposition of a Regular Security by a Non-U.S. Person generally will be
exempt from United States federal income and withholding tax, provided that (i)
such gain is not effectively connected with the conduct of a trade or business
in the United States by the Non-U.S. Person and (ii) in the case of an
individual Non-U.S. Person, the Non-U.S. Person is not present in the United
States for 183 days or more in the taxable year.
If the interest on the Regular Security is effectively connected with the
conduct of a trade or business within the United States by that Non-U.S. Person,
the Non-U.S. Person, although exempt from the withholding tax previously
discussed if the holder provides an appropriate statement establishing that such
income is so effectively connected, 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.
2. 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 (1) the
mortgage loans were issued after July 18, 1984, and (2) the Trust Fund or
segregated pool of assets in the Trust Fund (as to which a separate REMIC
election
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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" above. 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
those Non-U.S. Persons, although exempt from the withholding tax previously
discussed if the holder provides an appropriate statement establishing that such
income is so effectively connected, the amounts paid to those Non-U.S. Persons
will be subject to United States federal income tax at regular rates. See
"--Tax-Related Restrictions on Transfer of Residual Securities--Foreign
Investors" above concerning the disregard of 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.
3. Backup Withholding
Distributions made on the REMIC Securities, and proceeds from the sale of
the REMIC Securities to or through certain brokers, may be subject to a "backup"
withholding tax under Code Section 3406 on "reportable payments" (including
interest distributions, original issue discount, and, under some circumstances,
principal distributions) if the Holder fails to comply with certain
identification procedures, unless the Holder is otherwise an exempt recipient
under applicable provisions of the Code, and, if necessary, demonstrates such
status. Any amounts to be withheld from distribution on the REMIC Securities
would be refunded by the Internal Revenue Service or allowed as a credit against
the Regular Holder's federal income tax liability.
GRANTOR TRUST FUNDS
Characterization. For each Series of Grantor Trust Securities, Federal
Tax Counsel will deliver its opinion that the Grantor Trust Fund will not be
classified as an association taxable as a corporation (or a taxable mortgage
pool) and that the Grantor Trust Fund will be classified as a grantor trust
under subpart E, Part I of subchapter J of the Code. In this case, beneficial
owners of Grantor Trust Securities (referred to in this prospectus as "Grantor
Trust Securityholders") will be treated for federal income tax purposes as
owners of a portion of the Grantor Trust Fund's assets as described below.
Taxation of Grantor Trust Securityholders. Subject to the discussion
below under "Stripped Certificates" and "Subordinated Certificates," each
Grantor Trust Securityholder will be treated as the owner of a pro rata
undivided interest in the assets of the Grantor Trust Fund. Accordingly, and
subject to the discussion below of the recharacterization of the servicing fee,
each Grantor Trust Securityholder must include in income its pro rata share of
the interest and other income from the assets of the Grantor Trust Fund,
including any interest, original issue discount, market discount, prepayment
fees, assumption fees, and late payment charges with respect to the assets, and,
subject to limitations discussed below, may deduct its pro rata share of the
fees and other deductible expenses paid by the Grantor Trust Fund, at the same
time and to the same extent as these items would be included or deducted by the
Grantor Trust Securityholder if the Grantor Trust Securityholder held directly a
pro rata interest in the assets of the Grantor Trust Fund and received and paid
directly the amounts received and paid by the Grantor Trust Fund. Any amounts
received by a Grantor Trust Securityholder in lieu of amounts due with respect
to any asset of the Grantor Trust Fund because of a default or delinquency in
payment will be treated for federal income tax purposes as having the same
character as the payments they replace.
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Each Grantor Trust Securityholder will be entitled to deduct its pro rata
share of servicing fees, prepayment fees, assumption fees, any loss recognized
upon an assumption and late payment charges retained by the servicer, provided
that these amounts are reasonable compensation for services rendered to the
Grantor Trust Fund. Grantor Trust Securityholders that are individuals, estates
or trusts will be entitled to deduct their share of expenses only to the extent
these expenses plus all other miscellaneous itemized deductions exceed two
percent of the Grantor Trust Securityholder's adjusted gross income, and will be
allowed no deduction for these expenses in determining their liabilities for
alternative minimum tax. In addition, Section 68 of the Code provides that the
amount of itemized deductions otherwise allowable for the taxable year for an
individual whose adjusted gross income exceeds a prescribed threshold amount
will be reduced by the lesser of (1) 3% of the excess of adjusted gross income
over the specified threshold amount (adjusted annually for inflation) or (2) 80%
of the amount of itemized deductions otherwise allowable for the applicable
taxable year. In the case of a partnership that has 100 or more partners and
elects to be treated as an "electing large partnership," 70% of the
partnership's miscellaneous itemized deductions will be disallowed, although the
remaining deductions will generally be allowed at the partnership level and will
not be subject to the 2% floor that would otherwise be applicable to individual
partners.
The servicing compensation to be received by the servicer may be questioned
by the Internal Revenue Service as exceeding a reasonable fee for the services
being performed in exchange for the servicing compensation, and a portion of the
servicing compensation could be recharacterized as an ownership interest
retained by the servicer or other party in a portion of the interest payments to
be made with respect to the Grantor Trust Fund's assets. In this event, a
certificate might be treated as a Stripped Certificate subject to the stripped
bond rules of Section 1286 of the Code, and either the original issue discount
or market discount rules. See the discussion below under "--Stripped
Certificates". Except as discussed below under "Stripped Certificates" or
"--Subordinated Certificates," this discussion assumes that the servicing fees
paid to the servicer do not exceed reasonable servicing compensation.
A purchaser of a Grantor Trust Security will be treated as purchasing an
interest in each asset in the Grantor Trust Fund at a price determined by
allocating the purchase price paid for the certificate among all asset of the
Grantor Trust Fund in proportion to their fair market values at the time of the
purchase of the certificate. To the extent that the portion of the purchase
price of a Grantor Trust Security allocated to an asset of the Grantor Trust
Fund is less than or greater than the stated redemption price at maturity of the
asset, the interest in the asset will have been acquired at a discount or
premium. See "--Market Discount" and "--Premium," below.
The treatment of any discount on an asset of the Grantor Trust Fund will
depend on whether the discount represents original issue discount or market
discount. Except as indicated otherwise in the applicable prospectus supplement,
it is not expected that any asset of the Grantor Trust Fund (other than a
Stripped Agency Security or other instrument evidencing ownership of specific
interest and/or principal of a particular bond) will have original issue
discount (except as discussed below under "Stripped Certificates" or
"Subordinated Certificates"). For the rules governing original issue discount,
see "REMICs--Taxation of Owners of Regular Securities--Original Issue Discount"
above.
The information provided to Grantor Trust Securityholders will not include
information necessary to compute the amount of discount or premium, if any, at
which an interest in each asset of the Grantor Trust Fund is acquired.
Market Discount. A Grantor Trust Securityholder that acquires an undivided
interest in the Grantor Trust Fund's assets may be subject to the market
discount rules of Sections 1276 through 1278 to the extent an undivided interest
in an asset of the Grantor Trust Fund is considered to have been purchased at a
"market discount". For a discussion of the market discount rules under the Code,
see
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"REMICs--Taxation of Owners of Regular Securities--Market Discount" above. As
discussed above, to the extent an asset of the Grantor Trust Fund is a Stripped
Agency Security or other instrument evidencing ownership of specific interest
and/or principal of a particular bond, it will be subject to the rules relating
to original issue discount (in lieu of the rules relating to market discount).
See "REMICs--Taxation of Owners of Regular Securities--Original Issue Discount"
above.
Premium. To the extent a Grantor Trust Securityholder is considered to have
purchased an undivided interest in an asset of the Grantor Trust Fund for an
amount that is greater than the stated redemption price at maturity of the
interest, the Grantor Trust Securityholder will be considered to have purchased
the interest in the asset with "amortizable bond premium" equal in amount to the
excess. For a discussion of the rules applicable to amortizable bond premium,
see "REMICs--Taxation of Owners of Regular Securities--Amortizable Premium"
above.
Status of the Grantor Trust Securities. Except as qualified below, a
Grantor Trust Security owned by a:
o "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" within the meaning of Code
Section 7701(a)(19)(C)(v), provided that the real property securing
the mortgage loans represented by that Grantor Trust Security is of
the type described in that section of the Code.
o 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 those assets will be
considered "interest on obligations secured by mortgages on real
property" to that extent within the meaning of Code Section
856(c)(3)(B).
o 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).
It is not clear whether Grantor Trust Certificates that are Stripped
Certificates (as described below under "Stripped Certificates") should be
treated as qualifying under the Code provisions cited in the first two bullet
points above to the same extent as Grantor Trust Certificates that are not
Stripped Certificate. Grantor Trust Securityholders are urged to consult their
own tax advisors concerning the characterization of the securityholder's
investment for federal income tax purposes.
Stripped Certificates. Some classes of certificates may be subject to the
stripped bond rules of Section 1286 of the Code and for purposes of this
discussion will be referred to as "Stripped Certificates." In general, a
Stripped Certificate will be subject to the stripped bond rules where there has
been a separation of ownership of the right to receive some or all of the
principal payments on a mortgage loan held by the Grantor Trust Fund from
ownership of the right to receive some or all of the related interest payments.
Generally, where a separation has occurred, under the stripped bond rules of
Section 1286 of the Code, the holder of a right to receive a principal or
interest payment on the bond is required to accrue into income, on a constant
yield basis under rules governing original issue discount (see "REMICs--Taxation
of Owners of Regular Securities--Original Issue Discount"), the difference
between the holder's initial purchase price for the right to receive principal
or interest, and the principal or interest payment to be received with respect
to that right. However, a holder of a Stripped Certificate will account
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for any discount on the Stripped Certificate (other than an interest treated as
a "stripped coupon") as market discount rather than original issue discount if
either (i) the amount of original issue discount with respect to the Stripped
Certificate was treated as zero under the original issue discount de minimis
rule when the Stripped Certificate was stripped or (ii) no more than 100 basis
points (including any amount of servicing in excess of reasonable servicing) is
stripped off from the mortgage assets.
Certificates will constitute Stripped Certificates and will be subject to
these rules under various circumstances, including the following:
o if any servicing compensation is deemed to exceed a reasonable amount;
o if the company or any other party retains a retained yield with
respect to the assets held by the Grantor Trust Fund;
o if two or more classes of certificates are issued representing the
right to non-pro rata percentages of the interest or principal
payments on the Grantor Trust Fund's assets; or
o if certificates are issued which represent the right to interest-only
payments or principal-only payments.
The tax treatment of the Stripped Certificates with respect to the
application of the original issue discount provisions of the Code is currently
unclear. However, the trustee intends to treat each Stripped Certificate as a
single debt instrument issued on the day it is purchased for purposes of
calculating any original issue discount. Original issue discount with respect to
a Stripped Certificate must be included in ordinary gross income for federal
income tax purposes as it accrues in accordance with the constant yield method
that takes into account the compounding of interest and this accrual of income
may be in advance of the receipt of any cash attributable to that income. See
"REMICs--Taxation of Owners of Regular Securities--Original Issue Discount"
above. For purposes of applying the original issue discount provisions of the
Code, the issue price of a Stripped Certificate will be the purchase price paid
by each holder of the Stripped Certificate and the stated redemption price at
maturity may include the aggregate amount of all payments to be made with
respect to the Stripped Certificate whether or not denominated as interest. The
amount of original issue discount with respect to a Stripped Certificate may be
treated as zero under the original issue discount de minimis rules described
above.
The precise tax treatment of Stripped Coupon Certificates is substantially
uncertain. The Code could read literally to require that OID computations be
made for each payment from each mortgage loan. However, based on IRS guidance,
it appears that all payments from a mortgage loan underlying a Stripped Coupon
Certificate should be treated as a single installment obligation subject to the
OID rules of the Code, in which case, all payments from the mortgage loan would
be included in the mortgage loan's stated redemption price at maturity for
purposes of calculating income on the Stripped Coupon Certificate under the OID
rules of the Code.
Based on current authority it is unclear under what circumstances, if any,
the prepayment of mortgage loans will give rise to a loss to the holder of a
Stripped Bond Certificate purchased at a premium or a Stripped Coupon
Certificate. The Code provides that a prepayment assumption must be used to
accrue income on any pool of debt instruments the yield on which can be affected
by prepayments. There is no guidance as to whether a Stripped Coupon Certificate
or Stripped Bond Certificate would represent an interest in a pool of debt
instruments for purposes of this Code provision. In addition, the manner in
which to take prepayments into account is uncertain. It is possible that no loss
may be available as a result of any particular prepayment, except perhaps to the
extent that even if no further prepayments were received a Certificateholder
would be unable to recover its basis. In addition,
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amounts received in redemption for debt instruments issued by natural persons
purchased or issued after June 8, 1997 are treated as received in exchange
therefor (that is treated the same as obligations issued by corporations). This
change could affect the character of any loss.
Holders of Stripped Bond Certificates and Stripped Coupon Certificates are
encouraged to consult with their own tax advisors regarding the proper treatment
of these certificates for federal income tax purposes.
Subordinated Certificates. In the event the Grantor Trust Fund issues two
classes of Grantor Trust Securities that are identical except that one class is
a subordinate class, with a relatively high certificate pass-through rate, and
the other is a senior class, with a relatively low certificate pass-through rate
(referred to in this prospectus as the "Subordinate Certificates" and "Senior
Certificates", respectively), the Grantor Trust Securityholders in the aggregate
will be deemed to have acquired the following assets: (1) the principal portion
of each mortgage loan plus a portion of the interest due on each mortgage loan
(the "Grantor Trust Fund Stripped Bond"), and (2) a portion of the interest due
on each mortgage loan equal to the difference between the Interest Rate on the
Subordinate Certificates and the Interest Rate on the Senior Certificates, if
any, which difference is then multiplied by the Subordinate Class Percentage
(the "Grantor Trust Fund Stripped Coupon"). The "Subordinate Class Percentage"
equals the initial aggregate principal amount of the Subordinate Certificates
divided by the sum of the initial aggregate principal amount of the Subordinate
Certificates and the Senior Certificates. The "Senior Class Percentage" equals
the initial aggregate principal amount of the Senior Certificates divided by the
sum of the initial aggregate principal amount of the Subordinate Certificates
and the Senior Certificates.
The Senior Certificateholders in the aggregate will own the Senior Class
Percentage of the Grantor Trust Fund Stripped Bond and accordingly each Senior
Certificateholder will be treated as owning its pro rata share of such asset.
The Senior Certificateholders will not own any portion of the Grantor Trust Fund
Stripped Coupon. The Subordinate Certificateholders in the aggregate own both
the Subordinate Class Percentage of the Grantor Trust Fund Stripped Bond plus
100% of the Grantor Trust Fund Stripped Coupon, if any, and accordingly each
Subordinate Certificateholder will be treated as owning its pro rata share in
both assets. The Grantor Trust Fund Stripped Bond will be treated as a "stripped
bond" and the Grantor Trust Fund Stripped Coupon will be treated as "stripped
coupons" within the meaning of Section 1286 of the Code.
Although not entirely clear, the interest income on the Subordinate
Certificates and the portion of the servicing fee allocable to such certificates
that does not constitute excess servicing will be treated by the Grantor Trust
Fund as qualified stated interest, assuming the interest with respect to the
mortgage loans held by the Grantor Trust Fund would otherwise qualify as
qualified stated interest. Accordingly, except to the extent modified below, the
income of the Subordinate Certificates will be reported in the same manner as
described generally above for holders of Senior Certificates.
If the Subordinate Certificateholders receive distribution of less than
their share of the Grantor Trust Fund's receipts of principal or interest (the
"Shortfall Amount") because of the subordination of the Subordinate
Certificates, holders of Subordinate Certificates would probably be treated for
federal income tax purposes as if they had
o received as distributions their full share of receipts;
o paid over to the Senior Certificateholders an amount equal to the
Shortfall Amount; and
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o retained the right to reimbursement of the relevant amounts to the
extent these amounts are otherwise available as a result of
collections on the mortgage loans or amounts available from a reserve
account or other form of credit enhancement, if any.
Under this analysis,
o Subordinate Certificateholders would be required to accrue as current
income any interest income, original issue discount, or (to the extent
paid on assets of the Grantor Trust Fund) accrued market discount of
the Grantor Trust Fund that was a component of the Shortfall Amount,
even though that amount was in fact paid to the Senior
Certificateholders;
o a loss would only be allowed to the Subordinate Certificateholders
when their right to receive reimbursement of the Shortfall Amount
became worthless (i.e., when it becomes clear that amount will not be
available from any source to reimburse the loss); and
o reimbursement of the Shortfall Amount prior to a claim of
worthlessness would not be taxable income to Subordinate
Certificateholders because the amount was previously included in
income.
Those results should not significantly affect the inclusion of income for
Subordinate Certificateholders on the accrual method of accounting, but could
accelerate inclusion of income to Subordinate Certificateholders on the cash
method of accounting by, in effect, placing them on the accrual method.
Moreover, the character and timing of loss deductions are unclear. Subordinate
Certificateholders are strongly urged to consult their own tax advisors
regarding the appropriate timing, amount and character of any losses sustained
with respect to the Subordinate Certificates including any loss resulting from
the failure to recover previously accrued interest or discount income.
Election to Treat All Interest as Original Issue Discount. The Treasury
Regulations relating to original issue discount permit a Grantor Trust
Securityholder to elect to accrue all interest, discount, including de minimis
market or original issue discount, reduced by any premium, in income as
interest, based on a constant yield method. If an election were to be made with
respect to an interest in a mortgage loan with market discount, the Grantor
Trust Securityholder would be deemed to have made an election to include in
income currently market discount with respect to all other debt instruments
having market discount that the Grantor Trust Securityholder acquires during the
year of the election or afterward. See "--Market Discount" above. Similarly, a
Grantor Trust Securityholder that makes this election for an interest in a
mortgage loan that is acquired at a premium will be deemed to have made an
election to amortize bond premium with respect to all debt instruments having
amortizable bond premium that the Grantor Trust Securityholder owns at the
beginning of the first taxable year to which the election applies or acquires
afterward. See "--Premium" above. The election to accrue interest, discount and
premium on a constant yield method with respect to a Grantor Trust Security is
irrevocable.
Prepayments. The Taxpayer Relief Act of 1997 (the "1997 Act") contains a
provision requiring original issue discount on any pool of debt instruments the
yield on which may be affected by reason of prepayments be calculated taking
into account the Prepayment Assumption and requiring the discount to be taken
into income on the basis of a constant yield to assumed maturity taking account
of actual prepayments. The legislative history to the 1986 Act states that
similar rules apply with respect to market discount and amortizable bond premium
on debt instruments.
Sale or Exchange of a Grantor Trust Security. Sale or exchange of a Grantor
Trust Security prior to its maturity will result in gain or loss equal to the
difference, if any, between the amount realized, exclusive of amounts
attributable to accrued and unpaid interest (which will be treated as ordinary
income
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allocable to the related asset of the Grantor Trust Fund), and the owner's
adjusted basis in the Grantor Trust Security. The adjusted basis generally will
equal the seller's cost for the Grantor Trust Security, increased by the
original issue discount and any market discount included in the seller's gross
income with respect to the Grantor Trust Security, and reduced, but not below
zero, by any premium amortized by the seller and by principal payments on the
Grantor Trust Security previously received by the seller. The gain or loss will,
except as discussed below, be capital gain or loss to an owner for which the
assets of the Grantor Trust Fund represented by a Grantor Trust Security are
"capital assets" within the meaning of Section 1221. A capital gain or loss will
be long-term or short-term depending on whether or not the Grantor Trust
Security has been owned for the long-term capital gain holding period, currently
more than one year.
Notwithstanding the foregoing, any gain realized on the sale or exchange of
a Grantor Trust Security will be ordinary income to the extent of the seller's
interest in accrued market discount on Grantor Trust Fund assets not previously
taken into income. See "--Market Discount," above. Further, Grantor Trust
Securities will be "evidences of indebtedness" within the meaning of Section
582(c)(1) to the extent the assets of the grantor trust would be so treated.
Accordingly, gain or loss recognized from the sale of a Grantor Trust Security
by a bank or thrift institution to which such section applied will be treated as
ordinary gain or loss to the extent selling the assets of the grantor trust
directly would be so treated.
Foreign Investors in Grantor Trust Securities. A holder of a Grantor Trust
Security who is not a "U.S. person" (as defined above at "REMICs--Tax Related
Restrictions on Transfer of Residual Securities--Foreign Investors") and is not
subject to federal income tax as a result of any direct or indirect connection
to the United States other than its ownership of a Grantor Trust Security
generally will not be subject to United States income or withholding tax in
respect of payments of interest or original issue discount on its Grantor Trust
Security to the extent attributable to debt obligations held by the Grantor
Trust Fund that were originated after July 18, 1984, provided that the Grantor
Trust Securityholder complies to the extent necessary with certain certification
requirements which generally relate to the identity of the beneficial owner and
the status of the beneficial owner as a person that is not a U.S. person.
Interest or original issue discount on a Grantor Trust Security attributable to
debt obligations held by the Grantor Trust Fund that were originated prior to
July 19, 1984 will be subject to a 30% withholding tax (unless such tax is
reduced or eliminated by an applicable tax treaty). All holders of Grantor Trust
Securities should consult their tax advisors regarding the tax documentation and
certifications that must be provided to secure any applicable exemptions from
United States withholding taxes including certain more extensive documentation
and certification requirements which may apply to a beneficial owner claiming
exemption through an intermediary.
Any capital gain realized on the sale or other taxable disposition of a
Grantor Trust Security by a Non-U.S. Person (as defined above at
"REMICs--Taxation of Certain Foreign Investors--Regular Securities") generally
will be exempt from United States federal income and withholding tax, provided
that (i) such gain is not effectively connected with the conduct of a trade or
business in the United States by the Non-U.S. Person and (ii) in the case of an
individual Non-U.S. Person, the Non-U.S. Person is not present in the United
States for 183 days or more in the taxable year.
If the interest, gain or income with respect to a Grantor Trust Security
held by a Non-U.S. Person is effectively connected with the conduct of a trade
or business in the United States by the Non-U.S. Person (although exempt from
the withholding tax previously discussed if the holder provides an appropriate
statement establishing that such income is so effectively connected), the holder
generally will be subject to United States federal income tax on the interest,
gain or income at regular federal income tax rates. In this regard, real estate
acquired by a Grantor Trust as a result of foreclosure or in lieu of foreclosure
could cause a foreign holder to have "effectively connected income" or a U.S.
tax filing
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obligation even in the absence of such income. In addition, if the Non-U.S.
Person is a foreign corporation, it may be subject to a branch profits tax equal
to 30% of its "effectively connected earnings and profits," within the meaning
of the Code, for the taxable year, as adjusted for certain items, unless it
qualifies for a lower rate under an applicable tax treaty (as modified by the
branch profits tax rules).
Backup Withholding. Distributions made on the Grantor Trust Securities and
proceeds from the sale of the Grantor Trust Securities will be subject to a
"backup" withholding tax if, in general, the Grantor Trust Securityholder fails
to comply with particular identification procedures, unless the holder is an
exempt recipient under applicable provisions of the Code and, if necessary,
demonstrates such status. Any amounts so withheld would be refunded by the
Internal Revenue Service or allowable as a credit against the Grantor Trust
Securityholder's federal income tax.
PARTNERSHIP TRUST FUNDS AND DISREGARDED TRUST FUNDS
Classification of Trust Funds
For each Series of Partnership Certificates or Debt Securities, McKee
Nelson LLP, or other counsel specified in the related prospectus supplement,
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 parties to the related Agreement and related documents will comply with the
terms of those documents.
Taxation of Debt Securityholders
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,
for each Series of Debt Securities, McKee Nelson LLP, or other counsel specified
in the related prospectus supplement, 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 Internal Revenue Service
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
Trust Fund. If so treated, the Trust Fund might be treated as a publicly traded
partnership that would be taxable as a corporation unless it met particular
qualifying income tests, and the resulting taxable corporation would not be able
to reduce its taxable income by deductions for interest expense on Debt
Securities recharacterized as equity. Treatment of the Debt Securities as equity
interests in a partnership could have adverse tax consequences to some holders,
even if the Trust Fund were not treated as a publicly traded partnership taxable
as a corporation. For example, income allocable to foreign holders might be
subject to United States tax and United States tax return filing and withholding
requirements, income allocable to tax-exempt holders might constitute "unrelated
business taxable income" (if some, but not all, of the Debt Securities were
recharacterized as equity in a partnership), individual holders might be subject
to limitations on their ability to deduct their share of Trust Fund expenses,
and income from the Trust Fund's assets would be taxable to owners of Debt
Securities without regard to whether cash distributions are made to such owners
and without regard to the owners' method of tax accounting.
Except for the treatment of the allocation of Realized Losses, Debt
Securities generally will be subject to the same rules of taxation as Regular
Securities issued by a REMIC, as described above, except that (1) income
reportable on Debt Securities is not required to be reported under the accrual
method
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unless the holder otherwise uses the accrual method and (2) the special 110%
yield 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" and "--Sale or Exchange of
Regular Securities."
Allocations of Realized Losses.
The manner losses are claimed on the Notes as a result of defaults by the
underlying obligors is complex and differs depending on the characterization of
the person considered the issuer of the Notes for federal tax purposes. Whether
the Notes are governed by the loss rules for bad debts under Code Section 166 or
for worthless securities under Code Section 165 depends on whether the Notes are
considered issued by a corporation. If there is a single corporate holder of the
Certificates constituting all of the equity interests in the issuing Trust Fund,
then the issuing Trust will be a disregarded entity and the Notes will be
considered issued by a corporation subject to the loss rules of Code Section 165
(which affects both timing and character of loss for corporate taxpayers, and
character and possibly timing for other taxpayers). If the Notes are considered
issued by a grantor trust, then the notes may be treated as issued in proportion
to the nature of the Certificateholders (e.g, if some Certificateholders are
natural persons or partnerships and some are corporations, losses on the Notes
would be governed in part by Code Section 166 and in part by Code Section 165).
If the Notes are considered issued by a partnership then they would be governed
by the rules under Code Section 166. Investors should consult their tax advisors
as to the character and timing of any loss that can be claimed with respect to a
Note.
Further, for federal income tax purposes, (i) 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" within the
meaning of Section 7701(a)(19)(C)(v) of the Code; (ii) interest on Debt
Securities held by a real estate investment trust will not be treated as
"interest on obligations secured by mortgages on real property or on interests
in real property "within the meaning of Code Section 856(c)(3)(B); (iii) Debt
Securities held by a real estate investment trust will not constitute "real
estate assets" or "Government securities" within the meaning of Section
856(c)(4)(A) of the Code; (iv) Debt Securities held by a regulated investment
company will not constitute "Government securities" within the meaning of
Section 851(b)(3)(A)(i) of the Code; and (v) Debt Securities will not constitute
"qualified mortgages" with in the meaning of Section 860G(a)(3) of the Code for
REMICs.
Taxation of Owners of Partnership Certificates
1. Treatment of the Trust Fund as a Partnership
The correct characterization of a Trust Fund that has issued debt and is
not otherwise taxed as a corporation is uncertain. If the Trust Fund has only a
single class of equity and the Trustee does not have the authority to accept any
additional assets after the initial acquisition of receivables (except within a
certain prescribed pre-funding period not exceeding three months) and has very
limited powers of investment (for example does not hold any reserve fund that
could ultimate flow to the Certificateholders if not needed to pay the
Noteholders) the Trust Fund could qualify as a grantor trust with interest
expense. As a consequence, each Certificateholer would be treated as owning a
pro rata share of the Trust Fund's assets, earning income thereon and incurring
the expenses of the Trust Fund (including the interest expense on the Notes).
See "Grantor Trusts." If a Trust Fund that issues Notes intends to take the
position that Certificateholders hold interests in a grantor trust it will be
disclosed in the related prospectus supplement. In addition, it is possible that
a Trust Fund that issued Notes could qualify as a partnership eligible to make
an election under Section 761 to not be taxed under the main partnership
provisions of the Code (although certain ancillary provisions, including the
rules relating to audits of partnerships, would continue to apply). Such an
election would cause Certificateholders to be treated as
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essentially the same as holding an interest in a grantor trust. However, the IRS
has recently taken a narrow interpretation of the type of entities that qualify
for this election, which may not include a Trust Fund. If a Trust Fund that is
treated as a partnership intends to report in accordance with having made an
election under Section 761 to be excluded from the main partnership provisions
of the Code the consequences of such reporting will be disclosed in the related
prospectus supplement along with a description of the consequences of making
such an election. If there is only one Certificateholder in a Trust Fund that
represents all of the equity of the Trust Fund for federal income tax purposes,
the separate existence of the Trust Fund is disregarded, and the
Certificateholder is treated as the owner of all of the assets of the Trust Fund
and as the issuer of the Notes of the Trust Fund for federal income tax
purposes. For all other Trust Funds that issue Notes, the Partnership Trust Fund
will agree, and the related owners of Partnership Certificates ("Partnership
Certificate Owners") will agree by their purchase of Partnership Certificates,
if there is more than one Partnership Certificate Owner, 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 Partnership Certificate
Owners, including, to the extent relevant, the Depositor in its capacity as
recipient of distributions from any reserve fund, and the Debt Securities, if
any, being debt of the partnership, and if there is one Partnership Certificate
Owner, to treat the Partnership Certificate Owner as the owner of the assets of
the Partnership Trust Fund and to treat the Partnership Trust Fund as a
disregarded entity. However, the proper characterization of the arrangement
involving the Partnership Trust Fund, the Partnership Certificates, the Debt
Securities and the Depositor is not certain because there is no authority on
transactions closely comparable to that contemplated in this prospectus.
A variety of alternative characterizations are possible. For example,
because the Partnership Certificates have certain features characteristic of
debt, the Partnership Certificates might be considered debt of the Partnership
Trust Fund. Generally, provided such Partnership Certificates are issued at or
close to face value, any such characterization would not result in materially
adverse tax consequences to holders of Partnership Certificates as compared to
the consequences from treatment of the Partnership Certificates as equity in a
partnership, described below. The following discussion assumes that the
Partnership Certificates represent equity interests in a partnership and that
only a single class of equity exists in a Partnership Trust Fund.
2. Partnership Taxation
As a partnership, the Partnership Trust Fund will not be subject to federal
income tax. Rather, each Partnership Certificate Owner will be required to take
into account separately the Partnership Certificate Owner's allocable share of
income, gains, losses, deductions and credits of the Partnership Trust Fund,
whether or not there is a corresponding cash distribution. The Trust will
generally be required to use an accrual method of accounting and a tax year
based on the tax year of its Certificateholders. Thus, cash basis holders will
in effect be required to report income from the Partnership Certificates on the
accrual basis and Partnership Certificate Owners may become liable for taxes on
Partnership Trust Fund income even if they have not received cash from the
Partnership Trust Fund to pay the taxes. The Partnership Trust Fund's income
will consist primarily of interest and finance charges earned on the related
mortgage loans, including appropriate adjustments for market discount, original
issue discount and bond premium, and any gain upon collection or disposition of
the 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 mortgage loans.
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The tax items of a partnership are allocable to the partners in accordance
with the Code, Treasury regulations and the partnership agreement (i.e., the
Agreement and related documents). To the extent that there is more than one
class of equity (or potentially more than one class of equity) the related
prospectus supplement will describe the manner in which income from the assets
of the Trust Fund will be allocated.
Assuming Debt Securities are also issued, all or substantially all of the
taxable income allocated to a Partnership Certificate Owner that is a pension,
profit sharing or employee benefit plan or other tax-exempt entity, including an
individual retirement account, will constitute "unrelated business taxable
income" generally taxable to the holder under the Code.
An individual taxpayer's share of expenses of the Partnership Trust Fund,
including fees to the servicer, but not interest expense, would be miscellaneous
itemized deductions and thus deductible only to the extent such expenses plus
all other miscellaneous itemized deductions exceeds two percent of the
individual's adjusted gross income. An individual taxpayer will be allowed no
deduction for his share of expenses of the Partnership Trust Fund, other than
interest, in determining his liability for alternative minimum tax. In addition,
Section 68 of the Code provides that the amount of itemized deductions otherwise
allowable for the taxable year for an individual whose adjusted gross income
exceeds a prescribed threshold amount will be reduced by the lesser of (1) 3% of
the excess of adjusted gross income over the specified threshold amount
(adjusted annually for inflation) or (2) 80% of the amount of itemized
deductions otherwise allowable for the applicable taxable year. Accordingly,
deductions might be disallowed to the individual in whole or in part and might
result in the Partnership Certificate Owner being taxed on an amount of income
that exceeds the amount of cash actually distributed to the holder over the life
of the Partnership Trust Fund. In the case of a partnership that has 100 or more
partners and elects to be treated as an "electing large partnership," 70% of
that partnership's miscellaneous itemized deductions will be disallowed,
although the remaining deductions will generally be allowed at the partnership
level and will not be subject to the 2% floor that would otherwise be applicable
to individual partners.
The Partnership Trust Fund intends to make all tax calculations relating to
income and allocations to Partnership Certificate Owners on an aggregate basis
to the extent relevant. If the IRS were to require that the calculations be made
separately for each mortgage loan, the calculations may result in some timing
and character differences under some circumstances.
3. Discount and Premium
The purchase price paid by the Partnership Trust Fund for the related
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 market discount, as the case may be. See
"REMICs--Taxation of Owners of Regular Securities--Acquisition Premium" and "--
Market Discount" above. As indicated above, the Partnership Trust Fund will make
this calculation on an aggregate basis, but it is possible that the IRS might
require that it be recomputed on a mortgage loan-by-mortgage loan basis.
Further, with respect to any asset of the Partnership Trust Fund that is a
Stripped Agency Security or other instrument evidencing ownership of specific
interest and/or principal of a particular bond, it will be subject to the rules
relating to original issue discount with respect to such security or instrument
(in lieu of the rules relating to market discount). See "REMICs--Taxation of
Owners of Regular Securities--Original Issue Discount" above.
If the Partnership Trust Fund acquires the mortgage loans at a market
discount or premium, the Partnership Trust Fund will elect to include any market
discount in income currently as it accrues over the life of the mortgage loans
or to offset any premium against interest income on the mortgage loans. As
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indicated above, a portion of the market discount income or premium deduction
may be allocated to Partnership Certificate Owners.
4. 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 a termination occurs under Section 708 of the Code, the
Partnership Trust Fund will be considered to contribute its assets to a new
Partnership Trust Fund, which would be treated as a new partnership, in exchange
for Partnership Certificates in the new Partnership Trust Fund. The original
Partnership Trust Fund will then be deemed to distribute the Partnership
Certificates in the new Partnership Trust Fund to each of the owners of
Partnership Certificates in the original Partnership Trust Fund in liquidation
of the original Partnership Trust Fund. The Partnership Trust Fund will not
comply with particular technical requirements that might apply when a
constructive termination occurs. As a result, the Partnership Trust Fund may be
subject to some 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 with these requirements due to lack of data.
5. Disposition of Partnership Certificates
Generally, capital gain or loss will be recognized on a sale of Partnership
Certificates in an amount equal to the difference between the amount realized
and the seller's tax basis in the Partnership Certificates sold. Any gain or
loss would be long-term capital gain or loss if the Partnership Certificate
Owner's holding period exceeded one year. A Partnership Certificate Owner's tax
basis in a Partnership Certificate will generally equal its cost, increased by
its share of Partnership Trust Fund income allocable to the Partnership
Certificate Owner and decreased by any distributions received or losses
allocated with respect to the Partnership Certificate. In addition, both the tax
basis in the Partnership Certificates and the amount realized on a sale of a
Partnership Certificate would include the Partnership Certificate Owner's share,
determined under Treasury Regulations, of the Debt Securities and other
liabilities of the Partnership Trust Fund. A Partnership Certificate Owner
acquiring Partnership Certificates at different prices will generally be
required to maintain a single aggregate adjusted tax basis in the Partnership
Certificates and, upon a sale or other disposition of some of the Partnership
Certificates, allocate a portion of the aggregate tax basis to the Partnership
Certificates sold, rather than maintaining a separate tax basis in each
Partnership Certificate for purposes of computing gain or loss on a sale of that
Partnership Certificate. A portion holding rule is applied, however, if a
Certificateholder has held some of its interest in the Partnership Trust Fund
for one year or less and some of its interest for more than one year and a "by
lot" identification is not permitted.
If a Partnership Certificate Owner 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 Certificates that
exceeds the aggregate cash distributions with respect to the Partnership
Certificates, the excess will generally give rise to a capital loss upon the
retirement of the Partnership Certificates.
6. 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 Partnership Certificate Owners in proportion to the
principal amount of Partnership Certificates owned by them as of the close of
the last day of that Due Period. As a result, a Partnership Certificate Owner
purchasing Partnership
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Certificates may be allocated tax items, which will affect the purchaser's tax
liability and tax basis, attributable to periods before the actual transaction.
The use of a Due Period convention may not be permitted by existing
Treasury 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 Partnership
Certificate Owners. The Partnership Trust Fund's method of allocation between
transferors and transferees may be revised to conform to a method permitted by
future laws, regulations or other IRS guidance.
7. Section 731 Distributions
In the case of any distribution to a Partnership Certificate Owner, no gain
will be recognized to that Partnership Certificate Owner to the extent that the
amount of any money distributed for that Partnership Certificate exceeds the
adjusted basis of that Partnership Certificate Owner's interest in the
Partnership Certificate. To the extent that the amount of money distributed
exceeds that Partnership Certificate Owner's adjusted basis, gain will be
currently recognized. In the case of any distribution to a Partnership
Certificate Owner, no loss will be recognized except upon a distribution in
liquidation of a Partnership Certificate Owner's interest. Any gain or loss
recognized by a Partnership Certificate Owner generally will be capital gain or
loss.
8. Section 754 Election
In the event that a Partnership Certificate Owner sells its Partnership
Certificates at a profit (or loss), the purchasing Partnership Certificate Owner
will have a higher (or lower) basis in the Partnership Certificates than the
selling Partnership Certificate Owner had. The tax basis of the Partnership
Trust Fund's assets will 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 current does not
intend to make an election under Section 754 of the Code. As a result,
Partnership Certificate Owners might be allocated a greater or lesser amount of
Partnership Trust Fund income than would be appropriate based on their own
purchase price for Partnership Certificates with an offsetting gain or loss
(capital in character) upon transfer of its Partnership Certificates or
liquidation of the Partnership Trust Fund.
9. Administrative Matters
The trustee is required to keep or cause to be kept complete and accurate
books of the Partnership Trust Fund. For each trust which is not a fixed pool of
assets or that has multiple classes of equity ownership, 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 Partnership Certificate
Owner's allocable share of items of Partnership Trust Fund income and expense to
Partnership Certificate Owners and the IRS on Schedule K-1. The Partnership
Trust Fund will provide the Schedule K-1 information to nominees that fail to
provide the Partnership Trust Fund with the information statement described
below and the nominees will be required to forward this information to the
beneficial owners of the Partnership Certificates. Generally, holders must
timely 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 the inconsistencies.
Under Section 6031 of the Code, any person that holds Partnership
Certificates as a nominee at any time during a calendar year is required to
furnish the Partnership Trust Fund with a statement
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containing specific information on the nominee, the beneficial owners and the
Partnership Certificates so held. The information includes (1) the name, address
and taxpayer identification number of the nominee and (2) as to each beneficial
owner
o the name, address and identification number of such person,
o 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
o particular information on Partnership Certificates that were held,
bought or sold on behalf of the person throughout the year.
In addition, brokers and financial institutions that hold Partnership
Certificates through a nominee are required to furnish directly to the
Partnership Trust Fund information as to themselves and their ownership of
Partnership Certificates. A clearing agency registered under Section 17A of the
Exchange Act is not required to furnish any 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.
Unless another designation is made, the Depositor will be designated as the
tax matters partner for each Partnership Trust Fund in the pooling and servicing
agreement and, as the tax matters partner, will be responsible for representing
the Partnership Certificate Owners in some specific disputes with the IRS. The
Code provides for administrative examination of a partnership as if the
partnership were a separate and distinct taxpayer. Generally, the statute of
limitations for partnership items does not expire before the later of three
years after the date on which the partnership information return is filed or the
last day for filing the return for the applicable year, determined without
regard to extensions. 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 Partnership Certificate Owners, and,
under some circumstances, a Partnership Certificate Owner 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 Partnership
Certificate Owner's returns and adjustments of items not related to the income
and losses of the Partnership Trust Fund.
A special audit system exists for qualifying large partnerships that have
elected to apply a simplified flow-through reporting system under Sections 771
through 777 of the Code. Unless otherwise specified in the applicable prospectus
supplement, a Partnership Trust Fund will not elect to apply the simplified
flow-through reporting system.
10. Taxation of Certain Foreign Partnership Certificate Owners
As used below, the term "Non-United States Owner" means a Partnership
Certificate Owner that is not a U.S. Person, as defined under "REMICs--Taxation
of Owners of Residual Securities--Tax Related Restrictions on Transfer of
Residual Securities--Foreign Investors," above.
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-United States Owners because there is no
clear authority dealing with that issue under facts substantially similar to
those described in this prospectus. Although it is not expected that the
Partnership Trust Fund would be engaged in a trade or business in the United
States for these purposes, the Partnership Trust Fund will
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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 expects to withhold on the portion of its taxable income that is
allocable to Non-United States Owners pursuant to Section 1446 of the Code, as
if the income were effectively connected to a U.S. trade or business.
Subsequent adoption of Treasury regulations or the issuance of other
administrative pronouncements may require the Partnership Trust Fund to change
its withholding procedures.
Each Non-United States Owner might be required to file a U.S. individual or
corporate income tax return on its share of the income of the Partnership Trust
Fund including, in the case of a corporation, a return in respect of the branch
profits tax. Assuming the Partnership Trust Fund is not engaged in a U.S. trade
or business, a Non-United States Owner would be entitled to a refund with
respect to all or a portion of taxes withheld by the Partnership Trust Fund if,
in particular, the Owner's allocable share of interest from the Partnership
Trust Fund constituted "portfolio interest" under the Code.
The interest, however, may not constitute "portfolio interest" if, among
other reasons, the underlying obligation is not in registered form or if the
interest is determined without regard to the income of the Partnership Trust
Fund, in the later case, the interest being properly characterized as a
guaranteed payment under Section 707(c) of the Code. If this were the case,
Non-United States Owners would be subject to a United States federal income and
withholding tax at a rate of 30 percent on the Partnership Trust Fund's gross
income, without any deductions or other allowances for costs and expenses
incurred in producing the income, unless reduced or eliminated pursuant to an
applicable treaty. In this case, a Non-United States Owner would only be
entitled to a refund for that portion of the taxes, if any, in excess of the
taxes that should have been withheld with respect to the interest.
11. Backup Withholding
Distributions made on the Partnership Certificates and proceeds from the
sale of the Partnership Certificates will be subject to a "backup" withholding
tax if, in general, the Partnership Certificate Owner fails to comply with
particular identification procedures, unless the holder is an exempt recipient
under applicable provisions of the Code and, if necessary, demonstrates such
status. Any amounts so withheld would be refunded by the IRS or allowable as a
credit against the Non-United States Owner's federal income tax.
CERTAIN CERTIFICATES TREATED AS INDEBTEDNESS
General. Upon the issuance of Certificates that are intended to be treated
as indebtedness for federal income tax purposes, Federal Tax Counsel will opine
that based upon its analysis of the factors discussed below and certain
assumptions and qualifications, the Certificates will be properly classified as
indebtedness for federal income tax purposes. However, opinions of counsel are
not binding on the Internal Revenue Service and there can be no assurance that
the Internal Revenue Service could not successfully challenge this conclusion.
Such Certificates that are intended to be treated as indebtedness are herein
referred to as "Debt Certificates" and holders of such Certificates are herein
referred to as "Debt Certificateholders."
The Depositor and any Unaffiliated Sellers, will express in the Agreements
their intent that for federal, state and local income and franchise tax
purposes, the Debt Certificates will be indebtedness secured by the assets in
the Trust Fund. The Depositor and each Unaffiliated Seller agrees and each Debt
Certificateholder, by acquiring an interest in a Debt Certificate, agrees or
will be deemed to agree to treat the Debt Certificates as indebtedness for
federal, state and local income or franchise tax purposes. However, because
different criteria are used to determine the non-tax accounting characterization
of the
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transactions contemplated by the Agreements, the transactions may be treated as
a sale of ownership interests in the assets held by the Trust Fund for financial
accounting purposes, and not as debt obligations.
In general, whether for federal income tax purposes a transaction
constitutes a sale of property or a loan the repayment of which is secured by
the property, is a question of fact, the resolution of which is based upon the
economic substance of the transaction. The form of a transaction, while a
relevant factor, is not conclusive evidence of its economic substance. In
appropriate circumstances, the courts have allowed taxpayers, as well as the
Internal Revenue Service, to treat a transaction in accordance with its economic
substance, as determined under federal income tax laws, notwithstanding that the
participants characterize the transaction differently for non-tax purposes. In
some instances, however, courts have held that a taxpayer is bound by a
particular form it has chosen for a transaction, even if the substance of the
transaction does not accord with its form. It is expected that Federal Tax
Counsel will advise that the rationale of those cases will not apply to the
transactions evidenced by a Series of Debt Certificates.
While the Internal Revenue Service and the courts have set forth several
factors to be taken into account in determining whether the substance of a
transaction is a sale of property or a secured indebtedness for federal income
tax purposes, the primary factor in making this determination is whether the
transferee has assumed the risk of loss or other economic burdens relating to
the property and has obtained the economic benefits of ownership thereof.
Federal Tax Counsel will analyze and rely on several factors in reaching its
opinion that the weight of the benefits and burdens of ownership of the assets
held by the Trust Fund has not been transferred to the Debt Certificateholders
and that the Debt Certificates are properly characterized as indebtedness for
federal income tax purposes. Contrary characterizations that could be asserted
by the Internal Revenue Service are described below under "--Possible
Classification of the Transaction as a Partnership or as an Association Taxable
as a Corporation."
Taxation of Income of Debt Certificateholders. As set forth above, it is
expected that Federal Tax Counsel will advise the Depositor and/or the
Unaffiliated Sellers that the Debt Certificates will constitute indebtedness for
federal income tax purposes, and accordingly, holders of Debt Certificates
generally will be taxed in the manner described above in "Partnership Trust
Funds and Disregarded Trust Funds--Taxation of Debt Securityholders."
If the Debt Certificates are issued with OID that is more than a de minimis
amount as defined in the Code and Treasury regulations (see "REMICs--Taxation of
Regular Securities--Original Issue Discount") a United States holder of a Debt
Certificate (including a cash basis holder) generally would be required to
accrue the OID on its interest in a Debt Certificate in income for federal
income tax purposes on a constant yield basis, resulting in the inclusion of OID
in income in advance of the receipt of cash attributable to that income. Under
Section 1272(a)(6) of the Code, special provisions apply to debt instruments on
which payments may be accelerated due to prepayments of other obligations
securing those debt instruments. However, no regulations have been issued
interpreting those provisions, and the manner in which those provisions would
apply to the Debt Certificates is unclear. Additionally, the Internal Revenue
Service could take the position based on Treasury regulations that none of the
interest payable on a Debt Certificate is "unconditionally payable" and hence
that all of such interest should be included in the Debt Certificate's stated
redemption price at maturity. Accordingly, Federal Tax Counsel is unable to
opine as to whether interest payable on a Debt Certificates constitutes
"qualified stated interest" that is not included in a Debt Certificate's stated
redemption price at maturity. Consequently, prospective investors in Debt
Certificates should consult their own tax advisors concerning the impact to them
in their particular circumstances. The prospectus supplement will indicate
whether the Trust expects to treat a Debt Certificate as having been issued with
OID.
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Tax Characterization of the Trust Fund. Consistent with the treatment of
the Debt Certificates as indebtedness, the Trust Fund will be treated as a
security device to hold mortgage assets securing the repayment of the Debt
Certificates. In connection with the issuance of Debt Certificates of any
Series, Federal Tax Counsel will render an opinion that, based on the
assumptions and qualifications set forth therein, under then current law, the
applicable Trust will not be characterized for federal income tax purposes as a
taxable mortgage pool or as an association (or publicly traded partnership)
taxable as a corporation.
Possible Classification of the Transaction as a Partnership or as an
Association Taxable as a Corporation. The opinion of Federal Tax Counsel with
respect to Debt Certificates will not be binding on the courts or the Internal
Revenue Service. It is possible that the Internal Revenue Service could assert
that, for federal income tax purposes, the transactions contemplated constitute
a sale of the assets held in the Trust Fund (or an interest therein) to the Debt
Certificateholders and that the proper classification of the legal relationship
between the Unaffiliated Sellers, the Depositor, and some or all of the Debt
Certificateholders resulting from the transactions is that of a partnership
(including a publicly traded partnership), a publicly traded partnership taxable
as a corporation, or an association taxable as a corporation. The Depositor
currently does not intend to comply with the federal income tax reporting
requirements that would apply if any Classes of Debt Certificates were treated
as interests in a partnership or corporation.
If a transaction were treated as creating a partnership between any of the
Unaffiliated Sellers and/or the Depositor and the Debt Certificateholders, the
partnership itself would not be subject to federal income tax (unless it were
characterized as a publicly traded partnership taxable as a corporation);
rather, the partners of such partnership, including the Debt Certificateholders,
would be taxed individually on their respective distributive shares of the
partnership's income, gain, loss, deductions and credits. The amount and timing
of items of income and deductions of a Debt Certificate could differ if the Debt
Certificates were held to constitute partnership interests, rather than
indebtedness. Moreover, unless the partnership were treated as engaged in a
trade or business, an individual's share of expenses of the partnership would be
miscellaneous itemized deductions that, in the aggregate, are allowed as
deductions only to the extent they exceed two percent of the individual's
adjusted gross income, and would be subject to reduction under Section 68 of the
Code if the individual's adjusted gross income exceeded certain limits. As a
result, the individual might be taxed on a greater amount of income than the
stated rate on the Debt Certificates. Finally, all or a portion of any taxable
income allocated to a Debt Certificateholder that is a pension, profit-sharing
or employee benefit plan or other tax-exempt entity (including an individual
retirement account) may, under certain circumstances, constitute "unrelated
business taxable income" which generally would be taxable to the holder under
the Code.
If it were determined that a transaction created an entity classified as an
association or as a publicly traded partnership taxable as a corporation, the
Trust Fund would be subject to federal income tax at corporate income tax rates
on the income it derives from the mortgage assets it holds, which would reduce
the amounts available for distribution to the Debt Certificateholders. Such
classification may also have adverse state and local tax consequences that would
reduce amounts available for distribution to Debt Certificateholders. Moreover,
distributions on Debt Certificates that are recharacterized as equity in an
entity taxable as a corporation would not be deductible in computing the
entity's taxable income, and cash distributions on such Debt Certificates
generally would be treated as dividends for tax purposes to the extent of such
deemed corporation's earnings and profits.
Foreign Investors in Debt Certificates. As set forth above, it is expected
that Federal Tax Counsel will advise the Depositor and/or the Unaffiliated
Sellers that the Debt Certificates will constitute indebtedness for federal
income tax purposes. Accordingly, Foreign Persons (that is, persons which are
not U.S. Persons, as defined in "REMICs--Taxation of Owners of Residual
Securities--Tax Related
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Restrictions on Transfer of Residual Securities--Foreign Investors) that hold
Debt Certificates generally will be taxed in the manner described in that
section.
If the Internal Revenue Service were to contend successfully that the Debt
Certificates are interests in a partnership and if such partnership were
considered to be engaged in a trade or business in the United States, the
partnership would be subject to a withholding tax on income of the Trust Fund
that is allocable to a Foreign Person and such Foreign Person would be credited
for his or her share of the withholding tax paid by the partnership. In such
case, the Foreign Person generally would be subject to United States federal
income tax at regular income tax rates, and possibly a branch profits tax in the
case of a corporate holder.
Alternatively, although there may be arguments to the contrary, if such
partnership is not considered to be engaged in a trade or business within the
United States and if income with respect to the Debt Certificates is not
otherwise effectively connected with the conduct of a trade or business in the
United States by the Foreign Person, the Foreign Person would be subject to
United States income tax and withholding at a rate of 30% (unless reduced by an
applicable tax treaty) on the holder's distributive share of the partnership's
interest income. See "Partnership Trust Funds and Disregarded Trust
Funds--Taxation of Owners of Partnership Certificates--Taxation of Certain
Foreign Partnership Certificate Owners" for a general discussion of the
consequences of an equity investment by a Foreign Person in an entity
characterized as a partnership.
If the Trust Fund were recharacterized as an association or publicly traded
partnership taxable as a corporation, distribution to owners of Debt
Certificates that are Foreign Persons, to the extent treated as dividends, would
generally be subject to withholding at the rate of 30%, unless such rate were
reduced or eliminated by an applicable income tax treaty. If such dividend were
effectively connected with the Foreign Person's United States trade or business
(and, if necessary, the Foreign Person establishes that it is so effectively
connected) the dividend would not be subject to withholding tax, but would be
subject to United States federal income tax at regular federal income tax rates,
and if the holder is a corporation, might be subject to a branch profits tax.
CONSEQUENCES FOR PARTICULAR INVESTORS
The federal tax discussions above may not be applicable depending on a
Securityholder's particular tax situation. The Depositor recommends that
prospective purchasers consult their tax advisors for the tax consequences to
them of the purchase, ownership and disposition of REMIC Securities, Grantor
Trust Securities, Partnership Certificates, Debt Securities and Debt
Certificates, including the tax consequences under state, local, foreign and
other tax laws and the possible effects of changes in federal or other tax laws.
STATE AND OTHER TAX CONSIDERATIONS
In addition to the federal income tax consequences described in "Material
Federal Income Tax Considerations," potential investors should consider the
state and other tax consequences of the acquisition, ownership, and disposition
of the Notes or Certificates, as applicable, offered under this prospectus.
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 for the various tax consequences of investments
in the Notes or Certificates, as applicable, offered under this prospectus. In
particular, individuals should consider the deductibility of the expenses
(including interest expense) of the partnership.
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ERISA CONSIDERATIONS
GENERAL
A fiduciary of a pension, profit-sharing, retirement or other employee
benefit plan subject to Title I of ERISA should consider the fiduciary standards
under the Employee Retirement Income Security Act of 1974, as amended ("ERISA")
in the context of the plan's particular circumstances before authorizing an
investment of a portion of such plan's assets in the Securities. Accordingly,
pursuant to Section 404 of ERISA, such fiduciary should consider among other
factors (i) whether the investment is for the exclusive benefit of plan
participants and their beneficiaries; (ii) whether the investment satisfies the
applicable diversification requirements; (iii) whether the investment is in
accordance with the documents and instruments governing the plan; and (iv)
whether the investment is prudent, considering the nature of the investment.
Fiduciaries of plans also should consider ERISA's prohibition on improper
delegation of control over, or responsibility for, plan assets.
In addition, employee benefit plans and other retirement arrangements
subject to ERISA, as well as individual retirement accounts, certain types of
Keogh plans not subject to ERISA but subject to Section 4975 of the Code, and
any entity (including insurance company separate or general accounts) whose
underlying assets include plan assets by reason of such plans, arrangements or
accounts investing in the entity (each, a "Plan") are prohibited from engaging
in a broad range of transactions involving Plan assets with persons having
certain specified relationships to the Plan ("parties in interest" and
"disqualified persons"). Such transactions are treated as "prohibited
transactions" under Sections 406 of ERISA and excise taxes and/or other
penalties are imposed upon such persons under ERISA and/or Section 4975 of the
Code unless an exemption applies. The Depositor, Credit Suisse First Boston,
each Master Servicer or other Servicer, any Insurer, the Trustee, the Indenture
Trustee and certain of their affiliates might be considered "parties in
interest" or "disqualified persons" with respect to a Plan. If so, the
acquisition, holding or disposition of Securities by or on behalf of such Plan
could be considered to give rise to a "prohibited transaction" within the
meaning of ERISA and the Code unless a statutory, regulatory or administrative
exception or exemption is available.
ERISA CONSIDERATIONS RELATING TO CERTIFICATES
Plan Assets
In 29 C.R.F ss.2510.3-101 (the "Plan Asset Regulations"), the U.S.
Department of Labor ("DOL") has defined what constitutes "plan assets" for
purposes of ERISA and Section 4975 of the Code. The Plan Asset Regulations
provide that if a Plan makes an investment in an "equity interest" in an entity,
an undivided portion of the assets of the entity will be considered the assets
of such Plan unless certain exceptions set forth in such Regulations apply. The
Certificates will be deemed an equity interest for purposes of the Plan Asset
Regulations, and the Depositor can give no assurance that the Certificates will
qualify for any of the exceptions under the Plan Asset Regulations. As a result,
(i) a Plan may be deemed to have acquired an interest in the assets of the Trust
Fund and not merely an interest in the Certificates, (ii) the fiduciary
investment standards of ERISA could apply to such assets and (iii) transactions
occurring in the course of managing, operating and servicing the Trust Fund and
its assets might constitute prohibited transactions, unless a statutory,
regulatory or administrative exemption applies.
Prohibited Transaction Class Exemption 83-1
The DOL has issued an administrative exemption, Prohibited Transaction
Class Exemption 83-1 ("PTCE 83-1"), which under certain conditions exempts from
the application of the prohibited transaction rules of ERISA and the excise tax
provisions of Section 4975 of the Code transactions involving a Plan in
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connection with the operation of a "mortgage pool" and the purchase, sale and
holding of Certificates which are "mortgage pool pass-through certificates." A
"mortgage pool" is defined as a fixed investment pool consisting solely of
interest-bearing obligations secured by first or second mortgages or deeds of
trust on single-family residential property, property acquired in foreclosure
and undistributed cash. A "mortgage pool pass-through certificate" is defined as
a Certificate which represents a beneficial undivided interest in a mortgage
pool which entitles the holder to pass through payments of principal and
interest from the mortgage loans. PTCE 83-1 requires that: (i) the Depositor and
the Trustee maintain a system of insurance or other protection for the mortgage
loans, the property securing such mortgage loans and for indemnifying holders of
Certificates against reductions in pass-through payments due to defaults in loan
payments or property damage in an amount at least equal to the greater of (x) 1%
of the aggregate principal balance of the mortgage loans or (y) the principal
balance of the largest covered pooled mortgage loan; (ii) the Trustee may not be
an affiliate of the Depositor; and (iii) the payments made to, and retained by,
the Depositor in connection with the Trust Fund, together with all funds inuring
to its benefit for administering the Trust Fund, represent no more than
"adequate consideration" for selling the mortgage loans, plus reasonable
compensation for services provided to the Trust Fund. PTCE 83-1 exempts the
initial sale of Certificates to and the continued holding by a Plan with respect
to which the Depositor, the Insurer, the Master Servicer or other Servicer or
the Trustee is a party in interest if the Plan does not pay more than fair
market value for such Certificates and the rights and interests evidenced by
such Certificates are not subordinated to the rights and interests evidenced by
other Certificates of the same pool.
PTCE 83-1 also exempts from the prohibited transaction rules any
transactions in connection with the servicing and operation of the mortgage
pool, provided that any payments made to the Master Servicer in connection with
the servicing of the Trust Fund are made in accordance with a binding agreement,
copies of which must be made available to prospective Plan investors. In the
case of any Plan with respect to which the Depositor, the Master Servicer, the
Insurer or the Trustee is a fiduciary, PTCE 83-1 will only apply if, in addition
to the other requirements: (i) the initial sale, exchange or transfer of
Certificates is expressly approved by an independent fiduciary who has authority
to manage and control those Plan assets being invested in Certificates; (ii) the
Plan pays no more for the Certificates than would be paid in an arm's-length
transaction; (iii) no investment management, advisory or underwriting fee, sales
commission or similar compensation is paid to the Depositor with regard to the
sale, exchange or transfer of Certificates to the Plan; (iv) the total value of
the Certificates purchased by such Plan does not exceed 25% of the amount issued
and (v) at least 50% of the aggregate amount of Certificates is acquired by
persons independent of the Depositor, the Trustee, the Master Servicer and the
Insurer. Before purchasing Certificates in reliance on PTCE 83-1, a fiduciary of
a Plan should confirm that the Trust Fund is a "mortgage pool," that the
Certificates constitute "mortgage pool pass-through certificates" and that the
conditions set forth in PTCE 83-1 would be satisfied. In addition to making its
own determination as to the availability of the exemptive relief provided in
PTCE 83-1, the Plan fiduciary should consider the availability of any other
prohibited transaction exemptions. The Plan fiduciary should also consider its
general fiduciary obligations under ERISA in determining whether to purchase any
Certificates on behalf of a Plan pursuant to PTCE 83-1.
Underwriter Exemption
The DOL has granted to Credit Suisse First Boston an individual exemption,
Prohibited Transaction Exemption 89-90 which was amended by Prohibited
Transaction Exemption 97-34 ("PTE 97-34") and further recently amended pursuant
to Prohibited Transaction Exemption 2000-58 ("PTE 2000-58") (the "Exemption")
which is applicable to Certificates which meet its requirements whenever Credit
Suisse First Boston or its affiliate is the sole underwriter, manager or
co-manager of an underwriting syndicate or is the selling or placement agent.
The Exemption generally exempts certain transactions from the application of
certain of the prohibited transaction provisions of ERISA and the Code provided
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that the conditions set forth in the Exemption are satisfied. These transactions
include the servicing, managing and operation of investment trusts holding fixed
(generally non-revolving pools) of enumerated categories of assets which
include: single and multi-family residential mortgage loans, home equity loans
or receivables (including cooperative housing loans), manufactured housing loans
and participation interests therein and the purchase, sale and holding of
Certificates which represent beneficial ownership interests in the assets of
such trusts.
General Conditions of Exemption
The Exemption sets forth general conditions which must be satisfied for a
transaction involving the purchase, sale and holding of the Certificates to be
eligible for exemptive relief thereunder. First, the acquisition of Certificates
by Plans must be on terms that are at least as favorable to the Plan as they
would be in an arm's-length transaction with an unrelated party. Second, the
assets held by the Trust Fund must be fully secured (other than one-to-four
family residential mortgage loans and home equity loans or receivables backing
certain types of Certificates, as described below). (Mortgage loans, loans,
obligations and receivables will be collectively referred to herein as
"loans."). Third, unless the Certificates are issued in "designated
transactions" (as described below) and are backed by fully-secured loans, they
may not be subordinated. Fourth, the Certificates at the time of acquisition by
the Plan must generally be rated in one of the three (or in the case of
designated transactions, four) highest generic rating categories by Standard &
Poor's Ratings Services, a division of The McGraw-Hill Companies, Inc., Moody's
Investors Services, Inc. or Fitch, Inc. (each, a "Rating Agency"). Fifth, the
Trustee and the Indenture Trustee generally cannot be affiliates of any member
of the "Restricted Group" which consists of any (i) underwriter as defined in
the Exemption, (ii) the Depositor, (iii) the Master Servicer, (iv) each
Servicer, (v) the Insurer, (vi) the counterparty of any "interest swap" (as
described below) held as an asset of the Trust Fund and (vii) any Obligor with
respect to loans constituting more than 5% of the aggregate unamortized
principal balance of the loans held in the Trust Fund as of the date of initial
issuance of the Certificates. Sixth, the sum of all payments made to, and
retained by, such underwriters must represent not more than reasonable
compensation for underwriting the Certificates; the sum of all payments made to,
and retained by, the Depositor pursuant to the assignment of the loans to the
related Trust Fund must represent not more than the fair market value of such
loans; and the sum of all payments made to, and retained by, the Master Servicer
and any Servicer must represent not more than reasonable compensation for such
person's services under the Agreement and reimbursement of such person's
reasonable expenses in connection therewith. Seventh, (i) the investment pool
must consist only of assets of the type enumerated in the Exemption and which
have been included in other investment pools; (ii) Certificates evidencing
interests in such other investment pools must have been rated in one of the
three (or in the case of designated transactions, four) highest generic rating
categories by one of the Rating Agencies for at least one year prior to a Plan's
acquisition of Certificates; and (iii) Certificates evidencing interests in such
other investment pools must have been purchased by investors other than Plans
for at least one year prior to a Plan's acquisition of Certificates. Finally,
the investing Plan must be an accredited investor as defined in Rule 501(a)(1)
of Regulation D of the Commission under the Securities Act of 1933, as amended.
The Depositor assumes that only Plans which are accredited investors under the
federal securities laws will be permitted to purchase the Certificates.
Recent Amendments to Exemption
PTE 2000-58 (the "Amendment") recently amended the Exemption to make the
acquisition of Certificates by Plans in an initial offering or in a secondary
market transaction, the holding or transfer of Certificates and the servicing,
management and operation of the Trust Fund and its assets on or after November
13, 2000 eligible for exemptive relief to a broader range of Certificates. Prior
to such amendment, the Exemption generally permitted Plans to purchase only
unsubordindated Certificates rated within the highest three generic rating
categories backed by secured collateral. Such Certificates had to
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be issued by a Trust Fund which was a grantor trust, REMIC or a FASIT whose
corpus could not include certain types of assets such as interest-rate swaps.
Types of Trust Funds
The Amendment has expanded the types of permitted Trust Funds to include
owner-trusts, as well as grantor trusts, REMICs and FASITs. Owner-trusts are
subject to certain restrictions in their governing documents to ensure that
their assets may not be reached by the creditors of the Depositor in the event
of bankruptcy or other insolvency and must provide certain legal opinions.
Designated Transactions
In the case where the Certificates are backed by Trust Fund assets which
are residential, home equity, manufactured housing or multi-family loans which
are described and defined in the Exemption as designated transactions
("Designated Transactions"), the Amendment permits the Certificates issued by
the Trust Fund in such transactions to be rated in one of the highest four
generic rating categories by a Rating Agency and/or to be subordinated. The
assets will qualify for Designated Transaction treatment under the Exemption
unless otherwise specified in the prospectus supplement. In addition, one subset
of Designated Transactions, residential (one- to-four family) and home equity
loans, may be less than fully secured, provided that (a) the rights and
interests evidenced by Certificates issued in such Designated Transactions are
not subordinated to the rights and interests evidenced by Securities of the same
Trust Fund; (b) such Certificates acquired by the Plan have received a rating
from a Rating Agency at the time of such acquisition that is in one of the two
highest generic rating categories; and (c) any loan included in the corpus or
assets of the Trust Fund is secured by collateral whose fair market value on the
Closing Date of the Designated Transactions is at least equal to 80% of the sum
of: (i) the outstanding principal balance due under the loan which is held by
the Trust Fund and (ii) the outstanding principal balance(s) of any other
loan(s) of higher priority (whether or not held by the Trust Fund) which are
secured by the same collateral.
Insurance Company General Accounts
In the event that Certificates do not meet the requirements of the
Exemption solely because they are Subordinate Certificates or fail to meet a
minimum rating requirement under the Exemption, certain Plans may be eligible to
purchase Certificates pursuant to Section III of Prohibited Transaction Class
Exemption 95-60 ("PTCE 95-60") which permits insurance company general accounts
as defined in PTCE 95-60 to purchase such Certificates if they otherwise meet
all of the other requirements of the Exemption.
Permitted Assets
The Amendment permits an interest-rate swap to be an asset of a Trust Fund
which issues Certificates acquired by Plans in an initial offering or in the
secondary market on or after November 13, 2000 and clarifies the requirements
regarding yield supplement agreements. An interest-rate swap (or if purchased by
or on behalf of the Trust Fund) an interest-rate cap contract (collectively, a
"Swap" or "Swap Agreement") is a permitted Trust Fund asset if it: (a) is an
"eligible Swap;" (b) is with an "eligible counterparty;" (c) relates to a Class
of Certificates purchased by a "qualified plan investor;" (d) meets certain
additional specific conditions which depend on whether the Swap is a "ratings
dependent Swap" or a "non-ratings dependent Swap" and (e) permits the Trust Fund
to make termination payments to the Swap (other than currently scheduled
payments) solely from excess spread or amounts otherwise payable to the Servicer
or Depositor.
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An "eligible Swap" is one which: (a) is denominated in U.S. dollars; (b)
pursuant to which the Trust Fund pays or receives, on or immediately prior to
the respective payment or distribution date for the class of Certificates to
which the Swap relates, a fixed rate of interest or a floating rate of interest
based on a publicly available index (e.g., LIBOR or the U.S. Federal Reserve's
Cost of Funds Index (COFI)), with the Trust Fund receiving such payments on at
least a quarterly basis and obligated to make separate payments no more
frequently than the counterparty, with all simultaneous payments being netted
("Allowable Interest Rate"); (c) has a notional amount that does not exceed
either: (i) the principal balance of the class of Certificates to which the Swap
relates, or (ii) the portion of the principal balance of such class represented
by obligations ("Allowable Notional Amount"); (d) is not leveraged (i.e.,
payments are based on the applicable notional amount, the day count fractions,
the fixed or floating rates permitted above, and the difference between the
products thereof, calculated on a one-to-one ratio and not on a multiplier of
such difference) ("Leveraged"); (e) has a final termination date that is either
the earlier of the date on which the Trust Fund terminates or the related class
of Certificates are fully repaid and (f) does not incorporate any provision
which could cause a unilateral alteration in the interest rate requirements or
the prohibition against leveraging described above.
An "eligible counterparty" means a bank or other financial institution
which has a rating at the date of issuance of the Certificates, which is in one
of the three highest long-term credit rating categories or one of the two
highest short-term credit rating categories, utilized by at least one of the
Rating Agencies rating the Certificates; provided that, if a counterparty is
relying on its short-term rating to establish eligibility hereunder, such
counterparty must either have a long-term rating in one of the three highest
long-term rating categories or not have a long-term rating from the applicable
Rating Agency.
A "qualified plan investor" is a Plan or Plans where the decision to buy
such class of Certificates is made on behalf of the Plan by an independent
fiduciary qualified to understand the Swap transaction and the effect the Swap
would have on the rating of the Certificates and such fiduciary is either (a) a
"qualified professional asset manager" ("QPAM") under Prohibited Transaction
Class Exemption 84-14 ("PTCE 84-14") (see below), (b) an "in-house asset
manager" under Prohibited Transaction Class Exemption 96-23 ("PTCE 96-23") (see
below) or (c) has total assets (both Plan and non-Plan) under management of at
least $100 million at the time the Certificates are acquired by the Plan.
In "ratings dependent Swaps" (where the rating of a class of Certificates
is dependent on the terms and conditions of the Swap), the Swap Agreement must
provide that if the credit rating of the counterparty is withdrawn or reduced by
any Rating Agency below a level specified by the Rating Agency, the Servicer
must, within the period specified under the Pooling and Servicing Agreement: (a)
obtain a replacement Swap Agreement with an eligible counterparty which is
acceptable to the Rating Agency and the terms of which are substantially the
same as the current Swap Agreement (at which time the earlier Swap Agreement
must terminate); or (b) cause the Swap counterparty to establish any
collateralization or other arrangement satisfactory to the Rating Agency such
that the then current rating by the Rating Agency of the particular class of
Certificates will not be withdrawn or reduced (and the terms of the Swap
Agreement must specifically obligate the counterparty to perform these duties
for any class of Certificates with a term of more than one year). In the event
that the Servicer fails to meet these obligations, Plan certificateholders must
be notified in the immediately following periodic report which is provided to
certificateholders but in no event later than the end of the second month
beginning after the date of such failure. Sixty days after the receipt of such
report, the exemptive relief provided under the Exemption will prospectively
cease to be applicable to any class of Certificates held by a Plan which
involves such ratings dependent Swap.
"Non-ratings dependent Swaps" (those where the rating of the Certificates
does not depend on the terms and conditions of the Swap) are subject to the
following conditions. If the credit rating of the counterparty is withdrawn or
reduced below the lowest level permitted above, the Servicer will, within a
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specified period after such rating withdrawal or reduction: (a) obtain a
replacement Swap Agreement with an eligible counterparty, the terms of which are
substantially the same as the current Swap Agreement (at which time the earlier
Swap Agreement must terminate); (b) cause the counterparty to post collateral
with the Trust Fund in an amount equal to all payments owed by the counterparty
if the Swap transaction were terminated; or (c) terminate the Swap Agreement in
accordance with its terms.
An "eligible yield supplement agreement" is any yield supplement agreement
or similar arrangement (or if purchased by or on behalf of the Trust Fund) an
interest rate cap contract to supplement the interest rates otherwise payable on
obligations held by the Trust Fund ("EYS Agreement"). If the EYS Agreement has a
notional principal amount and/or is written on an International Swaps and
Derivatives Association, Inc. (ISDA) form, the EYS Agreement may only be held as
an asset of the Trust Fund with respect to Certificates purchased by Plans on or
after April 7, 1998 if it meets the following conditions: (a) it is denominated
in U.S. dollars; (b) it pays an Allowable Interest Rate; (c) it is not
Leveraged; (d) it does not allow any of these three preceding requirements to be
unilaterally altered without the consent of the Trustee; (e) it is entered into
between the Trust Fund and an eligible counterparty and (f) it has an Allowable
Notional Amount.
Pre-Funding Accounts
The Exemption was amended by PTE 97-34 to extend exemptive relief to
Certificates issued in transactions using pre-funding accounts whereby a portion
of the loans backing the Certificates are transferred to the Trust Fund within a
specified period following the Closing Date ("DOL Pre-Funding Period") (see
below) instead of requiring that all such loans be either identified or
transferred on or before the Closing Date. The relief is effective for
transactions occurring on or after May 23, 1997 provided that the following
conditions are met. First, the ratio of the amount allocated to the Pre-Funding
Account to the total principal amount of the Certificates being offered
("Pre-Funding Limit") must not exceed twenty-five percent (25%). Second, all
loans transferred after the Closing Date (referred to here as "additional
loans") must meet the same terms and conditions for eligibility as the original
loans used to create the Trust Fund, which terms and conditions have been
approved by the Rating Agency. Third, the transfer of such additional loans to
the Trust Fund during the DOL Pre-Funding Period must not result in the
Certificates receiving a lower credit rating from the Rating Agency upon
termination of the DOL Pre-Funding Period than the rating that was obtained at
the time of the initial issuance of the Certificates by the Trust Fund. Fourth,
solely as a result of the use of pre-funding, the weighted average annual
percentage interest rate (the "average interest rate") for all of the loans in
the Trust Fund at the end of the DOL Pre-Funding Period must not be more than
100 basis points lower than the average interest rate for the loans which were
transferred to the Trust Fund on the Closing Date. Fifth, either: (i) the
characteristics of the additional loans must be monitored by an Insurer or other
credit support provider which is independent of the Depositor; or (ii) an
independent accountant retained by the Depositor must provide the Depositor with
a letter (with copies provided to the Rating Agency, the underwriter and the
Trustee) stating whether or not the characteristics of the additional loans
conform to the characteristics described in the prospectus, prospectus
supplement, private placement memorandum ("Offering Documents") and/or the
Agreement. In preparing such letter, the independent accountant must use the
same type of procedures as were applicable to the loans which were transferred
as of the Closing Date. Sixth, the DOL Pre-Funding Period must end no later than
three months or 90 days after the Closing Date or earlier, in certain
circumstances, if the amount on deposit in the Pre-Funding Account is reduced
below the minimum level specified in the Agreement or an event of default occurs
under the Agreement. Seventh, amounts transferred to any Pre-Funding Account
and/or Capitalized Interest Account used in connection with the pre-funding may
be invested only in investments which are permitted by the Rating Agency and (i)
are direct obligations of, or obligations fully guaranteed as to timely payment
of principal and interest by, the United States or any agency or instrumentality
thereof (provided that such obligations are backed by the full faith and credit
of the United States); or (ii) have been rated (or the Obligor has
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been rated) in one of the three highest generic rating categories by the Rating
Agency ("Acceptable Investments"). Eighth, certain disclosure requirements must
be met.
Revolving Pool Features
The Exemption only covers Certificates backed by "fixed" pools of loans
which require that all the loans must be transferred to the Trust Fund or
identified at closing (or transferred within the DOL Pre-Funding Period, if
pre-funding meeting the conditions described above is used). Accordingly,
Certificates issued by Trust Funds which feature revolving pools of assets will
not be eligible for a purchase by Plans. However, Securities which are Notes
backed by revolving pools of assets may be eligible for purchase by Plans
pursuant to certain other prohibited transaction exemptions. See discussion
below in "ERISA Considerations Relating to Notes."
Limitations on Scope of the Exemption
If the general conditions of the Exemption are satisfied, the Exemption may
provide an exemption from the restrictions imposed by ERISA and the Code in
connection with the initial acquisition, transfer or holding, and the
acquisition or disposition in the secondary market, of the Certificates by
Plans. However, no exemption is provided from the restrictions of ERISA for the
acquisition or holding of a Certificate on behalf of an "Excluded Plan" by any
person who is a fiduciary with respect to the assets of such Excluded Plan. For
those purposes, an Excluded Plan is a Plan sponsored by any member of the
Restricted Group. Exemptive relief may also be provided for the acquisition,
holding and disposition of Certificates by Plans if the fiduciary or its
affiliate is the Obligor with respect to 5% or less of the fair market value of
the Loans in the Trust Fund provided that: (i) the Plan is not an Excluded Plan,
(ii) each Plan's investment in each class of Certificates does not exceed 25% of
the outstanding Certificates in the class, (iii) after the Plan's acquisition of
the Certificates, no more than 25% of the assets over which the fiduciary has
investment authority are invested in Certificates of a trust containing assets
which are sold or serviced by the same entity and (iv) in the case of initial
issuance (but not secondary market transactions), at least 50% of each class of
Certificates and at least 50% of the aggregate interests in the Trust Fund are
acquired by persons independent of the Restricted Group.
ERISA CONSIDERATIONS RELATING TO NOTES
Under the Plan Asset Regulations, the assets of the Trust Fund would be
treated as "plan assets" of a Plan for the purposes of ERISA and the Code only
if the Plan acquires an "equity interest" in the Trust Fund and none of the
exceptions contained in the Plan Asset Regulations is applicable. An equity
interest is defined under the Plan Asset Regulations as an interest other than
an instrument which is treated as indebtedness under applicable local law and
which has no substantial equity features. Assuming that the Notes are treated as
indebtedness without substantial equity features for purposes of the Plan Asset
Regulations, then such Notes will be eligible for purchase by Plans. However,
without regard to whether the Notes are treated as an "equity interest" for such
purposes, the acquisition or holding of Notes by or on behalf of a Plan could be
considered to give rise to a prohibited transaction if the Trust Fund or any of
its affiliates is or becomes a party in interest or disqualified person with
respect to such Plan, or in the event that a Note is purchased in the secondary
market and such purchase constitutes a sale or exchange between a Plan and a
party in interest or disqualified person with respect to such Plan. There can be
no assurance that the Trust Fund or any of its affiliates will not be or become
a party in interest or a disqualified person with respect to a Plan that
acquires Notes.
The Amendment to the Exemption permits Trust Funds which are grantor
trusts, owner-trusts, REMICs or FASITs to issue Notes, as well as Certificates,
provided a legal opinion is received to the
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effect that the noteholders have a perfected security interest in the Trust
Fund's assets. The exemptive relief provided under the Exemption for any
prohibited transactions which could be caused as a result of the operation,
management or servicing of the Trust Fund and its assets would not be necessary
with respect to Notes with no substantial equity features which are issued as
obligations of the Trust Fund. However, effective for the acquisition, holding
or transfer of Notes between a Plan and a party in interest which occurs on or
after November 13, 2000, the Exemption would provide prohibited transaction
exemptive relief, provided that the same conditions of the Exemption described
above relating to Certificates are met with respect to the Notes. The same
limitations of such exemptive relief relating to acquisitions of Certificates by
fiduciaries with respect to Excluded Plans would also be applicable to the Notes
as described herein in "Limitations on Scope of the Exemption."
In the event that the Exemption is not applicable to the Notes, one or more
other prohibited transactions exemptions may be available to Plans purchasing or
transferring the Notes depending in part upon the type of Plan fiduciary making
the decision to acquire the Notes and the circumstances under which such
decision is made. These exemptions include, but are not limited to, Prohibited
Transaction Class Exemption 90-1 (regarding investments by insurance company
pooled separate accounts), Prohibited Transaction Class Exemption 91-38
(regarding investments by bank collective investments funds), PTCE 84-14
(regarding transactions effected by "qualified professional asset managers"),
PTCE 95-60 (regarding investments by insurance company general accounts) and
PTCE 96-23 (regarding transactions effected by "in-house asset managers")
(collectively, the "Investor-Based Exemptions"). However, even if the conditions
specified in these Investor-Based Exemptions are met, the scope of the relief
provided under such Exemptions might or might not cover all acts which might be
construed as prohibited transactions.
EACH PROSPECTUS SUPPLEMENT WILL CONTAIN INFORMATION CONCERNING
CONSIDERATIONS RELATING TO ERISA AND THE CODE THAT ARE APPLICABLE TO THE RELATED
SECURITIES. BEFORE PURCHASING SECURITIES IN RELIANCE ON PTCE 83-1, THE
EXEMPTION, THE INVESTOR-BASED EXEMPTIONS OR ANY OTHER EXEMPTION, A FIDUCIARY OF
A PLAN SHOULD ITSELF CONFIRM THAT REQUIREMENTS SET FORTH IN SUCH EXEMPTION WOULD
BE SATISFIED.
ANY PLAN INVESTOR WHO PROPOSES TO USE "PLAN ASSETS" OF ANY PLAN TO PURCHASE
SECURITIES OF ANY SERIES OR CLASS SHOULD CONSULT WITH ITS COUNSEL WITH RESPECT
TO THE POTENTIAL CONSEQUENCES UNDER ERISA AND SECTION 4975 OF THE CODE OF THE
ACQUISITION AND OWNERSHIP OF SUCH SECURITIES.
Governmental plans and church plans as defined in ERISA are not subject to
ERISA or Code Section 4975, although they may elect to be qualified under
Section 401(a) of the Code and exempt from taxation under Section 501(a) of the
Code and would then be subject to the prohibited transaction rules set forth in
Section 503 of the Code. In addition, governmental plans may be subject to
federal, state and local laws which are to a material extent similar to the
provisions of ERISA or a Code Section 4975 ("Similar Law"). A fiduciary of a
governmental plan should make its own determination as to the propriety of an
investment in Securities under applicable fiduciary or other investment
standards and the need for the availability of any exemptive relief under any
Similar Law.
LEGAL INVESTMENT
The applicable prospectus supplement for a Series of Notes or Certificates,
as applicable, will specify whether a Class or Subclass of the Notes or
Certificates, as applicable, as long as it is rated in one of the two highest
rating categories by one or more nationally recognized statistical rating
organizations,
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will constitute a "mortgage related security" for purposes of the Secondary
Mortgage Market Enhancement Act of 1984 ("SMMEA"). The Class or Subclass, if
any, constituting a "mortgage related security" will be a legal investment for
persons, trusts, corporations, partnerships, associations, business trusts and
business entities, including depository institutions, insurance companies,
trustees and state government employee retirement systems, 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 of the United States constitute legal investments for
the entities.
Pursuant to SMMEA, a number of states enacted legislation, on or prior to
the October 3, 1991 cutoff for the enactments, limiting to varying extents the
ability of specific 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 the legislation will be authorized to invest in Notes or
Certificates, as applicable, qualifying as "mortgage related securities" only to
the extent provided in the legislation.
SMMEA also amended the legal investment authority of federally-chartered
depository institutions as follows: federal savings and loan associations and
federal savings banks may invest in, sell or otherwise deal in mortgage related
securities without limitation as to the percentage of their assets represented
thereby, federal credit unions may invest in the securities, and national banks
may purchase the securities for their own account without regard to the
limitations generally applicable to investment securities set forth in 12 U.S.C.
24 (Seventh), subject in each case to the regulations as the applicable federal
regulatory authority may prescribe. In this connection, federal credit unions
should review NCUA Letter to Credit Unions No. 96, as modified by Letter to
Credit Unions No. 108, which includes guidelines to assist federal credit unions
in making investment decisions for mortgage related securities. The NCUA has
adopted rules, codified as 12 C.F.R. Section 703.5(f)-(k), which prohibit
federal credit unions from investing in particular mortgage related securities,
including the securities of particular Series, Classes or Subclasses of Notes or
Certificates, as applicable, except under limited circumstances.
All depository institutions considering an investment in the Notes or
Certificates, as applicable, should review the "Supervisory Policy Statement on
Securities Activities" dated January 28, 1992, as revised April 15, 1994 (the
"Policy Statement") of the Federal Financial Institutions Examination Council.
The Policy Statement which has been adopted by the Board of Governors of
the Federal Reserve System, the Office of the Comptroller of the Currency, the
FDIC and the Office of Thrift Supervision and by the NCUA, with some
modifications, prohibits depository institutions from investing in particular
"high-risk Mortgage Certificates", including the securities of particular
Series, Classes or Subclasses of the Notes or Certificates, as applicable,
except under limited circumstances, and sets forth investment practices deemed
to be unsuitable for regulated institutions.
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 the authorities before purchasing any Notes or
Certificates, as applicable, as some Series, Classes or Subclasses may be deemed
unsuitable investments, or may otherwise be restricted, under the rules,
policies or guidelines, in some 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
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may restrict or prohibit investment in securities which are not "interest
bearing" or "income paying," and, with regard to any Notes or Certificates, as
applicable, 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 some of the Classes of Notes or Certificates, as
applicable, as "mortgage related securities," no representation is made as to
the proper characterization of the Notes or Certificates, as applicable, for
legal investment purposes, financial institution regulatory purposes, or other
purposes, or as to the ability of particular investors to purchase Notes or
Certificates, as applicable, under applicable legal investment restrictions. The
uncertainties described above, and any unfavorable future determinations
concerning legal investment or financial institution regulatory characteristics
of the Notes or Certificates, as applicable, may adversely affect the liquidity
of the Notes or Certificates, as applicable.
Investors should consult their own legal advisers in determining whether
and to what extent the Notes or Certificates, as applicable, constitute legal
investments for the investors.
PLAN OF DISTRIBUTION
Each Series of Notes or Certificates, as applicable, offered by this
prospectus and by means of the related prospectus supplements may be sold
directly by the Depositor or may be offered through Credit Suisse First Boston
Corporation, an affiliate of the Depositor, or underwriting syndicates
represented by Credit Suisse First Boston Corporation (the "Underwriters"). The
prospectus supplement with respect to each Series of Notes or Certificates, as
applicable, will set forth the terms of the offering of the Series or Class of
Notes or Certificates, as applicable, and each Subclass within the Series,
including the name or names of the Underwriters, the proceeds to the Depositor,
and either the initial public offering price, the discounts and commissions to
the Underwriters and any discounts or concessions allowed or reallowed to
particular dealers, or the method by which the price at which the Underwriters
will sell the Notes or Certificates, as applicable, will be determined.
Unless otherwise specified in the prospectus supplement, the Underwriters
will be obligated to purchase all of the Notes or Certificates, as applicable,
of a Series described in the prospectus supplement with respect to the Series if
any Notes or Certificates, as applicable, are purchased. The Notes or
Certificates, as applicable, may be acquired by the Underwriters for their own
account and may be resold from time to time in one or more transactions,
including negotiated transactions, at a fixed public offering price or at
varying prices determined at the time of sale.
If so indicated in the prospectus supplement, the Depositor will authorize
the Underwriters or other persons acting as the Depositor's agents to solicit
offers by specific institutions to purchase the Notes or Certificates, as
applicable, from the Depositor pursuant to contracts providing for payment and
delivery on a future date. Institutions with which the contracts may be made
include commercial and savings banks, insurance companies, pension funds,
investment companies, educational and charitable institutions and others, but in
all cases the institutions must be approved by the Depositor. The obligation of
any purchaser under any contract will be subject to the condition that the
purchase of the offered Notes or Certificates, as applicable, shall not at the
time of delivery be prohibited under the laws of the jurisdiction to which the
purchaser is subject. The Underwriters and other agents will not have any
responsibility in respect of the validity or performance of the contracts.
The Depositor may also sell the Notes or Certificates, as applicable,
offered by this prospectus and by means of the related prospectus supplements
from time to time in negotiated transactions or otherwise, at prices determined
at the time of sale. The Depositor may effect the transactions by selling Notes
or Certificates, as applicable, to or through dealers, and the dealers may
receive compensation in
-143-
the form of underwriting discounts, concessions or commissions from the
Depositor and any purchasers of Notes or Certificates, as applicable, for whom
they may act as agents.
The place and time of delivery for each Series of Notes or Certificates, as
applicable, offered by this prospectus and by means of the related prospectus
supplement will be set forth in the prospectus supplement with respect to the
Series.
If and to the extent required by applicable law or regulation, this
prospectus and the attached prospectus supplement will also be used by the
Underwriters after the completion of the offering in connection with offers and
sales related to market-making transactions in the offered Notes or
Certificates, as applicable, in which the Underwriters act as principal. Sales
will be made at negotiated prices determined at the time of sales.
LEGAL MATTERS
Some legal matters in connection with the Notes or Certificates, as
applicable, offered by this prospectus, including material federal income tax
consequences, will be passed upon for the Depositor and for the Underwriters by
McKee Nelson LLP, New York, New York, or other counsel specified in the related
prospectus supplement.
PROSPECTUS SUPPLEMENT
The prospectus supplement with respect to each Series of Notes or
Certificates, as applicable, will, among other things, set forth with respect to
the Series of Notes or Certificates, as applicable:
o the identity of each Class or Subclass of Notes or Certificates, as
applicable, within the Series;
o the undivided interest, Percentage Interest, Stated Principal Balance,
principal balance or notional amount of each Class or Subclass of
Notes or Certificates, as applicable;
o the Interest Rate borne, or manner in which interest is paid, if any,
by each Class or Subclass of Notes or Certificates, as applicable,
within the Series;
o particular information concerning the Mortgage Loans, the Mortgage
Certificates, the Contracts, if any, and the other assets comprising
the Trust Fund for the Series;
o the final Distribution Date of each Class or Subclass of Notes or
Certificates, as applicable, within the Series;
o the identity of each Class or Subclass of Compound Interest Notes or
Certificates, as applicable, if any, within the Series;
o the method used to calculate the amount to be distributed with respect
to each Class or Subclass of Notes or Certificates, as applicable,
within the Series;
o the order of application of distributions to each of the Classes or
Subclasses of Notes or Certificates, as applicable, within the Series,
whether sequential, pro rata or otherwise;
o the Distribution Dates with respect to the Series;
-144-
o information with respect to the terms of the Residual Certificates or
Subordinated Securities offered by this prospectus, if any, are
offered;
o information with respect to the method of credit support, if any, with
respect to the Series; and
o additional information with respect to the plan of distribution of the
Series of Certificates.
ADDITIONAL INFORMATION
This prospectus contains, and the prospectus supplement for each Series of
Notes or Certificates, as applicable, will contain, a summary of the material
terms of the documents referred to in this prospectus and in the prospectus
supplement, but neither contains nor will contain all of the information set
forth in the Registration Statement of which this prospectus and the related
prospectus supplement is a part. For further information, reference is made to
the Registration Statement and the exhibits to the Registration Statement which
the Depositor has filed with the Securities and Exchange Commission (the
"Commission") under the Securities Act of 1933, as amended. Statements contained
in this prospectus and any prospectus supplement as to the contents of any
contract or other document referred to are summaries and in each instance
reference is made to the copy of the contract or other document filed as an
exhibit to the Registration Statement, each statement being qualified in all
respects by the reference. Copies of the Registration Statement may be obtained
from the Commission, upon payment of the prescribed charges, or may be examined
free of charge at the Commission's offices. Reports and other information filed
with the Commission can be inspected and copied at the public reference
facilities maintained by the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the Regional Offices of the Commission at Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and 233 Broadway,
New York, New York 10279. Copies of this information can be obtained from the
Public Reference Section of the Commission at Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549, at prescribed rates.
The Commission maintains a Web site that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission. The address of the site is
(http://www.sec.gov).
Copies of the Pooling and Servicing Agreement or of the Trust Agreement,
Indenture and Sale and Servicing Agreement pursuant to which a Series of Notes
or Certificates, as applicable, is issued, as applicable, will be provided to
each person to whom a prospectus and the related prospectus supplement are
delivered, upon written or oral request directed to: Treasurer, Asset Backed
Securities Corporation, Eleven Madison Avenue, New York, New York 10010, (212)
325-2000.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
There are incorporated in this prospectus by reference all documents and
reports filed or caused to be filed by the Depositor with respect to a Trust
Fund pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act prior to
the termination of the offering of Notes or Certificates, as applicable, offered
by this prospectus. The Depositor will provide or cause to be provided without
charge to each person to whom this prospectus is delivered in connection with
the offering of one or more Classes or Subclasses of Notes or Certificates, as
applicable, upon request, a copy of any or all the documents or reports
incorporated in this prospectus by reference, in each case to the extent the
documents or reports relate to one or more of the Classes of the Notes or
Certificates, as applicable, other than the exhibits to the documents, unless
the exhibits are specifically incorporated by reference in the documents.
Requests to
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the Depositor should be directed to: Asset Backed Securities Corporation, Eleven
Madison Avenue, New York, New York 10010, (212) 325-2000.
IF AND TO THE EXTENT REQUIRED BY APPLICABLE LAW OR REGULATIONS, THIS
PROSPECTUS AND THE ATTACHED PROSPECTUS SUPPLEMENT WILL ALSO BE USED BY THE
UNDERWRITER AFTER THE COMPLETION OF THE OFFERING IN CONNECTION WITH OFFERS AND
SALES RELATED TO MARKET-MAKING TRANSACTIONS IN THE OFFERED SECURITIES IN WHICH
THE UNDERWRITER ACTS AS PRINCIPAL. SALES WILL BE MADE AT NEGOTIATED PRICES
DETERMINED AT THE TIME OF SALE.
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INDEX OF TERMS
1986 Act...........................................99
1997 Act..........................................123
Accrual Distribution Amount........................31
Advances...........................................48
Agreement..........................................12
Alternative Credit Support..........................6
appraised value....................................19
Approved Sale......................................78
APRs...............................................17
ARM Loans...........................................8
Asset Value........................................28
Buy-Down Fund.......................................9
Buy-Down Loans......................................9
Certificate Account................................40
Certificate Distribution Account...................40
Certificate Principal Balance......................25
Certificate Register...............................32
Certificateholders.................................12
Certificates........................................5
chattel paper......................................89
Class...............................................5
Cleanup Costs......................................88
Closed Loans.......................................13
Closed-End Loans....................................6
Code...............................................93
coinsurance........................................75
Collection Account.................................40
commercially reasonable............................85
Commission........................................146
Contract Loan-to-Value Ratio.......................19
Contract Pool......................................17
Contract Schedule..................................35
Contracts..........................................17
Converted Mortgage Loan.............................9
Cooperative.........................................6
Cooperative Dwelling................................6
cooperative housing corporation....................84
Cooperative Loans...................................6
Credit Support......................................6
Custodial Account..................................40
Custodial Agreement................................18
Custodian..........................................18
Cut-off Date........................................5
Debt Securities....................................93
defective obligation...............................95
Deferred Interest...................................9
Deficiency Event...................................57
Deleted Contract...................................19
Deleted Mortgage Certificates......................33
Deleted Mortgage Loans.............................34
Depositor..........................................21
Description of Insurance............................6
Determination Date.................................44
Discount Securities................................26
disqualified organizations.........................95
Distribution Date..................................29
Due Date............................................8
Due Period.........................................31
due-on-sale........................................24
Eligible Investment................................37
Escrow Account.....................................49
FHA................................................10
FHA Experience.....................................22
FHA Loans...........................................7
fixture filing.....................................89
Garn-St Germain Act................................87
GPM Fund............................................9
GPM Loans...........................................9
Grantor Trust Fund.................................93
Grantor Trust Fund Stripped Bond..................121
Grantor Trust Fund Stripped Coupon................121
Grantor Trust Securities...........................93
Grantor Trust Securityholders.....................117
Holder-in-Due-Course...............................92
Home Equity Loans...................................6
Indenture...........................................5
Indenture Trustee...................................5
Indirect Participants..............................63
Initial Deposit....................................66
Insurance Proceeds.................................41
Insured............................................51
interest bearing..................................144
Interest Distribution..............................30
Interest Rate......................................25
Interest Weighted Class............................25
Interest Weighted Subclass.........................25
Issuer..............................................5
L/C Bank...........................................65
L/C Percentage.....................................65
Letter of Credit....................................5
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limited documentation..............................14
Liquidating Loan...................................66
Liquidation Proceeds...............................41
Loss...............................................72
Manufactured Home..................................17
Mortgage Certificates...............................7
Mortgage Loans......................................7
Mortgage Notes......................................7
Mortgage Pools......................................6
Mortgage Rates......................................8
mortgage related securities.......................143
mortgage related security.........................143
Mortgagor...........................................7
Mortgagor Bankruptcy Bond...........................6
Multi-Class Securities.............................25
Multifamily Property................................6
Note Distribution Account..........................40
Note Register......................................32
Noteholders........................................12
Notes...............................................5
Obligor............................................24
OID Regulations....................................94
Original Value......................................8
Originator.........................................13
Participants.......................................63
Partnership Certificates...........................93
Partnership Trust Fund.............................93
Pass-Through Entity...............................110
payment deficiencies...............................67
peaceful...........................................91
Percentage Interest.................................5
Performance Bond...................................19
Policy Statement..................................144
Pool Insurance Policy...............................5
Pool Insurer.......................................51
Pooling and Servicing Agreement.....................5
Pre-Funded Amount..................................37
Pre-Funding Account................................37
Pre-Funding Period.................................37
Premium Securities.................................26
Prepayment Assumption.............................100
Primary Insurer....................................42
Primary Mortgage Insurance Policy..................51
Primary Mortgage Insurer...........................51
Principal Distribution.............................30
Principal Prepayments..............................26
Principal Weighted Class...........................25
Principal Weighted Subclass........................25
prudent investor..................................144
Purchase Price.....................................37
qualified liquidation..............................24
Rating Agency.......................................7
Record Date........................................29
Reference Agreement................................26
regular interests..................................28
Regular Securities.................................94
Regular Securityholder.............................98
REMIC..............................................93
REMIC Pool.........................................94
REMIC Provisions...................................93
REMIC Regulations..................................94
REMIC Securities...................................93
Required Distribution..............................69
Required Reserve...................................66
Reserve Fund........................................6
Residual Certificates..............................26
residual interest..................................28
Residual Securities................................95
Revolving Credit Line Loans.........................6
Rules..............................................63
Sale and Servicing Agreement........................5
Securities..........................................5
Securities Act.....................................29
Security Guarantee Insurance........................6
Security Owners....................................63
Securityholders....................................12
self-help..........................................91
Senior Certificates.................................6
Senior Class Percentage...........................121
Senior Prepayment Percentage.......................68
Senior Securities...................................6
Series..............................................5
Servicemen's Readjustment Act......................10
Servicer...........................................12
Servicing Account..................................41
Servicing Agreement................................12
Shortfall Amount..................................122
Single Family Property..............................6
SMMEA.............................................143
SPA................................................23
Special Distributions..............................46
Special Hazard Insurance Policy.....................6
Standard Hazard Insurance Policy...................49
Standard Terms.....................................26
Startup Day........................................95
Stated Principal Balance...........................25
Stated Principal Distribution Amount...............31
Stripped Certificates.............................117
Subclass............................................5
Subordinate Certificates............................6
Subordinate Class Percentage......................121
Subordinate Securities..............................6
-148-
Subordinated Amount.................................6
Subordinated Class..................................6
Subordinated Subclass...............................6
Substitute Contract................................19
Substitute Mortgage Certificates...................33
Substitute Mortgage Loans..........................34
Substitute Warehouse Loan..........................21
super-premium......................................99
Supervisory Policy Statement on Securities
Activities......................................144
Taxable Mortgage Pools.............................94
Tiered REMICs......................................97
Title V............................................92
Trust...............................................5
Trust Agreement.....................................5
Trust Assets.......................................17
Trust Fund..........................................5
Trustee.............................................5
UCC................................................63
Unaffiliated Sellers...............................13
Underwriters......................................144
VA .................................................7
VA Loans............................................7
voidable preference................................71
Warehouse Loan Pool................................20
Warehouse Loans....................................20
Warranty and Servicing Agreement...................27
-149-
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$606,752,000
(APPROXIMATE)
ASSET BACKED SECURITIES CORPORATION
Depositor
OCWEN FEDERAL BANK FSB
Servicer
ASSET BACKED SECURITIES CORPORATION
HOME EQUITY LOAN TRUST, SERIES 2003-HE3
Issuer
ASSET BACKED PASS-THROUGH CERTIFICATES, SERIES 2003-HE3
---------------------
PROSPECTUS SUPPLEMENT
---------------------
CREDIT SUISSE FIRST BOSTON
Underwriter
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY REFERENCE
IN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS. WE HAVE NOT
AUTHORIZED ANYONE TO PROVIDE YOU WITH DIFFERENT INFORMATION.
WE ARE NOT OFFERING THE CERTIFICATES IN ANY STATE WHERE THE OFFER IS NOT
PERMITTED.
We represent the accuracy of the information in this prospectus supplement and
the accompanying prospectus only as of the dates on their respective covers.
Dealers will be required to deliver a prospectus supplement and prospectus when
acting as underwriters of the certificates offered hereby and with respect to
their unsold allotments or subscriptions. In addition, all dealers selling the
offered certificates, whether or not participating in this offering, may be
required to deliver a prospectus supplement and prospectus until ninety days
after the date of this prospectus supplement.
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