Filed Pursuant to Rule 424(b)5
Registration Number 333-90772
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED JUNE 26, 2002)
$1,041,600,100 (APPROXIMATE)
SEQUOIA MORTGAGE TRUST 10
MORTGAGE PASS-THROUGH CERTIFICATES
Consider carefully the risk factors beginning on page S-10 of this prospectus
supplement.
The certificates will represent interests in a trust fund only and will not
represent an interest in, or an obligation of, the seller or the depositor or
any of their affiliates.
Sequoia Mortgage Trust 10 will issue:
- - Eight classes of senior certificates, including four classes of interest-only
certificates; and
- - Six classes of subordinate certificates.
This prospectus supplement and the accompanying prospectus relate only to the
offering of certificates listed in the table on page S-1 under "Summary --
Offered Certificates" and not to the other classes of certificates that will be
issued by the trust fund as described in this prospectus supplement.
The assets of the trust fund will primarily consist of two pools of
conventional, adjustable rate, fully amortizing mortgage loans secured by first
liens on one- to four-family residential properties having the additional
characteristics described in "Description of the Mortgage Pools" in this
prospectus supplement.
The certificates offered by this prospectus supplement will be purchased by
Merrill Lynch, Pierce, Fenner & Smith Incorporated and Greenwich Capital
Markets, Inc., as underwriters, from Sequoia Residential Funding, Inc., as
depositor, and are being offered by the underwriters from time to time for sale
to the public in negotiated transactions or otherwise at varying prices to be
determined at the time of sale. The underwriters have the right to reject any
order. Proceeds to Sequoia Residential Funding, Inc. from the sale of these
certificates will be approximately 99.8294% of their initial principal balance
before deducting expenses.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THE CERTIFICATES OR DETERMINED THIS
PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING PROSPECTUS IS ACCURATE OR COMPLETE.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
On or about September 26, 2002, delivery of the certificates (other than the
Class A-R Certificate which will be delivered in physical, fully registered
form) offered by this prospectus supplement will be made through the book-entry
facilities of The Depository Trust Company, Clearstream Banking, societe anonyme
and the Euroclear System.
Underwriters:
MERRILL LYNCH & CO.
GREENWICH CAPITAL MARKETS, INC.
September 24, 2002
IMPORTANT NOTICE ABOUT THE INFORMATION PRESENTED IN THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS
We tell you about the certificates in two separate documents that
progressively provide more detail: (1) the accompanying prospectus, which
provides general information, some of which may not apply to your certificates,
and (2) this prospectus supplement, which describes the specific terms of your
certificates and may be different from the information in the prospectus.
IF THE TERMS OF YOUR CERTIFICATES AND ANY OTHER INFORMATION CONTAINED
HEREIN VARY BETWEEN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS,
YOU SHOULD RELY ON THE INFORMATION IN THIS PROSPECTUS SUPPLEMENT.
We include cross-references in this prospectus supplement and the
accompanying prospectus to captions in these materials where you can find
further related discussions. The table of contents for this prospectus
supplement and the table of contents included in the accompanying prospectus
provide the pages on which these captions are located.
You can find a listing of the pages where capitalized terms used in this
prospectus supplement are defined under "Index of Certain Definitions" beginning
on page S-108 in this prospectus supplement.
Dealers will deliver a prospectus supplement and prospectus when acting
as underwriters of the certificates and with respect to their unsold allotments
and subscriptions. In addition, all dealers selling the certificates will be
required to deliver a prospectus supplement and prospectus for ninety days
following the date of this prospectus supplement.
WHERE YOU CAN FIND MORE INFORMATION
Federal securities law requires the filing of certain information with
the Securities and Exchange Commission (the "SEC"), including annual, quarterly
and special reports, proxy statements and other information. You can read and
copy these documents at the public reference facility maintained by the SEC at
Judiciary Plaza, 450 Fifth Street, NW, Room 1024, Washington, DC 20549. You can
also copy and inspect such reports, proxy statements and other information at
the following regional offices of the SEC:
Woolworth Building Chicago Regional Office
233 Broadway Citicorp Center
New York, New York 10279 500 West Madison Street, Suite 1400
Chicago, Illinois 60661
Please call the SEC at 1-800-SEC-0330 for further information on the
public reference rooms. SEC filings are also available to the public on the
SEC's web site at http://www.sec.gov. The SEC allows us to "incorporate by
reference" the information we file with it, which means that we can disclose
important information to you by referring you to those documents. The
information that we incorporate by reference is considered to be part of this
prospectus supplement, and later information that we file with the SEC will
automatically update and supersede this information.
S-ii
This prospectus supplement and the accompanying prospectus are part of a
registration statement filed by the depositor with the SEC (Registration No.
333-90772). You may request a free copy of any of the above filings by writing
or calling:
SEQUOIA RESIDENTIAL FUNDING, INC.
591 REDWOOD HIGHWAY, SUITE 3160
MILL VALLEY, CA 94941
(415) 381-1765
You should rely only on the information provided in this prospectus
supplement or the accompanying prospectus or incorporated by reference herein.
We have not authorized anyone else to provide you with different information.
You should not assume that the information in this prospectus supplement or the
accompanying prospectus is accurate as of any date other than the date on the
cover page of this prospectus supplement or the accompanying prospectus or that
the information incorporated by reference herein is accurate as of any date
other than the date stated therein.
S-iii
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
Page
SUMMARY ......................................... S-1
RISK FACTORS .................................... S-10
DESCRIPTION OF THE MORTGAGE POOLS ............... S-17
General ...................................... S-17
The Additional Collateral Loans .............. S-20
Tabular Characteristics of the
Mortgage Loans ............................. S-21
The Indices .................................. S-41
Assignment of the Mortgage Loans ............. S-41
MLCC Underwriting Guidelines ................. S-43
DESCRIPTION OF THE CERTIFICATES ................. S-46
General ...................................... S-46
Book-Entry Certificates ...................... S-48
Payments on Mortgage Loans; Accounts ......... S-53
Available Distribution Amount ................ S-54
Distributions of Interest .................... S-55
Distributions of Principal ................... S-63
Priority of Distributions .................... S-70
Limited Cross-Collateralization .............. S-72
Subordination of the Payment of the
Subordinate Certificates ................... S-73
Allocation of Realized Losses ................ S-74
Reports to Certificateholders ................ S-76
Final Scheduled Distribution Date ............ S-78
Optional Clean-Up Redemption of the
Certificates ............................... S-78
The Trustee .................................. S-79
Voting Rights ................................ S-79
THE SERVICER .................................... S-79
SERVICING OF THE MORTGAGE LOANS ................. S-83
Servicing and Collection Procedures .......... S-83
Servicing Compensation and Payment of
Expenses ................................... S-84
Adjustment to Servicing Fees in
Connection with Certain Prepaid
Mortgage Loans ............................. S-85
Advances ..................................... S-85
Evidence as to Compliance .................... S-85
Resignation of Servicer; Assignment
and Merger ................................. S-86
YIELD, PREPAYMENT AND WEIGHTED AVERAGE
LIFE ....................................... S-86
General ...................................... S-86
Subordination of the Offered Subordinate
Certificates ............................... S-89
Weighted Average Life ........................ S-90
Sensitivity of the Class X-1A,
Class X-1B, Class X-2 and Class X-B
Certificates ............................... S-98
USE OF PROCEEDS ................................. S-100
FEDERAL INCOME TAX CONSEQUENCES ................. S-100
Additional Tax Considerations
Applicable to the LIBOR
Certificates ............................... S-100
The Class A-R Certificates ................... S-102
ERISA MATTERS ................................... S-103
METHOD OF DISTRIBUTION .......................... S-106
LEGAL MATTERS ................................... S-107
RATINGS ......................................... S-108
INDEX OF CERTAIN DEFINITIONS .................... S-109
ANNEX I: GLOBAL CLEARANCE, SETTLEMENT
AND TAX DOCUMENTATION PROCEDURES .......... S-A-1
S-iv
TABLE OF CONTENTS
PROSPECTUS
Page
SUMMARY OF PROSPECTUS ........................... 4
RISK FACTORS .................................... 7
THE DEPOSITOR ................................... 10
THE TRUST ....................................... 11
General ....................................... 11
The Loans ..................................... 12
Agency Securities ............................. 14
Private Mortgage-backed Securities ............ 19
Substitution of Trust Assets .................. 21
USE OF PROCEEDS ................................. 21
LOAN PROGRAM .................................... 21
Underwriting Standards ........................ 21
Qualifications of Sellers ..................... 22
Quality Control ............................... 22
Representations by Sellers;
Repurchases ................................ 22
DESCRIPTION OF THE
SECURITIES .................................... 23
General ....................................... 24
Distributions on Securities ................... 25
Advances ...................................... 27
Compensating Interest ......................... 27
Reports to Securityholders .................... 28
Categories of Classes of Securities ........... 29
Book-Entry Registration of
Securities .................................. 31
CREDIT ENHANCEMENT .............................. 34
General ....................................... 34
Subordination ................................. 35
Insurance Policies, Surety Bonds and
Guaranties ................................. 35
Cross Support ................................. 36
Reserve Accounts .............................. 36
Pool Insurance Policies ....................... 37
Over-Collateralization ........................ 38
Letter of Credit .............................. 38
Other Insurance, Guaranties,
Letters of Credit and Similar
Instruments or Agreements .................. 38
YIELD AND PREPAYMENT CONSIDERATIONS ............. 39
THE AGREEMENTS .................................. 40
Assignment of the Trust Assets ................ 40
Payments on Loans; Deposits to
Collection Account ......................... 41
Pre-Funding Account ........................... 44
Subservicing by Sellers ....................... 44
Collection Procedures ......................... 44
Hazard Insurance .............................. 45
Primary Mortgage Insurance .................... 46
Claims Under Insurance Policies and
Other Realization Upon Defaulted
Loans ...................................... 47
Servicing and Other Compensation and
Payment of Expenses ........................ 47
Evidence as to Compliance ..................... 48
Certain Matters Regarding the
Servicer and the Depositor .................. 48
Events of Default; Rights Upon Event
of Default ................................. 49
Amendment ..................................... 51
Termination; Optional Termination ............. 51
The Trustee ................................... 52
CERTAIN LEGAL ASPECTS OF THE LOANS .............. 52
General ....................................... 53
Foreclosure/Repossession ...................... 53
Environmental Risks ........................... 55
Rights of Redemption .......................... 57
Anti-Deficiency Legislation;
Bankruptcy Laws; Tax Liens ................. 57
Due-on-Sale Clauses ........................... 58
Enforceability of Prepayment Charges
and Late Payment Fees ...................... 58
Applicability of Usury Laws ................... 58
Soldiers' and Sailors' Civil
Relief Act .................................. 59
Junior Mortgages; Rights of Senior
Mortgagees ................................. 59
Consumer Protection Laws ...................... 60
FEDERAL INCOME TAX CONSEQUENCES ................. 60
S-v
Overview ...................................... 60
Non-REMIC Securities .......................... 60
REMIC Securities .............................. 65
Withholding with Respect to Certain
Foreign Investors ........................... 72
Backup Withholding ............................ 73
STATE TAX CONSIDERATIONS ........................ 74
ERISA CONSIDERATIONS ............................ 74
LEGAL INVESTMENT ................................ 78
METHOD OF DISTRIBUTION .......................... 80
LEGAL MATTERS ................................... 80
FINANCIAL INFORMATION ........................... 80
AVAILABLE INFORMATION ........................... 81
INCORPORATION OF CERTAIN DOCUMENTS BY
REFERENCE ................................... 81
RATING .......................................... 81
INDEX OF DEFINED TERMS .......................... 83
S-vi
SUMMARY
This summary highlights selected information from this prospectus
supplement and does not contain all the information that you need to consider in
making your investment decision. Please read this entire prospectus supplement
and the accompanying prospectus carefully for additional information about the
offered certificates.
OFFERED CERTIFICATES
Sequoia Mortgage Trust 10 Mortgage Pass-Through Certificates consist of
the classes of certificates listed in the table below, together with the Class
B-4, Class B-5 and Class B-6 Certificates. Only the classes of certificates
listed in the table below are being offered by this prospectus supplement:
CLASS INITIAL CLASS INTEREST DESIGNATION CUSIP
PRINCIPAL RATE
AMOUNT(1)
1A............................. $822,375,000 (4) Senior 81743VAA1
2A-1........................... 190,000,000 (4) Senior 81743VAB9
2A-2(2)........................ 3,500,000 (4) Senior 81743VAN3
X-1A........................... (3) (3) Notional/Senior 81743VAC7
X-1B........................... (3) (3) Notional/Senior 81743VAD5
X-2............................ (3) (3) Notional/Senior 81743VAP8
X-B............................ (3) (3) Notional/Senior 81743VAE3
A-R............................ 100 (5) Residual/Senior 81743VAF0
B-1............................ 12,600,000 (4) Subordinate 81743VAG8
B-2............................ 8,400,000 (4) Subordinate 81743VAH6
B-3............................ 4,725,000 (4) Subordinate 81743VAJ2
- ----------------
(1) These balances are approximate and are subject to an increase or decrease
of up to 10%, as described in this prospectus supplement.
(2) The Class 2A-2 Certificates will not receive accelerated payments of
principal to the same extent as the other related senior certificates, as
discussed in this prospectus supplement under "Description of the
Certificates -- Distributions of Principal." In addition, realized losses
which would otherwise be allocated to the Class 2A-1 Certificates in any
period will first be allocated to the Class 2A-2 Certificates as described
at "Description of the Certificates -- Allocation of Realized Losses."
(3) Interest will accrue on the Class X-1A, Class X-1B, Class X-2 and Class
X-B Certificates based upon notional amounts as described in this
prospectus supplement under "Description of the Certificates --
Distributions of Interest." No principal will be distributable on the
Class X-1A, Class X-1B, Class X-2 and Class X-B Certificates.
(4) Interest will accrue on the Class 1A, Class 2A-1, Class 2A-2, Class B-1,
Class B-2 and Class B-3 Certificates based upon one-month LIBOR plus a
specified margin, subject to limitation, as described in this prospectus
supplement.
(5) Interest will accrue on the Class A-R Certificate based upon the weighted
average of the net interest rates on the pool 1 mortgage loans, as
described in this prospectus supplement.
S-1
The certificates offered by this prospectus supplement, except for the
Class A-R Certificate, will be issued in book-entry form and in the minimum
denominations (or multiples thereof) set forth under "Description of the
Certificates -- General" in this prospectus supplement. The Class A-R
Certificate will be issued in fully registered definitive form.
The certificates represent ownership interests in a trust fund that will
consist primarily of two separate pools of mortgage loans, "pool 1" and "pool
2."
Generally, with certain limited exceptions discussed at "Limited
Cross-Collateralization" below, distributions to the Class 1A, Class A-R, Class
X-1A and Class X-1B Certificates will be solely derived from collections on the
pool 1 mortgage loans and distributions to the Class 2A-1, Class 2A-2 and Class
X-2 Certificates will be solely derived from collections on the pool 2 mortgage
loans. Aggregate collections from both pools of mortgage loans will be available
to make distributions on the Class X-B, Class B-1, Class B-2 and Class B-3
Certificates and the other subordinate classes.
THE TRUST
Sequoia Mortgage Trust 10 will be formed pursuant to a trust agreement
between the depositor and the trustee. The certificates solely represent
beneficial ownership interests in the trust fund created under the trust
agreement and not an interest in, or the obligation of, the depositor or any
other person.
THE TRUSTEE
Wells Fargo Bank Minnesota, National Association, will act as trustee of
the trust under the trust agreement.
THE ORIGINATOR AND SERVICER
Each Mortgage Loan was originated by Cendant Mortgage Corporation on
behalf of Merrill Lynch Credit Corporation and underwritten in accordance with
Merrill Lynch Credit Corporation underwriting guidelines as in effect at the
time of origination. Cendant Mortgage Corporation will continue to service the
mortgage loans pursuant to existing servicing agreements with the seller. On or
prior to the Closing Date, the seller will assign its rights under such
servicing agreements to the depositor which will, in turn, assign such rights to
the trust.
We refer you to "Description of the Mortgage Pools--MLLC Underwriting
Guidelines" and "Servicing of the Mortgage Loans" in this prospectus supplement
for more information.
THE SELLER
RWT Holdings, Inc., a Delaware corporation and wholly-owned subsidiary
of Redwood Trust, Inc. has previously acquired the mortgage loans from Merrill
Lynch Credit Corporation. On the closing date, RWT Holdings, Inc., as seller,
will sell all of its interest in the mortgage loans to the depositor.
THE DEPOSITOR
On the closing date, Sequoia Residential Funding, Inc., a Delaware
corporation and indirect wholly-owned subsidiary of Redwood Trust, Inc., will
assign all of its interest in the mortgage loans to the trustee for the benefit
of the certificateholders.
CUT-OFF DATE
September 1, 2002.
S-2
DISTRIBUTION DATE
The 20th day of each month or, if such day is not a business day, the
next business day thereafter, commencing in October 2002. Distributions on each
distribution date will be made to certificateholders of record as of the related
record date, except that the final distribution on the certificates will be made
only upon presentment and surrender of the certificates at the corporate trust
office of the trustee.
RECORD DATE
With respect to the Class 1A, Class 2A-1, Class 2A-2, Class B-1, Class
B-2 and Class B-3 Certificates, the last business day preceding a distribution
date (or the closing date, in the case of the first distribution date), unless
such certificates are no longer book-entry certificates, in which case the
record date is the last business day of the month preceding the month of a
distribution date. With respect to all other classes of certificates, the record
date will be last business day of the month preceding the month of a
distribution date (or the closing date, in the case of the first distribution
date).
DISTRIBUTIONS OF INTEREST
On each distribution date, to the extent funds are available from the
related mortgage pool (or both pools in the aggregate, in the case of the Class
X-B, Class B-1, Class B-2 and Class B-3 Certificates and the other subordinate
classes), each class of certificates will be entitled to receive accrued and
unpaid interest determined on the basis of the outstanding class principal
amount of such class immediately prior to such distribution date (or notional
amount, in the case of the Class X-1A, Class X-1B, Class X-2 and Class X-B
Certificates), the applicable certificate interest rate and accrual period, and,
in the case of the Class 1A, Class 2A-1, Class 2A-2, Class B-1, Class B-2 and
Class B-3 Certificates, any accrued and unpaid interest shortfall attributable
solely to basis risk, but solely to the extent of funds available in the basis
risk reserve fund.
For each distribution date, the accrual period applicable to the Class
1A, Class 2A-1, Class 2A-2, Class B-1, Class B-2 and Class B-3 Certificates for
a given distribution date, will be the period commencing on the 20th day of the
month immediately preceding the month in which such distribution date occurs (or
in the case of the first distribution date, beginning on the closing date of
this transaction) and ending on the 19th day of the month in which such
distribution date occurs. The accrual period applicable to all other classes of
offered certificates will be the calendar month preceding the month in which
such distribution date occurs. Interest on all classes of certificates for all
accrual periods will be calculated and payable on the basis of a 360-day year
consisting of twelve 30-day months.
Interest payments will be allocated among certificateholders of a class
of certificates on a pro rata basis.
We refer you to "Description of the Certificates -- Distributions of
Interest" in this prospectus supplement for more information.
DISTRIBUTIONS OF PRINCIPAL
The amount of principal distributable on the certificates (other than
the interest-only certificates) on any distribution date will be determined by
(1) formulas that allocate portions of principal payments received on the
mortgage loans among the different classes of certificates and (2) the
S-3
amount of funds actually received on the mortgage loans and available to make
distributions on the certificates. Funds actually received on the mortgage loans
may consist of scheduled payments and unscheduled payments resulting from
prepayments by borrowers, liquidation of defaulted mortgage loans or repurchases
of mortgage loans under the circumstances described in this prospectus
supplement.
Generally, the Class 1A, Class 2A-1, Class 2A-2 and Class A-R
Certificates will receive principal payments on each distribution date in an
amount equal to their pro rata share of the related "Senior Principal
Distribution Amount" based on principal collections from the related mortgage
pool for the related due period; provided, however, as described herein, the
allocation of the Senior Principal Distribution Amount with respect to pool 2
between the Class 2A-1 and Class 2A-2 Certificates will be determined by
applying the same shifting interest percentage rules described herein with
respect to the subordinate classes of certificates. As a result, until the
Distribution Date in October 2012, unless certain performance triggers are
satisfied, the Class 2A-2 Certificates will not receive principal distributions,
but rather the Class 2A-1 Certificates will be allocated all pool 2 principal
collections allocable to the pool 2 senior certificates. Thereafter, the Class
2A-2 Certificates will generally receive their pro rata share of scheduled
principal and increasing portions of unscheduled principal payments from pool 2
principal collections. Generally, unless certain performance triggers are
satisfied the Class B-1, Class B-2 and Class B-3 Certificates and the other
subordinate classes will not receive principal distributions from collections on
the mortgage loans until the distribution date in October 2012. From and after
that distribution date, provided that certain tests are met, the Class B-1,
Class B-2 and Class B-3 Certificates and the other subordinate classes will
receive principal collections in an amount equal to their allocable share of the
related "Subordinate Principal Distribution Amount" based on collections of
principal from the mortgage pools in the aggregate for the related due period.
We refer you to "Description of the Certificates -- Distributions of
Principal" in this prospectus supplement and "Description of the Securities --
Distributions on Securities" in the prospectus for more information.
FINAL SCHEDULED DISTRIBUTION DATE
The final scheduled distribution date for the offered certificates is
the distribution date in October 2027, which is the distribution date in the
month after the scheduled maturity date for the latest maturing mortgage loan.
PRIORITY OF DISTRIBUTIONS
Distributions on the certificates will be made on each distribution date
from available principal and interest collections received in the related due
period from the related mortgage pool (in the case of the senior certificates
other than the Class X-B Certificates) and from both mortgage pools in the
aggregate (in the case of the subordinate certificates and the Class X-B
Certificates), and other available funds, in the following order of priority.
1. From the related mortgage pool (or pools, in the case of the Class
X-B Certificates), to accrued and unpaid interest at the related certificate
interest rate on the Class A-R, Class 1A, Class 2A-1, Class 2A-2, Class X-1A,
Class X-1B, Class X-2 and Class X-B Certificates; provided, however, that the
sum of current interest payable on
S-4
the Class X-1A, Class X-1B, Class X-2 and Class X-B Certificates on any
distribution date, to the extent of the required basis risk reserve fund deposit
for such date, will be deposited in the basis risk reserve fund on such date;
and
2. Concurrently, to the senior certificates (other than the
interest-only certificates) from principal collections received in the related
due period from the related mortgage pool, as follows:
a) To principal to the Class A-R and Class 1A Certificates,
sequentially, in that order, until the principal balance of each such
class has been reduced to zero; and
b) To principal to the Class 2A-1 and Class 2A-2 Certificates
until the principal balance of such classes have been reduced to zero.
3. From aggregate interest and principal collections received in the
related due period from the mortgage pools (after giving effect to distributions
in 1 and 2 above), to accrued and unpaid interest on, and principal of, the
Class B-1, Class B-2 and B-3 Certificates, sequentially, in that order; and
4. From the basis risk reserve fund, to the Class 1A, Class 2A-1, Class
2A-2, Class B-1, Class B-2 and Class B-3 Certificates, sequentially, in that
order, any related basis risk shortfall or related unpaid basis risk shortfall,
as described herein; and
5. From aggregate interest and principal collections received in the
related due period from the mortgage pools (after giving effect to distributions
in 1 through 4 above), to accrued and unpaid interest on, and principal of, the
Class B-4, Class B-5 and Class B-6 Certificates, sequentially, in that order;
and
6. To the Class A-R Certificates, any remaining amount.
We refer you to "Description of the Certificates -- Priority of
Distributions" and "-- Allocation of Realized Losses" in this prospectus
supplement for more information.
LIMITED CROSS-COLLATERALIZATION
In certain very limited circumstances relating to a pool's experiencing
either rapid prepayments or disproportionately high realized losses, principal
and interest collected from the other pool may be applied to pay principal or
interest, or both, to the senior certificates of the pool experiencing such
conditions.
We refer you to "Description of the Certificates -- Limited
Cross-Collateralization" in this prospectus supplement for more information.
OPTIONAL CLEAN-UP REDEMPTION
On any distribution date on or after the distribution date (the "initial
clean-up call date") on which the aggregate outstanding principal balance of the
mortgage loans is equal to or less than 10% of the aggregate principal balance
of the mortgage loans as of the cut-off date, the depositor will have the option
to purchase all of the mortgage loans and apply the proceeds to redeem the
certificates at a price equal to 100% of the unpaid principal balance of the
certificates, plus accrued and unpaid interest thereon (excluding the amount of
any unpaid basis risk shortfalls).
If the depositor fails to exercise its optional clean-up redemption
right on the initial clean-up call date, then on the
S-5
immediately succeeding distribution date and each distribution date thereafter,
the related margin over the LIBOR component of the interest rate of the Class
1A, Class 2A-1, Class 2A-2, Class B-1, Class B-2 and Class B-3 Certificates will
increase as described at "Description of the Certificates -- Distributions of
Interest" and "-- Optional Clean-Up Redemption of the Certificates" in this
prospectus supplement.
We refer you to "Description of the Certificates -- Optional Clean-Up
Redemption of the Certificates" in this prospectus supplement for more
information.
CREDIT ENHANCEMENT
Subordination. The subordinate classes of certificates will provide
credit enhancement for the senior certificates. In addition, the Class B-1
Certificates will have a payment priority over the Class B-2, Class B-3, Class
B-4, Class B-5 and Class B-6 Certificates; the Class B-2 Certificates will have
a payment priority over the Class B-3, Class B-4, Class B-5 and Class B-6
Certificates; and the Class B-3 Certificates will have a payment priority over
the Class B-4, Class B-5 and Class B-6 Certificates.
If the mortgage loans in any pool experience losses (except for certain
excess losses as described in this prospectus supplement), then the principal
amount of the subordinate class of certificates that is lowest in seniority and
still outstanding will be reduced by the amount of those losses until the total
outstanding principal balance of such class equals zero.
If a loss has been allocated to reduce the principal amount of your
class of certificates, you will receive no payment in respect of that reduction.
If the applicable subordination of the subordinate certificates is insufficient
to absorb losses, then the senior certificates relating to the mortgage pool
incurring the realized losses will be allocated such losses and may never
receive all of their principal payments; provided, however, that losses that
would otherwise be allocated to the Class 2A-1 Certificates will first be
allocated to the Class 2A-2 Certificates until the principal balance of the
Class 2A-2 Certificates has been reduced to zero.
We refer you to "Description of the Certificates -- Priority of
Distributions" and "-- Allocation of Realized Losses" in this prospectus
supplement for more information.
THE MORTGAGE LOANS
Statistical Information. The statistical information on the mortgage
loans presented herein is based on the principal balance of such mortgage loans
as of the cut-off date. Such information does not take into account defaults,
delinquencies and prepayments that may have occurred with respect to the
mortgage loans since such date. As a result, the statistical distribution of the
characteristics in the final mortgage pools as of the closing date will vary
from the statistical distribution of such characteristics as presented in this
prospectus supplement, although such variance will not be material.
General. On the cut-off date, the assets of the trust fund consisted of
approximately 2,764 mortgage loans with a total principal balance of
approximately $1,050,010,262. The mortgage loans consist primarily of adjustable
rate, conventional, fully amortizing, first lien residential mortgage loans,
substantially all of which have an original term to stated maturity of
approximately 25 years. All of the mortgage
S-6
loans provide for payments of interest at the related mortgage interest rate,
but no payments of principal, for a period of ten years following origination of
such mortgage loan. Following such ten-year period, the monthly payment with
respect to each mortgage loan will be increased to an amount sufficient to
amortize the principal balance of such mortgage loan over its remaining 15-year
term and to pay interest at the related mortgage interest rate.
Pool 1 Characteristics. As of the cut-off date, pool 1 consisted of
approximately 2,187 mortgage loans having a total principal balance of
approximately $850,007,097 (or approximately 80.95% of the aggregate cut-off
date balance of the mortgage loans). The mortgage interest rates of
approximately 47.78% and 52.22% of the pool 1 mortgage loans adjust based on the
one-month LIBOR and six-month LIBOR index, respectively, and substantially all
of such mortgage loans have original terms to maturity of approximately 25
years.
Pool 2 Characteristics. As of the cut-off date, pool 2 consisted of
approximately 577 mortgage loans having a total principal balance of
approximately $200,003,165 (or approximately 19.05% of the aggregate cut-off
date balance of the mortgage loans). The mortgage interest rates of all of the
pool 2 mortgage loans adjust based on the six-month LIBOR index.
We refer you to "Description of the Mortgage Pools" in this prospectus
supplement for more information.
Summary Statistical Data. The following table summarizes the
characteristics of the mortgage loans in the aggregate and by pool as of the
cut-off date. Tabular information concerning the characteristics of the mortgage
loans in each mortgage pool as of the cut-off date can be found at "Description
of the Mortgage Pools -- Tabular Characteristics of the Mortgage Loans" in this
prospectus supplement.
Aggregate Outstanding Principal Balance:..... $1,050,010,262
Pool 1: ..................................... $ 850,007,097
Pool 2: ..................................... $ 200,003,165
Aggregate Number of Mortgage Loans:.......... 2,764
Pool 1: ..................................... 2,187
Pool 2: ..................................... 577
Aggregate Average Current Balance:........... $ 379,888
Pool 1: ..................................... $ 388,664
Pool 2: ..................................... $ 346,626
Aggregate Weighted Average Mortgage
Interest Rate:............................. 3.667%
Pool 1: ..................................... 3.656%
Pool 2: ..................................... 3.716%
Aggregate Weighted Average Gross Margin:..... 1.809%
Pool 1: ..................................... 1.802%
Pool 2: ..................................... 1.839%
Aggregate Weighted Average Original Term to
Maturity:.................................. 300 months
Pool 1: ..................................... 300 months
Pool 2: ..................................... 300 months
Aggregate Weighted Average Remaining Term
to Maturity:............................... 299 months
Pool 1: ..................................... 299 months
Pool 2: ..................................... 299 months
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Additional Collateral Loans. Approximately 12.26% and 10.79% of the pool
1 and pool 2 mortgage loans, respectively, in addition to being secured by real
property, are secured by a security interest in a limited amount of additional
collateral owned by the borrower or a third-party guarantor. Such additional
collateral may no longer be required when the principal balance of such
additional collateral mortgage loan is reduced to a predetermined amount set
forth in the related pledge agreement or guaranty agreement, as applicable, or
when the loan-to-value ratio for such additional collateral mortgage loan is
reduced to the applicable loan-to-value ratio for such additional collateral
mortgage loan by virtue of an increase in the appraised value of the mortgaged
property as determined by the related servicer.
We refer you to "Description of the Mortgage Pools -- The Additional
Collateral Loans" for more information.
SERVICING OF THE MORTGAGE LOANS
Cendant Mortgage Corporation, as servicer, is generally obligated to
make monthly advances of cash (to the extent such advances are deemed
recoverable), which will be included with mortgage principal and interest
collections, in an amount equal to any delinquent monthly payments due on the
mortgage loans on the immediately preceding determination date. The servicer
will be entitled to reimburse itself for any such advances from future payments
and collections (including insurance or liquidation proceeds) with respect to
the mortgage loans. However, if the servicer makes advances which are
nonrecoverable from future payments and collections on the related mortgage
loan, the servicer will be entitled to reimbursement for such advances prior to
any distributions to certificateholders.
The servicer will also make interest payments to compensate in part for
any shortfall in interest payments on the certificates which results from a
mortgagor prepaying a mortgage loan in whole or in part. However, the amount of
such payments will generally not exceed the servicing fees payable to the
servicer for the related due period.
We refer you to "Servicing of the Mortgage Loans" in this prospectus
supplement for more detail.
FEDERAL INCOME TAX CONSEQUENCES
The trustee will elect to treat all or a part of the assets of the trust
fund as comprising two REMICs for federal income tax purposes. Each of the
certificates, other than the Class A-R Certificate, will represent ownership of
"regular interests" in a REMIC and the Class A-R Certificate and Class LT-R
Certificate will be designated as the sole class of "residual interest" in the
related REMICs.
There are restrictions on the types of investors that are permitted to
purchase the Class A-R Certificate.
We refer you to "Federal Income Tax Consequences" in this prospectus
supplement and in the prospectus for more information.
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ERISA MATTERS
Subject to important considerations described under "ERISA Matters" in
this prospectus supplement and in the accompanying prospectus, the offered
certificates, other than the Class A-R Certificate, will be eligible for
purchase by persons investing assets of employee benefit plans or individual
retirement accounts. The Class A-R Certificate will NOT be eligible for purchase
by any such plan or account.
We refer you to "ERISA Matters" in this prospectus supplement and "ERISA
Considerations" in the accompanying prospectus for more information.
LEGAL INVESTMENT
Generally all of the certificates offered by this prospectus supplement
(except the Class A-R, Class B-2 and Class B-3 Certificates) will constitute
"mortgage related securities" for purposes of the Secondary Mortgage Market
Enhancement Act of 1984.
There are other restrictions on the ability of certain types of
investors to purchase the certificates that prospective investors should
consider.
We refer you to "Legal Investment" in the prospectus for more
information.
RATING OF THE CERTIFICATES
The certificates offered by this prospectus supplement will initially
have the following ratings from Moody's Investors Service, Inc., Standard and
Poor's Rating Services, a division of The McGraw-Hill Companies, Inc. and Fitch
Ratings.
MOODY'S S&P FITCH
CLASS RATING RATING RATING
----- ------- ------ ------
1A Aaa AAA AAA
2A-1 Aaa AAA AAA
2A-2 Aaa AAA AAA
X-1A Aaa AAA AAA
X-1B Aaa AAA AAA
X-2 Aaa AAA AAA
X-B Aaa AAA AAA
B-1 Aa2 AA AA
B-2 A2 A A
B-3 Baa2 BBB BBB
- - These ratings are not recommendations to buy, sell or hold these
certificates. A rating may be changed or withdrawn at any time by the
assigning rating agency.
- - The ratings do not address the possibility that, as a result of principal
prepayments, the yield on your certificates may be lower than anticipated.
- - The ratings do not address the likelihood that any basis risk shortfall will
be repaid to certificateholders.
We refer you to "Ratings" in this prospectus supplement for a more
complete discussion of the certificate ratings.
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RISK FACTORS
INVESTORS SHOULD CONSIDER THE FOLLOWING FACTORS IN CONNECTION WITH THE
PURCHASE OF CERTIFICATES. YOU SHOULD ALSO CONSIDER THE RISK FACTORS DESCRIBED IN
THE ACCOMPANYING PROSPECTUS. ALL STATISTICAL INFORMATION REFERRED TO IN THIS
SECTION IS BASED ON THE MORTGAGE POOLS AS CONSTITUTED ON THE CUT-OFF DATE.
PREPAYMENTS ARE UNPREDICTABLE AND AFFECT YIELD
The rate of principal distributions and yield to maturity on the
certificates will be directly related to the rate of principal payments on the
mortgage loans of the related mortgage pool, in the case of the senior
certificates, or the combined mortgage pools, in the case of the subordinate
certificates. For example, the rate of principal payments on the mortgage loans
will be affected by the following:
- the amortization schedules of the mortgage loans;
- the rate of principal prepayments, including partial prepayments and
full prepayments resulting from:
- refinancing by borrowers;
- liquidations of defaulted loans by the related servicer; and
- repurchases of mortgage loans by the seller as a result of
defective documentation or breaches of representations and
warranties.
The yield to maturity of the certificates will also be affected by the
depositor's exercise of its optional redemption rights.
All of the mortgage loans may be prepaid in whole or in part at any time
without payment of a prepayment penalty. The rate of principal payments on
mortgage loans is influenced by a wide variety of economic, geographic, social
and other factors, including general economic conditions, the level of
prevailing interest rates, the availability of alternative financing and
homeowner maturity. For example, if interest rates for similar loans fall below
the interest rates on the mortgage loans, the rate of prepayment would generally
be expected to increase. Conversely, if interest rates on similar loans rise
above the interest rates on the mortgage loans, the rate of prepayment would
generally be expected to decrease. We cannot predict the rate at which borrowers
will repay their mortgage loans. Please consider the following:
- If you are purchasing any offered certificate at a discount, your
yield may be lower than expected if principal payments on the related
mortgage loans occur at a slower rate than you expected;
- If you are purchasing any offered certificate at a premium, your
yield may be lower than expected if principal payments on the related
mortgage loans occur at a faster rate than you expected, and you
could lose your initial investment;
S-10
- If the rate of default and the amount of losses on the related
mortgage loans are higher than you expect, then your yield may be
lower than you expect;
- The earlier a payment of principal occurs, the greater the impact on
your yield. For example, if you purchase any offered certificate at a
premium, although the average rate of principal payments is
consistent with your expectations, if the rate of principal payments
occurs initially at a rate higher than expected, which would
adversely impact your yield, a subsequent reduction in the rate of
principal payments will not offset any adverse yield effect;
- The priorities governing payments of scheduled and unscheduled
principal will have the effect of accelerating the rate of principal
payments to holders of the classes of senior certificates relative to
the classes of subordinate certificates and to the holders of the
Class 2A-1 Certificates relative to the holders of the Class 2A-2
Certificates; and
- Prospective purchasers of the Class X-1A, Class X-1B, Class X-2 and
Class X-B Certificates should carefully consider the risk that a
rapid rate of principal payments on the related mortgage loans could
result in the failure of such purchasers to recover their initial
investments.
See "Yield, Prepayment and Weighted Average Life" and "Description of
the Certificates -- Distributions of Principal" in this prospectus supplement
for a description of the factors that may influence the rate and timing of
prepayments on the mortgage loans.
MORTGAGE LOANS WITH INTEREST-ONLY PAYMENTS AND HIGH BALANCE LOANS
All of the mortgage loans provide for payment of interest at the related
mortgage rate, but no payment of principal, for a period of ten years following
the origination of the related mortgage loan. Following the applicable
interest-only period, the monthly payment with respect to the mortgage loans
will be increased to an amount sufficient to amortize the principal balance of
the mortgage loan over its remaining term, and to pay interest at the related
mortgage interest rate.
Such interest-only mortgage loans will, absent other considerations,
result in longer weighted average lives of the certificates when compared to
certificates backed by fully amortizing mortgage loans. If you purchase a
certificate at a discount, you should consider that the extension of its
weighted average life could result in a lower yield than would be the case if
such mortgage loans provided for payment of principal and interest on every
distribution date. In addition, a borrower may view the absence of any
obligation to make a payment of principal during the first ten years of the term
of the mortgage loan as a disincentive to prepayment.
If a recalculated monthly payment as described above is substantially
higher than a borrower's previous interest-only monthly payment, that loan may
also be subject to an increased risk of delinquency and loss.
See "Description of the Mortgage Pools" in this prospectus supplement.
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As of the cut-off date, the principal balances of approximately 116 of
the mortgage loans in pool 1 and of approximately 20 of the mortgage loans in
pool 2 (representing approximately 19.67% and 14.88%, respectively, of each such
pool's cut-off date principal balance) were in excess of $1,000,000. You should
consider the risk that the loss and delinquency experience on these high balance
loans may have a disproportionate effect on the performance of either pool.
YOUR YIELD MAY BE AFFECTED BY CHANGES IN INTEREST RATES
No prediction can be made as to future levels of one-month LIBOR (the
applicable index in determining the certificate interest rate for the Class 1A,
Class 2A-1, Class 2A-2, Class B-1, Class B-2 and Class B-3 Certificates and the
mortgage interest rate for approximately 47.78% of the mortgage loans in pool
1), six-month LIBOR (the applicable index in determining the mortgage interest
rate for approximately 52.22% of the mortgage loans in pool 1 and all of the
mortgage loans in pool 2) or as to the timing of any changes therein, each of
which will directly affect the yields of the certificates.
Except for any payments made from the basis risk reserve fund, as
described herein, the holders of the Class 1A, Class 2A-1, Class 2A-2, Class
B-1, Class B-2 and Class B-3 Certificates will absorb the risk associated with
basis risk shortfalls determined as the excess of (1) the related certificate
interest rate calculated on the basis of one-month LIBOR plus the applicable
margin (subject to the maximum interest rate of 11.75%) over (2) the weighted
average net mortgage rate of the pool 1 mortgage loans (in the case of the Class
1A Certificates), the weighted average net mortgage rate of the pool 2 mortgage
loans (in the case of the Class 2A-1 and Class 2A-2 Certificates) or the
subordinate net WAC limitation (in the case of the Class B-1, Class B-2 and
Class B3 Certificates) as described herein under "Description of the
Certificates--Distributions of Interest."
The holders of the Class 1A, Class 2A-1, Class 2A-2, Class B-1, Class
B-2 and Class B-3 Certificates may not always receive interest at a rate equal
to one-month LIBOR plus the applicable margin. If the weighted average net
mortgage rate of the mortgage loans in pool 1, in the case of the Class 1A
Certificates, the weighted average net mortgage rate of the mortgage loans in
pool 2, in the case of the Class 2A-1 and Class 2A-2 Certificates, or the
subordinate net WAC limitation, in the case of the Class B-1, Class B-2 and
Class B-3 Certificates, is less than one-month LIBOR plus the related margin,
the interest rate of those certificates will be reduced to the applicable
weighted average net mortgage rate or subordinate net WAC limitation, as
applicable. Thus, the yield to investors in those certificates will be sensitive
to fluctuations in the level of one-month LIBOR and six-month LIBOR and may be
adversely affected by the application of the weighted average net mortgage rate
of the mortgage loans.
The prepayment of mortgage loans with relatively higher net mortgage
rates may result in a lower weighted average net mortgage rate. Consequently, if
on any distribution date the application of the related weighted average net
mortgage rate results in an interest payment lower than one-month LIBOR plus the
related margin on the Class 1A, Class 2A-1, Class 2A-2, Class B-1, Class B-2 and
Class B-3 Certificates during the related interest accrual period, the value of
those certificates may be temporarily or permanently reduced.
S-12
Investors in the Class 1A, Class 2A-1, Class 2A-2, Class B-1, Class B-2
and Class B-3 Certificates should be aware that the mortgage rates on
approximately 61.32% of the mortgage loans in pool 1 and on all of the mortgage
loans in pool 2 are generally adjustable semi-annually based on the related
six-month LIBOR index. Consequently, the interest that becomes due on those
mortgage loans during the related due period may be less than interest that
would accrue on the related certificates at the rate of one-month LIBOR plus the
related margin. In a rising interest rate environment, such certificates may
receive interest at the related weighted average net mortgage rate for a
protracted period of time.
To the extent that the related weighted average net mortgage rate of the
mortgage loans limits the amount of interest paid on the Class 1A, Class 2A-1,
Class 2A-2, Class B-1, Class B-2 and Class B-3 Certificates, the difference
between the related weighted average net mortgage rate and one-month LIBOR plus
the related margin for such class of certificates, will create a shortfall that
will carry forward, with interest thereon as described herein. However, any such
resulting shortfall will only be paid after any current interest for such
distribution date has been paid to such certificates and only to the extent that
there are amounts on deposit in the basis risk reserve fund funded from interest
accrued on and otherwise distributable to the Class X-1A, Class X-1B, Class X-2
and Class X-B Certificates on the related distribution date. Accordingly, these
shortfalls may remain unpaid on any optional redemption or final distribution
date.
See "Description of the Certificates -- Distributions of Interest" in
this prospectus supplement.
LIMITED CROSS-COLLATERALIZATION AMONG THE MORTGAGE POOLS; LIMITED RECOURSE
With limited exception described in "Description of the Certificates --
Limited Cross-Collateralization," interest and principal on the senior
certificates will solely be payable out of amounts collected in respect of the
mortgage loans in the related mortgage pool. In the case of the senior
certificates, the mortgage pools will generally not be "cross-collateralized" --
interest and principal collections received from the mortgage loans in a pool
will only be available for distribution to the related certificates and not to
the senior certificates related to the other pool. For example, collections from
pool 1 will generally only be available to make distributions to the Class 1A,
Class X-1A, Class X-1B and Class A-R Certificates, but not to the Class 2A-1,
Class 2A-2 or Class X-2 Certificates. On the other hand, the applicable
subordinate percentage of collections from each mortgage pool will be available
to make distributions to the Class X-B Certificates and the subordinate
certificates.
The applicable coverages for special hazard losses, fraud losses and
bankruptcy losses cover mortgage loans in both mortgage pools. Therefore, if
mortgage loans in any one pool suffer a high level of these types of losses, it
will reduce the available coverage for all of the senior certificates in either
of the pools. After the available coverage has been exhausted, if any mortgage
loan suffers these types of losses, all senior certificates will be allocated a
portion of the loss.
Because the subordinate certificates represent interests in both
mortgage pools, the class principal amounts of the subordinate certificates
could be reduced to zero as a result of realized losses on the mortgage loans in
any one pool. Therefore, the allocation of realized losses on the
S-13
mortgage loans in any one pool to the subordinate certificates will reduce the
subordination provided by the subordinate certificates to all of the senior
certificates, including the senior certificates related to the mortgage pool
that did not suffer any losses. This will increase the likelihood that future
realized losses may be allocated to the senior certificates related to the
mortgage pool that did not suffer those previous losses.
Neither the certificates nor the assets of the trust fund will be
guaranteed by the depositor, the seller, the servicer, the trustee or any of
their respective affiliates or insured by any governmental agency. Consequently,
if collections on the related mortgage loans are insufficient to make all
payments required on the certificates and the protection against losses provided
by subordination is exhausted, you may incur a loss on your investment.
POTENTIAL INADEQUACY OF CREDIT ENHANCEMENT
The certificates are not insured by any financial guaranty insurance
policy. The subordination and loss allocation features described in this
prospectus supplement are intended to enhance the likelihood that holders of
more senior classes of certificates will receive regular payments of interest
and principal, but are limited in nature and may be insufficient to cover all
losses on the mortgage loans.
The amount of any loss (other than certain "excess" losses described in
this prospectus supplement) experienced on a mortgage loan will be applied to
reduce the principal amount of the class of subordinate certificates with the
highest numerical class designation, until the principal balance of that class
has been reduced to zero. If subordination is insufficient to absorb losses,
then holders of more senior classes will incur losses and may never receive all
of their principal payments. You should consider the following:
- if you buy a Class B-3 Certificate and losses on the mortgage loans
exceed the total principal amount of the Class B-4, Class B-5 and
Class B-6 Certificates, the principal amount of your certificate will
be reduced proportionately with the principal amount of the other
Class B-3 Certificates by the amount of that excess;
- if you buy a Class B-2 Certificate and losses on the mortgage loans
exceed the total principal amount of the Class B-3, Class B-4, Class
B-5 and Class B-6 Certificates, the principal amount of your
certificate will be reduced proportionately with the principal amount
of the other Class B-2 Certificates by the amount of that excess;
- if you buy a Class B-1 Certificate and losses on the mortgage loans
exceed the total principal amount of the Class B-2, Class B-3, Class
B-4, Class B-5 and Class B-6 Certificates, the principal amount of
your certificate will be reduced proportionately with the principal
amount of the other Class B-1 Certificates by the amount of that
excess; and
- after the total class principal amount of the subordinate
certificates has been reduced to zero, losses on the mortgage loans
realized by any mortgage pool will reduce the class principal amounts
of the related senior certificates; provided, however, losses that
would otherwise be allocated to the Class 2A-1 Certificates will
first be allocated
S-14
to the Class 2A-2 Certificates until the principal balance of the
Class 2A-2 Certificates has been reduced to zero. See "Description
of the Certificates -- Priority of Distributions" and "-- Allocation
of Realized Losses" in this prospectus supplement.
CASH FLOW CONSIDERATIONS AND RISKS
The related mortgage loans, the related mortgaged property and
additional collateral and other assets of the trust fund are the sole source of
payments on the certificates. Even if the mortgaged properties provide adequate
security for the mortgage loans, you could encounter substantial delays in
connection with the liquidation of mortgage loans that are delinquent. This
could result in shortfalls in payments on the certificates if the credit
enhancement provided by subordination is insufficient. Further, liquidation
expenses, such as legal fees, real estate taxes and maintenance and preservation
expenses, will reduce the security for the related mortgage loans and could
thereby reduce the proceeds payable to certificateholders. If any of the
mortgaged properties and additional collateral fail to provide adequate security
for the related mortgage loans, certificateholders could experience a loss if
the credit enhancement created by the subordination has been exhausted.
CONCENTRATION OF MORTGAGE LOANS COULD ADVERSELY AFFECT YOUR INVESTMENT
Approximately 21.72% and 23.39% of the Mortgage Loans included in pool 1
and pool 2, respectively, are secured by mortgaged properties located in
California. Consequently, losses and prepayments on the mortgage loans in a
particular pool and the resultant payments on the related certificates may be
affected significantly by changes in the housing markets and the regional
economies in these areas and by the occurrence of natural disasters, such as
earthquakes, hurricanes, tornadoes, mud slides, fires and floods, in these
areas.
See "Description of the Mortgage Pools -- Tabular Characteristics of the
Mortgage Loans" in this prospectus supplement.
ABILITY TO RESELL SECURITIES MAY BE LIMITED
There is currently no market for any of the certificates and the
underwriters are not required to assist investors in resales of the offered
certificates, although they may do so. We cannot assure you that a secondary
market will develop, or if it does develop, that it will continue to exist for
the term of the certificates. Consequently, you may not be able to sell your
certificates readily or at prices that will enable you to realize your desired
yield. The market values of the certificates are likely to fluctuate; these
fluctuations may be significant and could result in significant losses to you.
The secondary market for mortgage pass-through certificates has
experienced periods of illiquidity and can be expected to do so in the future.
Illiquidity can have a severe adverse effect on the prices of certificates that
are especially sensitive to prepayment, credit or interest rate risk, or that
have been structured to meet the investment requirements of limited categories
of investors.
S-15
CONSEQUENCES OF OWNING BOOK-ENTRY SECURITIES
LIMIT ON LIQUIDITY OF SECURITIES. Issuance of the certificates in
book-entry form may reduce their liquidity in the secondary trading market
because investors may be unwilling to purchase certificates for which they
cannot obtain physical certificates.
LIMIT ON ABILITY TO TRANSFER OR PLEDGE. Since transactions in the
book-entry certificates can be effected only though the DTC, participating
organizations, indirect participants and certain banks, your ability to transfer
or pledge a book-entry certificate to persons or entities that do not
participate in the DTC system or otherwise to take actions in respect of such
certificates, may be limited due to lack of physical certificates.
DELAYS IN PAYMENTS. You may experience some delay in the receipt of
payments on book-entry certificates because the payment will be forwarded by the
Trustee to DTC for DTC to credit the accounts of its participants which will
thereafter credit them to your account either directly or indirectly through
indirect participants, as applicable.
DELINQUENCIES MAY ADVERSELY AFFECT INVESTMENT
The mortgage loans were either originated or acquired in accordance,
generally, with the underwriting guidelines described in this prospectus
supplement. We cannot assure you that the values of the mortgaged properties
have remained or will remain at levels in effect on the date of origination of
the related mortgage loans.
YOU COULD BE ADVERSELY AFFECTED BY VIOLATIONS OF CONSUMER PROTECTION LAWS
Applicable state laws generally regulate interest rates and other
charges and require certain disclosures. In addition, state and federal consumer
protection laws, unfair and deceptive practices acts and debt collection
practices acts may apply to the origination or collection of the mortgage loans.
Depending on the provisions of the applicable law, violations of these laws may
limit the ability of the servicer to collect all or part of the principal of or
interest on the mortgage loans, may entitle the borrower to a refund of related
amounts previously paid and, in addition, could subject the servicer to damages
and administrative enforcement.
See "Certain Legal Aspects of the Loans" in the accompanying prospectus.
BANKRUPTCY AND INSOLVENCY RISKS
It is believed that the transfer of the mortgage loans from the seller
to the depositor will be treated as a sale rather than a secured financing for
purposes of state law. Counsel for the seller will render an opinion on the
closing date that in the event of the bankruptcy of the seller, the mortgage
loans and other assets of the trust fund would not be considered part of the
seller's bankruptcy estates and, thus, would not be available to their
creditors. On the other hand, a bankruptcy trustee or one of the creditors of
the seller might challenge this conclusion and argue that the transfer of the
mortgage loans should be characterized as a pledge of assets in a secured
borrowing rather than as a sale. Such an attempt, even if unsuccessful, might
result in delays in distributions on the certificates.
S-16
RECENT ATTACKS AND MILITARY ACTION
The effects that terrorist attacks in the United States, possible future
attacks and other incidents and related military action may have on the
performance of the mortgage loans or on the values of mortgaged properties
cannot be determined at this time. Investors should consider the possible
effects on delinquency, default and prepayment experience of the mortgage loans.
Federal agencies and non-government lenders have, and may continue to, defer,
reduce or forgive payments and delay foreclosure proceedings in respect of loans
to borrowers affected in some way by recent and possible future events. In
addition, activation of a substantial number of U.S. military reservists or
members of the National Guard may significantly increase the proportion of
mortgage loans whose mortgage rates are reduced by application of the Soldiers'
and Sailors' Civil Relief Act of 1940 or similar state laws and the servicer
will not be required to advance for any interest shortfall caused by any such
reduction. Interest payable to senior and subordinate certificateholders will be
reduced on a pro rata basis by any reductions in the amount of interest
collectible as a result of application of the Soldiers' and Sailors' Civil
Relief Act of 1940 or similar state laws.
DESCRIPTION OF THE MORTGAGE POOLS
GENERAL
The following is a summary description of the Mortgage Loans (as defined
below) in the Mortgage Pools (as defined below) as of September 1, 2002 (the
"Cut-off Date"). The information presented herein does not take into account any
Mortgage Loans which have or may prepay in full or have been or may be removed
because of incomplete documentation or otherwise for the period from the Cut-off
Date to the Closing Date, or other Mortgage Loans that may be substituted
therefor. As a result, the information regarding the Mortgage Loans may vary
from comparable information based upon the actual composition of the Mortgage
Pools as of the Closing Date, although such variance will not be material.
Whenever reference is made herein to a percentage of some or all of the
Mortgage Loans or some or all of a Mortgage Pool, such percentage is determined
on the basis of the Stated Principal Balance of the Mortgage Loans in aggregate
or of a particular Pool as of the Cut-off Date.
At the Cut-off Date, the assets of the Trust Fund consisted of two pools
("Pool 1" and "Pool 2," respectively, and each, a "Mortgage Pool") of
approximately 2,764 conventional, adjustable rate mortgage loans (the "Mortgage
Loans") secured by first liens on one- to four-family residential properties
(each, a "Mortgaged Property"), substantially all of which have original terms
to maturity of 25 years, having an aggregate Stated Principal Balance as of the
Cut-off Date of approximately $1,050,010,262 (the "Aggregate Cut-off Date
Balance"). All of the Mortgage Loans provide for payment of interest at the
related Mortgage Rate, but no payment of principal, for a period of ten years
following the origination of the related Mortgage Loan. Following the ten-year
interest-only period, the Scheduled Payment with respect to each such Mortgage
Loan will be increased to an amount sufficient to amortize the principal balance
of such Mortgage Loan over its remaining term, and to pay interest at the
related Mortgage Rate.
S-17
As described herein at "Description of the Certificates--General," the Mortgage
Loans have been segregated into Pool 1 and Pool 2 for the purpose of allocating
distributions among the Senior Certificates. Each Pool has the characteristics
described below.
Pool 1 consists of approximately 2,187 Mortgage Loans (the "Pool 1
Mortgage Loans") having a Cut-off Date balance of approximately $850,007,097
(approximately 80.95% of the Aggregate Cut-off Date Balance). Approximately
47.78% and 52.22% of the Pool 1 Mortgage Loans are One-Month LIBOR and Six-Month
LIBOR indexed Mortgage Loans, respectively (see "--The Indices" below).
As of the Cut-off Date, with respect to those Mortgage Loans in Pool 1
which adjust their Mortgage Rates in accordance with One-Month LIBOR (the
"One-Month LIBOR Loans"), the weighted average Mortgage Rate is approximately
3.598% per annum, the weighted average Servicing Fee Rate is approximately 0.25%
per annum, the weighted average margin is approximately 1.767% per annum, the
weighted average remaining term to maturity is approximately 299 months, and the
weighted average interest only remaining term is approximately 119 months.
As of the Cut-off Date, with respect to those Mortgage Loans in Pool 1
which adjust their Mortgage Rates in accordance with Six-Month LIBOR (the
"Six-Month LIBOR Loans") the weighted average Mortgage Rate is approximately
3.708% per annum, the weighted average Servicing Fee Rate is approximately 0.25%
per annum, the weighted average margin is approximately 1.833% per annum, the
weighted average remaining term to maturity is approximately 299 months, and the
weighted average interest only remaining term is approximately 119 months.
Pool 2 consists of approximately 577 Mortgage Loans (the "Pool 2
Mortgage Loans"), having a Cut-off Date balance of approximately $200,003,165
(approximately 19.05% of the Aggregate Cut-off Date Balance). As of the Cut-off
Date, with respect to the Mortgage Loans in Pool 2, the weighted average
Mortgage Rate is approximately 3.716% per annum, the weighted average Servicing
Fee Rate is approximately 0.25% per annum, the weighted average margin is
approximately 1.839% per annum, the weighted average remaining term to maturity
is approximately 299 months, and the weighted average interest only remaining
term is approximately 119 months.
Substantially all of the Mortgage Loans were originated by Cendant
Mortgage Corporation on behalf of Merrill Lynch Credit Corporation ("MLCC") in
accordance with MLCC underwriting parameters.
Certain general information with respect to the Mortgage Loans is set
forth below. Prior to the Closing Date, Mortgage Loans may be removed from the
Trust Fund and other mortgage loans may be substituted therefor. The Depositor
believes that the information set forth herein with respect to the Mortgage
Loans as presently constituted is representative of the characteristics of the
Mortgage Loans as they will be constituted at the Closing Date, although the
numerical data and certain other characteristics of the Mortgage Loans described
herein may vary within a range of plus or minus 10%.
S-18
None of the Mortgage Loans will be guaranteed by any governmental
agency. All of the Mortgage Loans will have been assigned to the Trust Fund by
the Depositor, which, in turn, will have acquired them from the Seller pursuant
to an agreement (the "Mortgage Loan Purchase Agreement") between the Depositor
and the Seller. The Mortgage Loans have been acquired by the Seller from MLCC in
the ordinary course of its business. All of the Mortgage Loans were underwritten
substantially in accordance with the MLCC underwriting criteria specified
herein. See "--Underwriting Standards" below. The Servicer will service the
Mortgage Loans pursuant to existing Servicing Agreements with the Seller, which
agreements will be assigned to the Trust Fund. See "Servicing of the Mortgage
Loans--Servicing and Collections Procedures."
All of the Mortgage Loans provide for payments due on the first day of
each month (the "Due Date"). Due to the provisions for monthly advances by the
Servicer, scheduled payments made by the borrowers either earlier or later than
the scheduled Due Dates thereof will not affect the amortization schedule or the
relative application of such payments to principal and interest. All of the
Mortgage Loans may be prepaid in whole or in part at any time without payment of
a prepayment penalty.
The Mortgage Loans were originated from June 18, 2002 through August 29,
2002. No more than approximately 0.83% of the Mortgage Loans are secured by
Mortgaged Properties located in any one zip code area. The latest stated
maturity date of any Mortgage Loan is September 2027.
As of the Cut-off Date, none of the Mortgage Loans was more than 30 days
delinquent.
As of the Cut-off Date, the weighted average Mortgage Rate of the
Mortgage Loans is approximately 3.667% per annum, the weighted average Servicing
Fee Rate is approximately 0.25% per annum, the weighted average margin is
approximately 1.809% per annum, the weighted average remaining term to maturity
is approximately 299 months, and the weighted average interest only remaining
term is approximately 119 months.
None of the Mortgage Loans had a Loan-to-Value Ratio at origination of
more than 100.00%. Approximately 2.67% of the Mortgage Loans had an Effective
Loan-to-Value Ratio at origination of greater than 80%, and such Mortgage Loans
are covered by a primary mortgage insurance policy. All of the Mortgage Loans
with Loan-to-Value Ratios greater than 80% at origination were originated in
accordance with MLCC's Mortgage 100(SM) or Parent Power(R) programs. In each
case, in addition to being secured by real property, such Mortgage Loans may be
secured by a security interest in a limited amount of additional collateral
owned by the borrower or are supported by a third-party guarantee as described
at "-- The Additional Collateral Loans" below.
The "Loan-to-Value Ratio" of a Mortgage Loan at any given time is a
fraction, expressed as a percentage, the numerator of which is the principal
balance of the related Mortgage Loan at the date of determination and the
denominator of which is (a) in the case of a purchase, the lesser of the selling
price of the Mortgaged Property and its appraised value determined in an
appraisal obtained by the originator at origination of such Mortgage Loan, or
(b) in the case of a refinance, the appraised value of the Mortgaged Property at
the time of such refinance. No assurance can be given that the value of any
Mortgaged Property has remained or will remain at the level that
S-19
existed on the appraisal or sales date. If residential real estate values
generally or in a particular geographic area decline, the Loan-to-Value Ratios
might not be a reliable indicator of the rates of delinquencies, foreclosures
and losses that could occur with respect to such Mortgage Loans. The "Effective
Loan-to-Value Ratio" means a fraction, expressed as a percentage, the numerator
of which is the original Stated Principal Balance of the related Mortgage Loan,
less the amount secured by the Additional Collateral required at the time of
origination, if any, and the denominator of which is the appraised value of the
related Mortgaged Property at such time, or in the case of a Mortgage Loan
financing the acquisition of the Mortgaged Property, the sales price of the
Mortgaged Property if such sales price is less than such appraised value.
As set forth in the "Credit Scores" table below, credit scores have been
supplied with respect to the mortgagors. Credit scores are obtained by many
mortgage lenders in connection with mortgage loan applications to help assess a
borrower's credit-worthiness. Credit scores are generated by models developed by
a third party which analyzed data on consumers in order to establish patterns
which are believed to be indicative of the borrower's probability of default.
The credit score is based on a borrower's historical credit data, including,
among other things, payment history, delinquencies on accounts, levels of
outstanding indebtedness, length of credit history, types of credit, and
bankruptcy experience. Credit scores range from approximately 250 to
approximately 900, with higher scores indicating an individual with a more
favorable credit history compared to an individual with a lower score. However,
a credit score purports only to be a measurement of the relative degree of risk
a borrower represents to a lender, i.e., that a borrower with a higher score is
statistically expected to be less likely to default in payment than a borrower
with a lower score. In addition, it should be noted that credit scores were
developed to indicate a level of default probability over a two-year period
which does not correspond to the life of a mortgage loan. Furthermore, credit
scores were not developed specifically for use in connection with mortgage
loans, but for consumer loans in general. Therefore, a credit score does not
take into consideration the effect of mortgage loan characteristics (which may
differ from consumer loan characteristics) on the probability of repayment by
the borrower. There can be no assurance that a credit score will be an accurate
predictor of the likely risk or quality of the related mortgage loan.
THE ADDITIONAL COLLATERAL LOANS
Those Mortgage Loans with Loan-to-Value Ratios at origination in excess
of 80% originated in accordance with MLCC's Mortgage 100(SM) or Parent Power(R)
programs are, in general, also either (i) secured by a security interest in
additional collateral (generally securities) owned by the borrower, such loans
being referred to as Mortgage 100(SM) Loans or (ii) supported by a third party
guarantee (usually a parent of the borrower), which in turn was secured by a
security interest in collateral (normally securities), such loans in clause (ii)
being referred to as "Parent Power(R) Loans." Such Mortgage Loans secured by
collateral described in clauses (i) and (ii) are also collectively referred to
as "Additional Collateral Loans" and the collateral referred to in clauses (i)
and (ii) is referred to herein as "Additional Collateral." The amount of
Additional Collateral generally does not exceed 30% of the loan amount, although
the amount of Additional Collateral may exceed 30% of the loan amount if the
original principal amount of the loan exceeds $1,000,000. In limited cases, MLCC
may require Additional Collateral in excess of 30% of the loan amount as part of
the underwriting decision. The requirement to maintain Additional Collateral
generally terminates when the principal balance of an Additional Collateral
S-20
Loan is reduced to a predetermined amount set forth in the related pledge
agreement or guaranty agreement, as applicable, or, at the request of the
mortgagor, when the Loan-to-Value Ratio is reduced to MLCC's applicable
Loan-to-Value Ratio limit for that loan by virtue of an increase in the
appraised value of the related mortgaged property as determined by MLCC in
accordance with its policies and procedures. The pledge agreement and the
guaranty agreement, as applicable, and the security interest in the Additional
Collateral, if any, provided in the case of an Additional Collateral Loan will
be assigned to the Trustee as part of the Trust corpus.
On or prior to the Closing Date, the Depositor will have assigned to the
Trust Fund its rights under a limited purpose surety bond issued to MLCC by
AMBAC Assurance Corporation (the "Limited Purpose Surety Bond"), which is
intended to guarantee the receipt by the Trust Fund of certain shortfalls in the
net proceeds realized from the liquidation of any required Additional Collateral
(such amount generally not to exceed 30% of the original principal amount of the
related Additional Collateral Loan) to the extent that any such shortfall
results in a loss of principal as an Additional Collateral Loan that becomes a
Liquidated Mortgage Loan, as more particularly described in, and as limited by,
the terms and provisions of the Limited Purpose Surety Bond. The Limited Purpose
Surety Bond will not cover any payments on the Certificates that are recoverable
or sought to be recovered as a voidable preference under applicable law.
No assurance can be given as to the amount of proceeds, if any, that
might be realized from Additional Collateral. Proceeds from the liquidation of
any Additional Collateral will be included in net proceeds only when permitted
by applicable state law and by the terms of the related pledge or guaranty
agreement, as applicable.
TABULAR CHARACTERISTICS OF THE MORTGAGE LOANS
Tabular Characteristics of the Pool 1 Mortgage Loans
The Pool 1 Mortgage Loans are expected to have the following approximate
aggregate characteristics as of the Cut-off Date.
Number of Pool 1 Mortgage Loans...................... 2,187
Total Stated Principal Balance....................... $850,007,097
Mortgage Rates:
Weighted Average.................................. 3.656%
Range............................................. 2.625% to 4.750%
Weighted Average Remaining Term to Maturity (in months) 299
The Stated Principal Balances of the Pool 1 Mortgage Loans range from
approximately $20,000 to approximately $5,620,000. The Pool 1 Mortgage Loans
have an average Stated Principal Balance of approximately $388,664.
The weighted average Effective Loan-to-Value Ratio at origination of the
Pool 1 Mortgage Loans is approximately 64.95%, and no Pool 1 Mortgage Loan had
an Effective Loan-to-Value Ratio at origination exceeding 95.00%.
No more than approximately 0.84% of the Pool 1 Mortgage Loans are
secured by Mortgaged Properties located in any one zip code area.
S-21
The following information sets forth in tabular format certain
information, as of the Cut-off Date, as to the Pool 1 Mortgage Loans. Other than
with respect to rates of interest, percentages (approximate) are stated by
Stated Principal Balance of the Pool 1 Mortgage Loans as of the Cut-off Date and
have been rounded in order to total 100%.
CUT-OFF DATE STATED PRINCIPAL BALANCE(1) -- POOL 1
PERCENT OF
AGGREGATE AGGREGATE
PRINCIPAL PRINCIPAL
CUT-OFF DATE STATED NUMBER OF BALANCE BALANCE
PRINCIPAL BALANCES ($) MORTGAGE LOANS OUTSTANDING OUTSTANDING
-------------------------------- -------------- ------------ -----------
20,000.00 to 100,000.00........ 174 $ 13,254,673 1.56%
100,000.01 to 200,000.00........ 553 83,470,745 9.82
200,000.01 to 300,000.00........ 456 113,935,126 13.40
300,000.01 to 400,000.00........ 290 101,758,913 11.97
400,000.01 to 500,000.00........ 193 87,388,591 10.28
500,000.01 to 600,000.00........ 141 77,442,128 9.11
600,000.01 to 700,000.00........ 97 63,085,966 7.42
700,000.01 to 800,000.00........ 66 49,836,600 5.86
800,000.01 to 900,000.00........ 45 38,470,628 4.53
900,000.01 to 1,000,000.00........ 56 54,186,941 6.37
1,000,000.01 to 1,100,000.00........ 22 23,406,812 2.75
1,100,000.01 to 1,200,000.00........ 21 23,844,712 2.81
1,200,000.01 to 1,300,000.00........ 14 17,596,385 2.07
1,300,000.01 to 1,400,000.00........ 12 16,158,596 1.90
1,400,000.01 to 1,500,000.00........ 15 22,068,206 2.60
1,500,000.01 to 1,600,000.00........ 7 10,940,701 1.29
1,600,000.01 to 1,700,000.00........ 2 3,260,000 0.38
1,700,000.01 to 1,800,000.00........ 3 5,294,563 0.62
1,800,000.01 to 1,900,000.00........ 3 5,655,000 0.67
1,900,000.01 to 2,000,000.00........ 12 23,868,441 2.81
2,100,000.01 to 2,200,000.00........ 2 4,287,554 0.50
2,500,000.01 to 2,600,000.00........ 1 2,525,816 0.30
2,600,000.01 to 2,700,000.00........ 1 2,650,000 0.31
5,600,000.01 to 5,620,000.00........ 1 5,620,000 0.66
----- ------------ ------
Total........................ 2,187 $850,007,097 100.00%
===== ============ ======
- ----------------------
(1) As of the Cut-off Date, the average Stated Principal Balance of the Pool 1
Mortgage Loans is expected to be approximately $388,664.
S-22
CURRENT MORTGAGE RATES(1) -- POOL 1
PERCENT OF
AGGREGATE AGGREGATE
PRINCIPAL PRINCIPAL
NUMBER OF BALANCE BALANCE
CURRENT MORTGAGE RATES (%) MORTGAGE LOANS OUTSTANDING OUTSTANDING
- ------------------------------------ -------------- ------------ -----------
2.625 to 2.749...................... 1 $ 2,000,000 0.24%
2.750 to 2.999...................... 19 13,372,085 1.57
3.000 to 3.249...................... 33 13,143,546 1.55
3.250 to 3.499...................... 458 169,987,340 20.00
3.500 to 3.749...................... 635 217,553,602 25.59
3.750 to 3.999...................... 815 334,915,998 39.40
4.000 to 4.249...................... 214 88,743,330 10.44
4.250 to 4.499...................... 11 4,671,196 0.55
4.750............................... 1 5,620,000 0.66
----- ----------- ------
Total......................... 2,187 $850,007,097 100.00%
===== =========== ======
- ----------------------
(1) As of the Cut-off Date, the weighted average Mortgage Rate of the Pool 1
Mortgage Loans is expected to be approximately 3.656% per annum.
REMAINING TERM(1) -- POOL 1
PERCENT OF
AGGREGATE AGGREGATE
PRINCIPAL PRINCIPAL
NUMBER OF BALANCE BALANCE
REMAINING TERM (MONTHS) MORTGAGE LOANS OUTSTANDING OUTSTANDING
- ------------------------------------ -------------- ------------ -----------
298................................. 124 $ 50,125,555 5.90%
299................................. 1,280 492,418,477 57.93
300................................. 783 307,463,065 36.17
----- ------------ ------
Total......................... 2,187 $850,007,097 100.00%
===== ============ ======
- ----------------------
(1) As of the Cut-off Date, the weighted average "Remaining Term" of the Pool
1 Mortgage Loans is expected to be approximately 299 months.
S-23
ORIGINAL LOAN-TO-VALUE RATIOS(1) -- POOL 1
PERCENT OF
AGGREGATE AGGREGATE
PRINCIPAL PRINCIPAL
ORIGINAL LOAN-TO-VALUE NUMBER OF BALANCE BALANCE
RATIOS (%) MORTGAGE LOANS OUTSTANDING OUTSTANDING
- ----------------------------------- -------------- ------------ -----------
6.67 to 10.00.................. 4 $ 485,915 0.06%
10.01 to 20.00.................. 20 6,467,059 0.76
20.01 to 30.00.................. 73 21,645,292 2.55
30.01 to 40.00.................. 102 41,030,415 4.83
40.01 to 50.00.................. 193 76,660,077 9.02
50.01 to 60.00.................. 233 104,693,265 12.32
60.01 to 70.00.................. 330 149,507,665 17.59
70.01 to 80.00.................. 898 334,945,204 39.40
80.01 to 90.00.................. 80 24,050,543 2.83
90.01 to 100.00.................. 254 90,521,662 10.65
----- ------------ ------
Total........................ 2,187 $850,007,097 100.00%
===== ============ ======
- ----------------------
(1) The weighted average "Original Loan-to-Value Ratio" of the Pool 1 Mortgage
Loans is expected to be approximately 68.44%.
S-24
EFFECTIVE LOAN-TO-VALUE RATIOS(1) -- POOL 1
PERCENT OF
AGGREGATE AGGREGATE
PRINCIPAL PRINCIPAL
EFFECTIVE LOAN-TO-VALUE NUMBER OF BALANCE BALANCE
RATIOS (%) MORTGAGE LOANS OUTSTANDING OUTSTANDING
- ---------------------------------- -------------- ------------- -----------
6.67 to 10.00.................. 4 $ 485,915 0.06%
10.01 to 15.00.................. 9 2,664,565 0.31
15.01 to 20.00.................. 11 3,802,494 0.45
20.01 to 25.00.................. 33 8,346,808 0.98
25.01 to 30.00.................. 40 13,298,484 1.56
30.01 to 35.00.................. 38 18,543,804 2.18
35.01 to 40.00.................. 64 22,486,611 2.65
40.01 to 45.00.................. 73 28,155,537 3.31
45.01 to 50.00.................. 173 61,516,993 7.24
50.01 to 55.00.................. 97 38,509,946 4.53
55.01 to 60.00.................. 141 71,082,839 8.36
60.01 to 65.00.................. 149 73,937,357 8.70
65.01 to 70.00.................. 375 160,291,621 18.86
70.01 to 75.00.................. 328 138,894,922 16.34
75.01 to 80.00.................. 557 188,032,805 22.12
80.01 to 85.00.................. 8 2,158,815 0.25
85.01 to 90.00.................. 35 8,067,423 0.95
90.01 to 95.00.................. 52 9,730,158 1.14
----- ------------ ------
Total......................... 2,187 $850,007,097 100.00%
===== ============ ======
- ----------------------
(1) The weighted average Effective Loan-to-Value Ratio of the Pool 1 Mortgage
Loans is expected to be approximately 64.95%. See "Description of the
Mortgage Pools -- General" herein.
S-25
CREDIT SCORE(1) -- POOL 1
PERCENT OF
AGGREGATE AGGREGATE
PRINCIPAL PRINCIPAL
NUMBER OF BALANCE BALANCE
CREDIT SCORE MORTGAGE LOANS OUTSTANDING OUTSTANDING
- ---------------------------------- -------------- ------------ -----------
No FICO........................... 6 $ 2,979,750 0.35%
551 to 575........................ 7 3,537,776 0.42
576 to 600........................ 11 8,444,994 0.99
601 to 625........................ 37 16,930,620 1.99
626 to 650........................ 82 32,733,967 3.85
651 to 675........................ 149 59,150,165 6.96
676 to 700........................ 247 109,614,494 12.90
701 to 725........................ 308 119,987,497 14.12
726 to 750........................ 374 143,215,730 16.85
751 to 775........................ 478 180,657,277 21.25
776 to 800........................ 434 154,449,680 18.17
801 to 825........................ 54 18,305,147 2.15
----- ------------ ------
Total......................... 2,187 $850,007,097 100.00%
===== ============ ======
- ----------------------
(1) The weighted average "Credit Score" of the Pool 1 Mortgage Loans is
approximately 730. See discussion above under "-- General."
S-26
GEOGRAPHIC DISTRIBUTION OF MORTGAGED PROPERTIES -- POOL 1
PERCENT OF
AGGREGATE AGGREGATE
PRINCIPAL PRINCIPAL
NUMBER OF BALANCE BALANCE
STATE MORTGAGE LOANS OUTSTANDING OUTSTANDING
- ------------------------------------ -------------- --------------- -----------
California.......................... 334 $184,614,228 21.72%
Florida............................. 185 65,252,163 7.68
New York............................ 107 54,471,120 6.41
New Jersey.......................... 121 52,719,347 6.20
Texas............................... 139 52,023,974 6.12
Georgia............................. 166 51,317,918 6.04
Illinois............................ 101 38,355,065 4.51
Connecticut......................... 55 35,785,403 4.21
Colorado............................ 83 31,941,340 3.76
Virginia............................ 78 29,740,898 3.50
North Carolina...................... 76 25,737,496 3.03
Arizona............................. 59 22,903,278 2.69
Michigan............................ 58 22,123,295 2.60
Ohio................................ 60 14,880,671 1.75
Nevada.............................. 40 14,837,760 1.75
Massachusetts....................... 33 13,595,377 1.60
Washington.......................... 27 12,107,167 1.42
South Carolina...................... 41 11,973,479 1.41
Missouri............................ 39 11,342,941 1.33
Pennsylvania........................ 30 9,913,042 1.17
Maryland............................ 29 9,403,917 1.11
Minnesota........................... 29 9,009,337 1.06
Tennessee........................... 38 8,984,664 1.06
Indiana............................. 28 8,409,761 0.99
Alabama............................. 28 6,146,340 0.72
Wisconsin........................... 21 5,491,889 0.65
Arizona............................. 15 5,134,996 0.60
Utah................................ 21 4,886,675 0.57
Oregon.............................. 15 3,778,257 0.44
Hawaii.............................. 6 3,697,996 0.44
District of Columbia................ 9 3,236,293 0.38
Kentucky............................ 18 3,029,106 0.36
Delaware............................ 8 2,993,123 0.35
Kansas.............................. 10 2,686,147 0.32
Wyoming............................. 3 2,354,500 0.28
New Mexico.......................... 8 2,182,806 0.26
Oklahoma............................ 9 1,741,416 0.20
Louisiana........................... 7 1,472,518 0.17
Maine............................... 4 1,303,793 0.15
Rhode Island........................ 4 1,273,046 0.15
Idaho............................... 6 1,222,322 0.14
Vermont............................. 5 1,035,289 0.12
S-27
PERCENT OF
AGGREGATE AGGREGATE
PRINCIPAL PRINCIPAL
NUMBER OF BALANCE BALANCE
STATE MORTGAGE LOANS OUTSTANDING OUTSTANDING
- ------------------------------------ -------------- --------------- -----------
Nebraska............................ 8 951,520 0.11
Montana............................. 4 868,873 0.10
New Hampshire....................... 3 674,645 0.08
West Virginia....................... 3 564,864 0.07
Iowa................................ 4 548,250 0.06
Mississippi......................... 6 524,753 0.06
North Dakota........................ 4 407,999 0.05
South Dakota........................ 1 214,500 0.03
Alaska.............................. 1 141,540 0.02
----- ------------ ------
Total......................... 2,187 $850,007,097 100.00%
===== ============ ======
S-28
OCCUPANCY TYPE(1) -- POOL 1
PERCENT OF
AGGREGATE AGGREGATE
PRINCIPAL PRINCIPAL
NUMBER OF BALANCE BALANCE
OCCUPANCY TYPE MORTGAGE LOANS OUTSTANDING OUTSTANDING
- ------------------------------------ --------------- ------------- -----------
Primary............................. 1,930 $758,708,328 89.26%
Second Home......................... 170 71,211,629 8.38
Investment.......................... 87 20,087,140 2.36
----- ------------ ------
Total......................... 2,187 $850,007,097 100.00%
===== ============ ======
- ----------------------
(1) Based upon representations of the related borrowers at the time of
origination.
PROPERTY TYPE -- POOL 1
PERCENT OF
AGGREGATE AGGREGATE
PRINCIPAL PRINCIPAL
NUMBER OF BALANCE BALANCE
PROPERTY TYPE MORTGAGE LOANS OUTSTANDING OUTSTANDING
- ------------------------------------ --------------- ------------- -----------
Single Family...................... 1,412 $580,038,908 68.24%
Planned Unit Development........... 500 182,651,132 21.49
Condominium........................ 227 68,336,260 8.04
Cooperative........................ 28 11,922,014 1.40
Two- to Four-Family................ 20 7,058,783 0.83
----- ------------ ------
Total........................ 2,187 $850,007,097 100.00%
===== ============ ======
LOAN PURPOSE -- POOL 1
PERCENT OF
AGGREGATE AGGREGATE
PRINCIPAL PRINCIPAL
NUMBER OF BALANCE BALANCE
LOAN PURPOSE MORTGAGE LOANS OUTSTANDING OUTSTANDING
- ------------------------------------ --------------- ------------- -----------
Purchase............................ 703 $294,518,690 34.65%
Refinance (Cash-out)................ 684 275,579,814 32.42
Refinance (No Cash-out)............. 800 279,908,593 32.93
----- ------------ ------
Total......................... 2,187 $850,007,097 100.00%
===== ============ ======
S-29
LOAN DOCUMENTATION -- POOL 1
PERCENT OF
AGGREGATE AGGREGATE
PRINCIPAL PRINCIPAL
NUMBER OF BALANCE BALANCE
DOCUMENTATION MORTGAGE LOANS OUTSTANDING OUTSTANDING
- ------------------------------------ --------------- ------------- -----------
Full Documentation.................. 1,316 $572,107,663 67.31%
Streamline Documentation............ 377 120,043,328 14.12
No Income/No Ratio Documentation.... 363 113,358,775 13.34
Stated Income Documentation......... 131 44,497,331 5.23
----- ------------ ------
Total......................... 2,187 $850,007,097 100.00%
===== ============ ======
MARGIN(1) -- POOL 1
PERCENT OF
AGGREGATE AGGREGATE
PRINCIPAL PRINCIPAL
NUMBER OF BALANCE BALANCE
MARGIN (%) MORTGAGE LOANS OUTSTANDING OUTSTANDING
- ------------------------------------ --------------- ----------- -----------
0.875............................... 3 $ 3,361,250 0.40%
1.000............................... 16 11,943,864 1.41
1.125............................... 12 3,422,847 0.40
1.250............................... 19 8,436,491 0.99
1.375............................... 29 12,724,090 1.50
1.500............................... 311 121,313,941 14.27
1.625............................... 479 149,425,142 17.58
1.750............................... 119 43,807,156 5.15
1.875............................... 453 184,739,663 21.73
2.000............................... 643 252,904,783 29.75
2.125............................... 74 33,741,502 3.97
2.250............................... 26 17,194,368 2.02
2.375............................... 1 272,000 0.03
2.875............................... 1 1,100,000 0.13
3.000............................... 1 5,620,000 0.66
----- ------------ ------
Total......................... 2,187 $850,007,097 100.00%
===== ============ ======
- ----------------------
(1) As of the Cut-off Date, the weighted average margin of the Pool 1 Mortgage
Loans is expected to be approximately 1.802%.
S-30
MAXIMUM MORTGAGE RATE(1) -- POOL 1
PERCENT OF
AGGREGATE AGGREGATE
PRINCIPAL PRINCIPAL
NUMBER OF BALANCE BALANCE
MAXIMUM MORTGAGE RATE (%) MORTGAGE LOANS OUTSTANDING OUTSTANDING
- ------------------------------------ --------------- ------------- -----------
12.000.............................. 2,187 $850,007,097 100.00%
----- ------------ ------
Total......................... 2,187 $850,007,097 100.00%
===== ============ ======
- ----------------------
(1) As of the Cut-off Date, the weighted average maximum Mortgage Rate of the
Pool 1 Mortgage Loans is expected to be approximately 12.000% per annum.
NEXT RATE ADJUSTMENT DATE(1) -- POOL 1
PERCENT OF
AGGREGATE AGGREGATE
PRINCIPAL PRINCIPAL
NUMBER OF BALANCE BALANCE
NEXT RATE ADJUSTMENT DATE MORTGAGE LOANS OUTSTANDING OUTSTANDING
- ------------------------------------ --------------- ------------- -----------
October 2002........................ 922 $406,162,466 47.78%
January 2003........................ 66 25,232,609 2.97
February 2003....................... 718 244,170,498 28.73
March 2003.......................... 481 174,441,524 20.52
------ ------------- -------
Total......................... 2,187 $850,007,097 100.00%
===== ============ ======
- ----------------------
(1) As of the Cut-off Date, the weighted average months to the next rate
adjustment date of the Pool 1 Mortgage Loans was approximately 3 months.
S-31
Tabular Characteristics of the Pool 2 Mortgage Loans
The Pool 2 Mortgage Loans are expected to have the following approximate
aggregate characteristics as of the Cut-off Date.
Number of Pool 2 Mortgage Loans......................... 577
Total Stated Principal Balance.......................... $200,003,165
Mortgage Rates:
Weighted Average..................................... 3.716%
Range................................................ 2.875% to 4.250%
Weighted Average Remaining Term to Maturity (in months). 299
The Stated Principal Balances of the Pool 2 Mortgage Loans range from
approximately $34,781 to approximately $2,185,000. The Pool 2 Mortgage Loans
have an average Stated Principal Balance of approximately $346,626.
The weighted average Effective Loan-to-Value Ratio at origination of the
Pool 2 Mortgage Loans is approximately 65.98%, and no Pool 2 Mortgage Loan had
an Effective Loan-to-Value Ratio at origination exceeding 95.00%.
No more than approximately 1.41% of the Pool 2 Mortgage Loans are
secured by Mortgaged Properties located in any one zip code area.
The following information sets forth in tabular format certain
information, as of the Cut-off Date, as to the Pool 2 Mortgage Loans. Other than
with respect to rates of interest, percentages (approximate) are stated by
Stated Principal Balance of the Pool 2 Mortgage Loans as of the Cut-off Date and
have been rounded in order to total 100%.
S-32
CUT-OFF DATE STATED PRINCIPAL BALANCE(1) -- POOL 2
PERCENT OF
AGGREGATE AGGREGATE
PRINCIPAL PRINCIPAL
CUT-OFF DATE NUMBER OF BALANCE BALANCE
STATED PRINCIPAL BALANCES ($) MORTGAGE LOANS OUTSTANDING OUTSTANDING
- ------------------------------------ --------------- ------------ -----------
34,781.00 to 100,000.00........ 47 $ 3,614,330 1.81%
100,000.01 to 200,000.00........ 166 25,559,559 12.78
200,000.01 to 300,000.00........ 131 32,832,245 16.42
300,000.01 to 400,000.00........ 81 28,450,505 14.23
400,000.01 to 500,000.00........ 52 23,479,042 11.74
500,000.01 to 600,000.00........ 25 13,686,438 6.84
600,000.01 to 700,000.00........ 20 13,150,112 6.57
700,000.01 to 800,000.00........ 14 10,531,360 5.27
800,000.01 to 900,000.00........ 13 11,114,004 5.56
900,000.01 to 1,000,000.00........ 8 7,831,500 3.92
1,000,000.01 to 1,100,000.00........ 5 5,268,500 2.63
1,200,000.01 to 1,300,000.00........ 3 3,763,070 1.88
1,300,000.01 to 1,400,000.00........ 3 4,092,500 2.05
1,400,000.01 to 1,500,000.00........ 1 1,470,000 0.73
1,500,000.01 to 1,600,000.00........ 1 1,600,000 0.80
1,600,000.01 to 1,700,000.00........ 1 1,700,000 0.85
1,700,000.01 to 1,800,000.00........ 1 1,750,000 0.87
1,900,000.01 to 2,000,000.00........ 4 7,925,000 3.96
2,100,000.01 to 2,185,000.00........ 1 2,185,000 1.09
--- ------------ ------
Total......................... 577 $200,003,165 100.00%
=== ============ ======
- ----------------------
(1) As of the Cut-off Date, the average Stated Principal Balance of the Pool 2
Mortgage Loans is expected to be approximately $346,626.
CURRENT MORTGAGE RATES(1) -- POOL 2
PERCENT OF
AGGREGATE AGGREGATE
PRINCIPAL PRINCIPAL
NUMBER OF BALANCE BALANCE
CURRENT MORTGAGE RATES (%) MORTGAGE LOANS OUTSTANDING OUTSTANDING
- ------------------------------------ --------------- ------------ -----------
2.875 to 2.999...................... 2 $ 1,127,750 0.56%
3.000 to 3.249...................... 1 388,000 0.19
3.250 to 3.499...................... 63 19,700,149 9.85
3.500 to 3.749...................... 217 69,861,224 34.93
3.750 to 3.999...................... 221 77,842,014 38.92
4.000 to 4.249...................... 60 25,146,410 12.57
4.250............................... 13 5,937,618 2.97
--- ------------ ------
Total......................... 577 $200,003,165 100.00%
=== ============ ======
- ----------------------
(1) As of the Cut-off Date, the weighted average Mortgage Rate of the Pool 2
Mortgage Loans is expected to be approximately 3.716% per annum.
S-33
REMAINING TERM(1) - POOL 2
PERCENT OF
AGGREGATE AGGREGATE
PRINCIPAL PRINCIPAL
NUMBER OF BALANCE BALANCE
REMAINING TERM (MONTHS) MORTGAGE LOANS OUTSTANDING OUTSTANDING
- ------------------------------------ --------------- ------------ -----------
298................................. 31 $ 2,673,991 6.34%
299................................. 322 112,186,077 56.09
300................................. 224 75,143,097 37.57
--- ------------ ------
Total......................... 577 $200,003,165 100.00%
=== ============ ======
- ----------------------
(1) As of the Cut-off Date, the weighted average "Remaining Term" of the Pool
2 Mortgage Loans is expected to be approximately 299 months.
ORIGINAL LOAN-TO-VALUE RATIOS(1) -- POOL 2
PERCENT OF
AGGREGATE AGGREGATE
PRINCIPAL PRINCIPAL
ORIGINAL LOAN-TO-VALUE NUMBER OF BALANCE BALANCE
RATIOS (%) MORTGAGE LOANS OUTSTANDING OUTSTANDING
- ------------------------------------ --------------- ------------ -----------
9.52 to 10.00................... 1 $ 50,001 0.03%
10.01 to 20.00................... 7 3,321,929 1.66
20.01 to 30.00................... 20 5,520,782 2.76
30.01 to 40.00................... 25 5,337,463 2.67
40.01 to 50.00................... 54 18,925,551 9.46
50.01 to 60.00................... 51 20,072,421 10.04
60.01 to 70.00................... 81 31,220,227 15.61
70.01 to 80.00................... 271 89,500,526 44.75
80.01 to 90.00................... 18 5,504,740 2.75
90.01 to 100.00................... 49 20,549,525 10.27
--- ------------ ------
Total......................... 577 $200,003,165 100.00%
=== ============ ======
- ----------------------
(1) The weighted average "Original Loan-to-Value Ratio" of the Pool 2 Mortgage
Loans is expected to be approximately 68.95%.
S-34
EFFECTIVE LOAN-TO-VALUE RATIOS(1) -- POOL 2
PERCENT OF
AGGREGATE AGGREGATE
PRINCIPAL PRINCIPAL
EFFECTIVE LOAN-TO-VALUE NUMBER OF BALANCE BALANCE
RATIOS (%) MORTGAGE LOANS OUTSTANDING OUTSTANDING
- ------------------------------------ --------------- ------------ -----------
9.52 to 10.00..................... 1 $ 50,001 0.03%
10.01 to 15.00..................... 2 1,158,675 0.58
15.01 to 20.00..................... 5 2,163,254 1.08
20.01 to 25.00..................... 8 1,073,435 0.54
25.01 to 30.00..................... 12 4,447,347 2.22
30.01 to 35.00..................... 13 3,325,442 1.66
35.01 to 40.00..................... 12 2,012,021 1.01
40.01 to 45.00..................... 25 8,801,483 4.40
45.01 to 50.00..................... 33 13,101,723 6.55
50.01 to 55.00..................... 24 8,671,413 4.34
55.01 to 60.00..................... 28 13,151,008 6.58
60.01 to 65.00..................... 34 13,938,662 6.97
65.01 to 70.00..................... 80 33,673,620 16.84
70.01 to 75.00..................... 88 30,790,713 15.40
75.01 to 80.00..................... 177 55,582,734 27.79
80.01 to 85.00..................... 6 1,608,178 0.80
85.01 to 90.00..................... 7 1,621,555 0.81
90.01 to 95.00..................... 22 4,831,901 2.42
--- ------------ ------
Total........................ 577 $200,003,165 100.00%
=== ============ ======
- ----------------------
(1) The weighted average Effective Loan-to-Value Ratio of the Pool 2 Mortgage
Loans is expected to be approximately 65.98%. See "Description of the
Mortgage Pools -- General" herein.
S-35
CREDIT SCORE(1) -- POOL 2
PERCENT OF
AGGREGATE AGGREGATE
PRINCIPAL PRINCIPAL
NUMBER OF BALANCE BALANCE
CREDIT SCORE MORTGAGE LOANS OUTSTANDING OUTSTANDING
- ------------------------------------ --------------- ------------- -----------
No FICO............................. 1 $ 93,650 0.05%
526 to 550.......................... 1 208,069 0.10
601 to 625.......................... 4 1,371,837 0.69
626 to 650.......................... 20 5,846,976 2.92
651 to 675.......................... 35 12,166,070 6.08
676 to 700.......................... 63 29,779,928 14.89
701 to 725.......................... 95 39,045,426 19.52
726 to 750.......................... 103 29,915,234 14.96
751 to 775.......................... 120 39,958,911 19.98
776 to 800.......................... 121 38,266,471 19.13
801 to 825.......................... 14 3,350,593 1.68
--- ------------ ------
Total......................... 577 $200,003,165 100.00%
=== ============ ======
- ----------------------
(1) THE WEIGHTED AVERAGE "CREDIT SCORE" OF THE POOL 2 MORTGAGE LOANS IS
APPROXIMATELY 733. SEE DISCUSSION ABOVE UNDER "-- GENERAL."
S-36
GEOGRAPHIC DISTRIBUTION OF MORTGAGED PROPERTIES -- POOL 2
PERCENT OF
AGGREGATE AGGREGATE
PRINCIPAL PRINCIPAL
NUMBER OF BALANCE BALANCE
STATE MORTGAGE LOANS OUTSTANDING OUTSTANDING
- ------------------------------------ -------------- ----------- -----------
California.......................... 88 $ 46,781,416 23.39%
Georgia............................. 56 15,555,075 7.78
New Jersey.......................... 38 13,173,143 6.59
Florida............................. 41 12,816,119 6.41
Connecticut......................... 13 10,322,626 5.16
New York............................ 20 9,431,260 4.72
Connecticut......................... 27 8,828,407 4.41
Virginia............................ 28 8,271,977 4.14
Texas............................... 28 8,238,061 4.12
Massachusetts....................... 17 8,198,137 4.10
North Carolina...................... 20 6,590,308 3.30
Nevada.............................. 16 4,467,455 2.23
Ohio................................ 21 4,376,529 2.19
Illinois............................ 17 4,046,261 2.02
Arizona............................. 11 3,211,750 1.61
South Carolina...................... 9 3,191,362 1.60
Pennsylvania........................ 12 2,981,376 1.49
Michigan............................ 9 2,830,569 1.42
Indiana............................. 11 2,470,890 1.24
Missouri............................ 10 2,245,331 1.12
Maryland............................ 9 1,881,942 0.94
Alabama............................. 7 1,839,688 0.92
District of Columbia................ 4 1,777,210 0.89
Tennessee........................... 6 1,737,318 0.87
Washington.......................... 5 1,728,424 0.86
Minnesota........................... 5 1,661,240 0.83
Kansas.............................. 6 1,546,415 0.77
Wisconsin........................... 7 1,343,013 0.67
Utah................................ 4 1,291,380 0.65
Rhode Island........................ 2 1,263,000 0.63
Louisiana........................... 4 857,275 0.43
Nebraska............................ 4 682,909 0.34
Kentucky............................ 2 622,000 0.31
Oregon.............................. 3 512,225 0.26
Arizona............................. 2 502,100 0.25
New Hampshire....................... 2 486,379 0.24
Hawaii.............................. 1 436,500 0.22
Oklahoma............................ 3 421,839 0.21
Idaho............................... 2 399,800 0.20
Maine............................... 1 320,000 0.16
West Virginia....................... 1 194,500 0.10
Mississippi......................... 2 167,106 0.08
Vermont............................. 1 106,000 0.05
Iowa................................ 1 103,200 0.05
New Mexico.......................... 1 93,650 0.05
--- ------------ ------
Total......................... 577 $200,003,165 100.00%
=== ============ ======
S-37
OCCUPANCY TYPE(1) -- POOL 2
PERCENT OF
AGGREGATE AGGREGATE
PRINCIPAL PRINCIPAL
NUMBER OF BALANCE BALANCE
OCCUPANCY TYPE MORTGAGE LOANS OUTSTANDING OUTSTANDING
- ------------------------------------ --------------- ------------- -----------
Primary............................. 527 $180,362,890 90.18%
Second Home......................... 35 16,538,069 8.27
Investment.......................... 15 3,102,206 1.55
--- ------------ ------
Total......................... 577 $200,003,165 100.00%
=== ============ ======
- ----------------------
(1) Based upon representations of the related borrowers at the time of
origination.
PROPERTY TYPE -- POOL 2
PERCENT OF
AGGREGATE AGGREGATE
PRINCIPAL PRINCIPAL
NUMBER OF BALANCE BALANCE
PROPERTY TYPE MORTGAGE LOANS OUTSTANDING OUTSTANDING
- ------------------------------------ --------------- ------------- -----------
Single Family....................... 372 $135,882,992 67.94%
Planned Unit Development............ 151 48,310,969 24.16
Condominium......................... 45 12,135,847 6.07
Two- to Four-Family................. 5 2,193,697 1.10
Cooperative......................... 4 1,479,660 0.74
--- ------------ ------
Total......................... 577 $200,003,165 100.00%
=== ============ ======
LOAN PURPOSE -- POOL 2
PERCENT OF
AGGREGATE AGGREGATE
PRINCIPAL PRINCIPAL
NUMBER OF BALANCE BALANCE
LOAN PURPOSE MORTGAGE LOANS OUTSTANDING OUTSTANDING
- ------------------------------------ --------------- ------------- -----------
Purchase............................ 185 $ 74,255,542 37.13%
Refinance (Cash-out)................ 169 64,273,475 32.14
Refinance (No Cash-out)............. 223 61,474,148 30.74
--- ------------ ------
Total......................... 577 $200,003,165 100.00%
=== ============ ======
S-38
LOAN DOCUMENTATION -- POOL 2
PERCENT OF
AGGREGATE AGGREGATE
PRINCIPAL PRINCIPAL
NUMBER OF BALANCE BALANCE
DOCUMENTATION MORTGAGE LOANS OUTSTANDING OUTSTANDING
- ------------------------------------ --------------- ------------ -----------
Full Documentation.................. 316 $121,762,620 60.88%
Streamline Documentation............ 111 36,321,562 18.16
No Income/No Ratio Documentation.... 105 27,250,492 13.63
Stated Income Documentation......... 45 14,668,491 7.33
--- ------------ ------
Total......................... 577 $200,003,165 100.00%
=== ============ ======
MARGIN(1) -- POOL 2
PERCENT OF
AGGREGATE AGGREGATE
PRINCIPAL PRINCIPAL
NUMBER OF BALANCE BALANCE
MARGIN (%) MORTGAGE LOANS OUTSTANDING OUTSTANDING
- ------------------------------------ --------------- ------------ -----------
1.125............................... 3 $ 871,946 0.44%
1.250............................... 1 188,751 0.09
1.375............................... 8 2,450,889 1.23
1.500............................... 4 1,731,124 0.87
1.625............................... 231 76,364,054 38.18
1.750............................... 11 3,149,300 1.57
1.875............................... 60 22,021,352 11.01
2.000............................... 222 75,678,092 37.84
2.125............................... 25 11,663,407 5.83
2.250............................... 11 3,699,250 1.85
2.375............................... 1 2,185,000 1.09
--- ------------ ------
Total......................... 577 $200,003,165 100.00%
=== ============ ======
- ----------------------
(1) As of the Cut-off Date, the weighted average margin of the Pool 2 Mortgage
Loans is expected to be approximately 1.839%.
MAXIMUM MORTGAGE RATE(1) -- POOL 2
PERCENT OF
AGGREGATE AGGREGATE
PRINCIPAL PRINCIPAL
NUMBER OF BALANCE BALANCE
MAXIMUM MORTGAGE RATE (%) MORTGAGE LOANS OUTSTANDING OUTSTANDING
- ------------------------------------ --------------- ------------- -----------
12.000.............................. 577 $200,003,165 100.00%
--- ------------ ------
Total......................... 577 $200,003,165 100.00%
=== ============ ======
- ----------------------
(1) As of the Cut-off Date, the weighted average maximum Mortgage Rate of the
Pool 2 Mortgage Loans is expected to be approximately 12.000% per annum.
S-39
NEXT RATE ADJUSTMENT DATE(1) -- POOL 2
PERCENT OF
AGGREGATE AGGREGATE
PRINCIPAL PRINCIPAL
NUMBER OF BALANCE BALANCE
NEXT NOTE RATE ADJUSTMENT DATE MORTGAGE LOANS OUTSTANDING OUTSTANDING
- ------------------------------------ --------------- ------------- -----------
January 2003........................ 31 $ 12,673,991 6.34%
February 2003....................... 322 112,186,077 56.09
March 2003.......................... 224 75,143,097 37.57
--- ------------ ------
Total......................... 577 $200,003,165 100.00%
=== ============ ======
- ----------------------
(1) As of the Cut-off Date, the weighted average months to the next rate
adjustment date of the Pool 2 Mortgage Loans was approximately 5 months.
S-40
THE INDICES
The Mortgage Rate for all of the Mortgage Loans will be adjusted monthly
or semi-annually on the related adjustment date. The index for the Mortgage Rate
borne by each of the Mortgage Loans may be calculated as follows (in each case,
rounded to the nearest one-eighth of one percent):
ONE-MONTH LIBOR. The Mortgage Rate borne by approximately 38.68%
of the Mortgage Loans (by Aggregate Cut-off Date Balance) is adjusted
every month to equal the London interbank offered rate for one-month
U.S. dollar deposits as listed under "Money Rates" in The Wall Street
Journal most recently available as of the first day of the month prior
to the month in which the related interest adjustment date occurs
("One-Month LIBOR") plus a margin ranging from 0.875% to 3.000%.
SIX-MONTH LIBOR. The Mortgage Rate borne by approximately 61.32%
of the Mortgage Loans (by Aggregate Cut-off Date Balance) is adjusted
every six months to equal the London interbank offered rate for
six-month U.S. dollar deposits as listed under "Money Rates" in The Wall
Street Journal most recently available as of 45 days prior to the
related adjustment date ("Six-Month LIBOR") plus a margin ranging from
1.000% to 2.375%.
ASSIGNMENT OF THE MORTGAGE LOANS
Under the Mortgage Loan Purchase Agreement, RWT Holdings, Inc. (the
"Seller") will sell the Mortgage Loans to the Depositor. The Seller will make
certain representations, warranties and covenants relating to, among other
things, certain characteristics of the Mortgage Loans. Subject to the
limitations described below, the Seller will be obligated as described herein to
purchase or substitute a similar mortgage loan for any Mortgage Loan as to which
there exists deficient documentation or as to which there has been an uncured
breach of any such representation or warranty relating to the characteristics of
such Mortgage Loan that materially and adversely affects the value of such
Mortgage Loan or the interests of the Certificateholders in such Mortgage Loan
(a "Defective Mortgage Loan"). See "Loan Program -- Representations by Sellers;
Repurchases" in the accompanying prospectus.
Pursuant to the Trust Agreement, on the Closing Date the Depositor will
sell, transfer, assign, set over and otherwise convey without recourse to the
Trust Fund all of its rights to the Mortgage Loans and its rights under the
Mortgage Loan Purchase Agreement (including the right to enforce the Seller's
purchase obligation). The obligations of the Seller with respect to the
Certificates are limited to the Seller's obligations to purchase or substitute
for Defective Mortgage Loans.
In connection with such transfer and assignment of the Mortgage Loans,
the Depositor will deliver or cause to be delivered to the Trustee, among other
things, the original promissory note (the "Mortgage Note") (and any modification
or amendment thereto) endorsed in blank without recourse, the original
instrument creating a first lien on the related Mortgaged Property (the
"Mortgage") with evidence of recording indicated thereon, an assignment in
recordable form of the Mortgage, the title policy with respect to the related
Mortgaged Property and, if
S-41
applicable, all recorded intervening assignments of the Mortgage and any riders
or modifications to such Mortgage Note and Mortgage and, additionally in
connection with the transfer and assignment to the Trust of Additional
Collateral Loans, the pledge agreement, security agreement, stock power,
guaranty agreement or other evidence of a security interest in the Additional
Collateral (except for any such document other than Mortgage Notes not available
on the Closing Date, which will be delivered to the Trustee as soon as the same
is available to the Depositor) (collectively, the "Mortgage File"). Assignments
of the Mortgage Loans to the Trustee (or its nominee) will be recorded in the
appropriate public office for real property records, except in states where, in
the opinion of counsel, delivered at the request and at the expense of the
Depositor on the Closing Date, such recording is not required to protect the
Trustee's interest in the Mortgage Loans against the claim of any subsequent
transferee or any successor to or creditor of the Depositor.
The Trustee will review each Mortgage File within 270 days of the
Closing Date (or promptly after the Trustee's receipt of any document permitted
to be delivered after the Closing Date) and will hold such Mortgage Files in
trust for the benefit of the Certificateholders. If at the end of such 270-day
period, any document in a Mortgage File is found to be missing or defective in a
material respect and the Seller does not cure such omission or defect within 90
days after its receipt of notice from the Trustee, then the Seller is obligated
to purchase the related Defective Mortgage Loan from the Trust Fund at a price
equal to the sum of (a) 100% of the Stated Principal Balance thereof, (b) unpaid
accrued interest thereon from the Due Date to which interest was last paid by
the mortgagor to the Due Date immediately preceding the repurchase and (c) any
unreimbursed Monthly Advances and servicing advances not included in clauses (a)
and (b) above. Rather than purchase a Defective Mortgage Loan as provided above,
the Seller may remove such Mortgage Loan (a "Deleted Mortgage Loan") from the
Mortgage Pool and substitute in its place one or more mortgage loans of like
kind (such loan a "Replacement Mortgage Loan"); provided, however, that such
substitution is permitted only within two years after the Closing Date and may
not be made unless an opinion of counsel is provided to the effect that such
substitution would not disqualify the REMIC elections or result in a prohibited
transaction tax under the Code.
Any Replacement Mortgage Loan generally will, on the date of
substitution, as confirmed by a certificate delivered by the Seller to the
Trustee, among other characteristics set forth in the Mortgage Loan Purchase
Agreement, (i) have an outstanding principal balance, after deduction of all
Scheduled Payments due in the month of substitution, not in excess (and not less
than 90%) of the Stated Principal Balance of the Deleted Mortgage Loan (the
amount of any shortfall to be deposited in the Distribution Account by the
Seller not later than the succeeding Determination Date and held for
distribution to the Certificateholders on the related Distribution Date), (ii)
have a maximum Mortgage Rate not less than (and not more than two percentage
points greater than) the maximum mortgage rate of the Deleted Mortgage Loan,
(iii) have a gross margin not less than that of the Deleted Mortgage Loan and,
if Mortgage Loans of a Pool equal to 1% or more of the Cut-off Date balance of
such Pool have become Deleted Mortgage Loans, not more than two percentage
points more than that of the Deleted Mortgage Loan, (iv) have an Effective
Loan-to-Value Ratio not higher than that of the Deleted Mortgage Loan, (v) have
a remaining term to maturity not greater than (and not more than one year less
than) that of the Deleted Mortgage Loan, (vi) not permit conversion of the
related Mortgage Rate to a permanent fixed Mortgage Rate, (vii) have the same or
higher credit score, (viii) have an initial interest adjustment date no
S-42
earlier than five months before (and no later than five months after) the
initial interest adjustment date of the Deleted Mortgage Loan, (ix) be a
"qualified replacement mortgage" within the meaning of Section 860G(a)(4) of the
Code and (x) comply with all of the representations and warranties set forth in
the Mortgage Loan Purchase Agreement. This cure, repurchase or substitution
obligation constitutes the sole remedy available to the Certificateholders or
the Trustee for omission of, or a material defect in, a Mortgage File.
MLCC UNDERWRITING GUIDELINES
MLCC, a wholly-owned indirect subsidiary of Merrill Lynch & Co., Inc.
("ML & Co.") and an affiliate of Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch"), one of the Underwriters, is a Delaware
corporation engaged in the business of originating, purchasing and master
servicing real estate secured by conforming and non-conforming fixed and
adjustable rate mortgage loans (including its PrimeFirst(R) mortgages) and other
loan products. MLCC currently originates and master services loans in all fifty
states, the District of Columbia, and the U.S. Virgin Islands. All of the
Mortgage Loans were originated under MLCC's PrimeFirst(R) mortgage program.
PrimeFirst(R) loans are secured by first liens on one- to four-family
residences, condominiums and cooperative apartments (New York State only), most
of which are owner-occupied.
As of January of 2001, MLCC retained Cendant Mortgage Corporation
("Cendant") to originate, process, and underwrite MLCC's real estate based loan
products on a "private-label" basis. Substantially all such loans have been
closed in MLCC's name and funded by MLCC. All first-lien closed-end residential
mortgage loans originated on this basis are serviced by Cendant at its servicing
headquarters located in Mt. Laurel, New Jersey. Cendant originated all of the
Mortgage Loans on MLCC's behalf pursuant to this private-label relationship and
Cendant will also service all of the Mortgage Loans.
MLCC underwriting guidelines are applied to evaluate an applicant's
credit standing, financial condition, and repayment ability, as well as the
value and adequacy of the mortgaged property and additional collateral, if any,
as collateral for any loan made by MLCC. As part of the loan application
process, the applicant is required to provide information concerning his or her
assets, liabilities, income and expenses (except as described below), along with
an authorization permitting MLCC to obtain any necessary third party
verifications, including a credit report summarizing the applicant's credit
history. Unless prohibited by applicable state law, the applicant is typically
required to pay an application fee to MLCC.
In evaluating the applicant's ability and willingness to repay the
proposed loan, MLCC reviews the applicant's credit history and outstanding
debts, as reported on the credit report. If an existing mortgage or other
significant debt listed on the loan application is not adequately reported on
the credit report, MLCC generally requests a written or oral verification of the
balance and payment history of such debt from the servicer of such debt.
MLCC verifies the applicant's liquid assets to ensure that the client
has adequate liquid assets to apply toward any required down payment, closing
costs, prepaid interest, and at least two months' worth of cash reserves.
S-43
Except as described below, MLCC also evaluates the applicant's income to
determine its stability, probability of continuation, and adequacy to service
the proposed MLCC debt payment. MLCC's guidelines for verifying an applicant's
income and employment are generally as follows. For salaried applicants, MLCC
typically requires a written verification of employment from the applicant's
employer, or a copy of the applicant's two most recent IRS forms 1040 or W-2, a
current pay stub, and oral verification of employment. Oral verification of
employment is typically obtained directly from the applicant's employer, but in
certain circumstances, may be fulfilled by contacting the applicant at his or
her place of business. For non-salaried applicants, including self-employed
applicants, MLCC requires copies of the applicant's two most recent federal
income tax returns, along with all supporting schedules. In some cases, MLCC may
waive submission of such supporting schedules if this income is insignificant in
relation to the applicant's overall income, or does not affect the applicant's
ability to qualify for the proposed loan. A self-employed applicant is generally
required to submit a signed profit and loss statement if the applicant's income
shows significant variations from year to year.
In determining the adequacy of the property as collateral for the loan,
a Fannie Mae/Freddie Mac conforming appraisal of the property is performed by an
independent appraiser selected by MLCC, except as noted below. The appraiser is
required to inspect the property and verify that is in good condition and that
construction or renovation, if new, has been completed. The appraisal report
indicates a value for the property and provides information concerning
marketability, the neighborhood, the property site, interior and exterior
improvements, and the condition of the property. Most of the aforementioned
appraisals may have been procured by Lender's Service, Inc., in which MLCC holds
a minority interest and STARS, in which Cendant holds a majority interest.
The applicant has the option of directly obtaining a title report or may
choose to have MLCC obtain the report. Generally, all liens must have been
satisfied and removed prior to or upon the closing of any of the mortgage loans.
Title insurance is required to be obtained for all Mortgage Loans. Where
applicable, in addition to providing proof of standard hazard insurance on the
property, the applicant is required to obtain, to the extent available, flood
insurance when the subject property is identified as being in a federally
designated flood hazard area.
Once sufficient employment, credit and property information is obtained,
the decision as to whether to approve the mortgage loan is based upon the
applicant's income and credit history, the status of title to the mortgaged
property, and the appraised value of the mortgaged property. MLCC also reviews
the level of an applicant's liquid assets as an indication of creditworthiness.
The approval process generally requires that the applicant have a good credit
history and a total debt-service-to-income ratio ("DTI") that generally does not
exceed 38%; however, this limit may be raised to 50% or greater if the borrower
demonstrates satisfactory disposable income and/or that other mitigating or
compensating factors are present. The DTI ratio is calculated as the ratio of
the borrower's total monthly debt obligations (including the interest-only
payment on the proposed loan at an interest rate that is 2.00% to 2.50% higher
than the original rate), divided by the borrower's total verified monthly
income. In general, it is MLCC's belief that the DTI ratio is only one of
several factors, such as loan-to-value ratio, credit history, and reserves, that
should be considered in making a determination of an applicant's ability to
repay the proposed loan. As part of the underwriting process, MLCC typically
reviews an applicant's credit score. MLCC considers an applicant's credit score
in connection with other factors, including the
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applicant's overall credit payment history, level of income, debts, and assets.
It is not MLCC's practice to accept or reject an application based solely on the
basis of the applicant's credit score. See the table captioned "Credit Scores"
under "Description of the Mortgage Pools" herein for a description of these
credit scores and how they are derived. MLCC also requires that the proposed
loan have a loan-to-value ratio that generally does not exceed 80%, but under
certain circumstances may be up to 100%. MLCC's practice is to continuously
review loan-to-value ratio limits and to adjust such limits where economic
conditions dictate that such adjustments are appropriate. Any negative comments
concerning the quality, condition and current market conditions as noted in the
appraisal report may result in a reduction of the maximum loan-to-value ratio
permitted for the mortgage loans. In the case of a mortgage loan which is a
purchase money mortgage, MLCC computes the mortgage loans' loan-to-value ratio
as the original loan balance divided by the appraised value of the property or
the contract sales price, whichever is lower. In certain limited cases, MLCC may
accept verification of borrower assets and/or status of credit history in
addition to or in lieu of income verification, provided that the borrower meets
certain standards with regard to the ratio of liquid assets to the loan amount
and other compensating factors are present.
Certain of the Mortgage Loans originated by MLCC were originated under
loan programs that do not require verification of borrower income. MLCC's loan
origination process allows for expedited processing on certain loans based on
the risk profile of the loan. During the origination process, MLCC conducts an
assessment of the risk profile of the prospective borrower and subject property
to determine the level of income verification required to process the loan. MLCC
categorizes loans into different processing tracks based upon the overall risk
profile of the loan, as evidenced by the loan-to-value ratio, borrower credit
profile, the liquidity ratio (as described below), type of property, occupancy
status, and proposed loan amount. For loans that demonstrate the lowest level of
risk based upon this categorization, the borrower may not be required to
disclose his or her income in order for MLCC to process the loan.
MLCC uses a "liquidity ratio" as part of its underwriting criteria. The
liquidity ratio is defined as the total amount of a borrower's liquid assets, as
verified by MLCC, divided by the total amount of the proposed loan. For example,
a borrower with $500,000 in verified liquid assets who is requesting a $250,000
loan amount would have a 2.0 liquidity ratio. Liquid assets are generally
defined as cash and cash equivalents, marginable marketable securities, and
retirement accounts. Business assets are generally not considered part of a
borrower's liquid assets unless the business is 100% owned by the borrower. The
liquidity ratio generally excludes all assets that are pledged or margined,
estimated funds required for closing, concentrated equity positions if the share
price is less than $10 and any stock options or unvested shares of stock. MLCC
believes that the accumulation of net worth, particularly in the form of liquid
assets, is a strong indication of creditworthiness. A borrower who accumulates
net worth from earnings and savings demonstrates a strong ability to manage his
or her financial affairs. If the net worth is in liquid form, it can potentially
be used to service the proposed debt, to pay unexpected debts that may occur,
and to protect against short-term interruptions of income.
The level of income documentation required by MLCC is determined by a
combination of the borrower's credit score and overall credit profile, liquidity
ratio, and the loan-to-value ratio of the proposed loan. Using predetermined
parameters based upon the combination of these
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factors, adjusted for the property type and occupancy status, MLCC may require
the following different levels of income disclosure and verification:
(1) no income disclosure;
(2) debt-to-income ratio calculated based on stated income from the
borrower with no verification of income required ("stated
income");
(3) verification of income using streamlined/alternate
documentation; or
(4) full income disclosure and verification.
The above described underwriting guidelines may be varied in certain
cases, on the basis of compensating factors, as deemed appropriate by MLCC's or
Cendant's underwriting personnel.
DESCRIPTION OF THE CERTIFICATES
GENERAL
On or about September 26, 2002 (the "Closing Date"), the Certificates
will be issued pursuant to a trust agreement (the "Trust Agreement"), dated as
of September 1, 2002, between Sequoia Residential Funding, Inc., as depositor
(the "Depositor"), and Wells Fargo Bank Minnesota, National Association, as
trustee (the "Trustee") and acknowledged by the Seller. Set forth below are
summaries of the specific terms and provisions of the Trust Agreement. The
following summaries are subject to, and are qualified in their entirety by
reference to, the provisions of the Trust Agreement. When particular provisions
or terms used in the Trust Agreement are referred to, the actual provisions
(including definitions of terms) are incorporated by reference.
The Certificates will consist of the Class 1A, Class 2A-1, Class 2A-2,
Class X-1A, Class X-1B, Class X-2, Class X-B and Class A-R Certificates (the
"Senior Certificates") and the Class B-1, Class B-2, Class B-3, Class B-4, Class
B-5 and Class B-6 Certificates (the "Subordinate Certificates" or the
"Subordinate Classes"). The Senior Certificates and the Class B-1, Class B-2 and
Class B-3 Certificates are sometimes collectively referred to herein as the
"Offered Certificates." Only the Offered Certificates are offered under this
prospectus supplement. The Class B-4, Class B-5 and Class B-6 Certificates are
collectively referred to as the "Privately-Offered Certificates." The
Privately-Offered Certificates are not offered under this prospectus supplement.
Accordingly, the description of the Privately-Offered Certificates provided in
this prospectus supplement is solely for informational purposes. The Class 1A,
Class 2A-1, Class 2A-2, Class B-1, Class B-2 and Class B-3 Certificates are
sometimes collectively referred to herein as the "LIBOR Certificates" for the
purposes of describing interest payments with respect to such classes.
The Offered Certificates will be issued in the initial Class Principal
Amounts set forth in the table under "Summary -- Offered Certificates." The
Class B-4, Class B-5 and Class B-6 Certificates will be issued in the
approximate initial Class Principal Amounts of $2,625,000,
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$2,100,000 and $3,685,162, respectively. The initial Class Principal Amounts and
Class Notional Amounts of each class may be increased or decreased by up to 10%
to the extent that the Stated Principal Balance of the Mortgage Loans is
increased or decreased as described at "Description of the Mortgage Pools."
The Offered Certificates (other than the Class A-R, Class X-1A, Class
X-1B, Class X-2 and Class X-B Certificates) will be issued in minimum
denominations in principal amount of $25,000 and integral multiples of $1 in
excess thereof. The Class A-R Certificate will be issued as a single instrument
in fully registered definitive form, representing the entire principal amount of
such Certificate. Each of the Class X-1A, Class X-1B, Class X-2 and Class X-B
Certificates will be issued as a single instrument evidencing a 100% percentage
interest in each such class.
The Certificates represent beneficial ownership interests in a trust
fund (the "Trust Fund"), the assets of which on the Closing Date will consist
primarily of (1) the Mortgage Loans; (2) such assets as from time to time are
identified as deposited in respect of the Mortgage Loans in the Custodial
Account and the Distribution Account (see "-- Payments on Mortgage Loans;
Accounts" below); (3) funds on deposit in the Basis Risk Reserve Fund maintained
for the benefit of the Class X Certificates and the LIBOR Certificates; (4) the
Trust Fund's rights under the underlying mortgage loan purchase agreement and
servicing agreement with respect to the Mortgage Loans; (5) the Trust Fund's
rights under the Mortgage Loan Purchase Agreement, as described above under
"Description of the Mortgage Pools -- Assignment of the Mortgage Loans; (6)
property acquired by foreclosure of the Mortgage Loans or deed in lieu of
foreclosure; (7) any applicable insurance policies; and (8) the proceeds of all
of the foregoing. In addition, the rights under certain pledged collateral
accounts and the Limited Purpose Surety Bond with respect to the Additional
Collateral Loans will be assigned to the Trustee for the benefit of the
Certificateholders. See "Description of the Mortgage Pools -- The Additional
Collateral Loans." The Basis Risk Reserve Fund will not be part of any REMIC.
Solely for purposes of determining distributions of interest and
principal on the Senior Certificates, the Senior Certificates (other than the
Class X-B Certificates) have been divided into the following payment groups
(each a "Certificate Group"):
THE GROUP 1 CERTIFICATES: The Class 1A, Class X-1A, Class X-1B and Class
A-R Certificates are referred to herein as the "Group 1 Certificates." With
limited exception described at "-- Limited Cross-Collateralization,"
distributions of interest and principal on the Group 1 Certificates will be
based solely on interest and principal received on, or advanced with respect to,
the Pool 1 Mortgage Loans.
THE GROUP 2 CERTIFICATES: The Class 2A-1, Class 2A-2 and Class X-2
Certificates are referred to herein as the "Group 2 Certificates." With limited
exception described at "-- Limited Cross-Collateralization," distributions of
interest and principal on the Group 2 Certificates will be based solely on
interest and principal received on, or advanced with respect to, the Pool 2
Mortgage Loans.
Distributions of interest on the Class X-B Certificates and of interest
and principal on the Class B-1, Class B-2 and Class B-3 Certificates and the
other Subordinate Classes will be based
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on interest and principal, as applicable, received on, or advanced with respect
to, the Pool 1 and Pool 2 Mortgage Loans in the aggregate.
Distributions on the Certificates will be made by the Trustee on the
20th day of each month, or if such day is not a Business Day, on the first
Business Day thereafter commencing in October 2002 (each, a "Distribution
Date"), to the persons in whose names such Certificates are registered on the
applicable Record Date. For this purpose, a "Business Day" is any day other than
(i) a Saturday or Sunday, or (ii) a day on which banking institutions in the
City of New York, New York, the states of Maryland or Minnesota or the city in
which the Corporate Trust Office of the Trustee is located are authorized or
obligated by law or Executive Order to be closed. A "Record Date" with respect
to the LIBOR Certificates and any Distribution Date is the last Business Day
preceding that Distribution Date (or the Closing Date, in the case of the first
Distribution Date) or, in the case of all other Offered Certificates (including
LIBOR Certificates that are subsequently reissued as Definitive Certificates (as
described below at "-- Book Entry Certificates")), the last Business Day of the
month preceding the month of that Distribution Date.
Payments on each Distribution Date will be made by check mailed to the
address of the holder of the certificate (the "Certificateholder") entitled
thereto as it appears on the applicable certificate register or, in the case of
a Certificateholder who holds 100% of a notional class of Certificates or the
Class A-R Certificate or who holds Certificates with an aggregate initial Class
Principal Amount of $1,000,000 or more and who has so notified the Trustee in
writing in accordance with the Trust Agreement, by wire transfer in immediately
available funds to the account of such Certificateholder at a bank or other
depository institution having appropriate wire transfer facilities; provided,
however, that the final payment in retirement of the Certificates will be made
only upon presentment and surrender of such Certificates at the Corporate Trust
Office of the Trustee. See "-- Book Entry Certificates" below for the method of
payment to Beneficial Owners of Book-Entry Certificates.
BOOK-ENTRY CERTIFICATES
GENERAL. The Offered Certificates (other than the Class A-R Certificate)
will be book-entry certificates (each, a class of "Book-Entry Certificates")
issued, maintained and transferred on the book-entry records of The Depository
Trust Company ("DTC") and its Participants (as defined herein).
Each class of Book-Entry Certificates will be represented by one or more
global certificates which equal the initial principal balance of such class
registered in the name of the nominee of DTC. The Depositor has been informed by
DTC that DTC's nominee will be Cede & Co. No person acquiring an interest in a
Book-Entry Certificate (each, a "Beneficial Owner") will be entitled to receive
a physical certificate instrument evidencing such person's interest (a
"Definitive Certificates"), except as set forth in the prospectus under
"Description of the Securities -- Book-Entry Registration of Securities." Unless
and until Definitive Certificates are issued for the Book-Entry Certificates
under the limited circumstances described in the prospectus, all references to
actions by Certificateholders with respect to the Book-Entry Certificates shall
refer to actions taken by DTC upon instructions from its Participants (as
defined below), and all references herein to distributions, notices, reports and
statements to Certificateholders with respect to the Book-Entry Certificates
shall refer to distributions, notices,
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reports and statements to DTC or Cede & Co., as the registered holder of the
Book-Entry Certificates, for distribution to Beneficial Owners by DTC in
accordance with DTC procedures. Beneficial Owners are only entitled to exercise
their rights indirectly through Participants in the DTC.
REGISTRATION. Beneficial Owners will hold their interests in their
Offered Certificates through DTC in the United States, or, upon request, through
Clearstream Banking, societe anonyme (formerly Cedelbank) (hereafter,
"Clearstream Luxembourg") or the Euroclear System ("Euroclear") in Europe if
they are participants of such systems, or indirectly through organizations which
are participants in such systems. Clearstream Luxembourg and Euroclear will hold
omnibus positions on behalf of their participants through customers' securities
accounts in Clearstream Luxembourg's and Euroclear's names on the books of their
respective depositaries which in turn will hold such positions in customers'
securities accounts in the depositaries' names on the books of DTC. Citibank,
N.A. will act as depositary for Clearstream Luxembourg and JPMorgan Chase Bank
will act as depositary for Euroclear (in such capacities, individually the
"Relevant Depositary" and collectively, the "European Depositaries").
The Beneficial Owner's ownership interest in a Book-Entry Certificate
will be recorded on the records of the brokerage firm, bank, thrift institution
or other financial intermediary (each, a "Financial Intermediary") that
maintains the Beneficial Owner's account for such purpose. In turn, the
Financial Intermediary's ownership of such Book-Entry Certificate will be
recorded on the records of DTC (or of a participating firm (a "Participant")
that acts as agent for the Financial Intermediary, whose interest will in turn
be recorded on the records of DTC, if the Beneficial Owner's Financial
Intermediary is not a DTC participant and on the records of Clearstream
Luxembourg or Euroclear, as appropriate).
Beneficial Owners will receive all payments of principal of, and
interest on, the Offered Certificates from the Trustee through DTC and DTC
participants. While the Book-Entry Certificates are outstanding (except under
the circumstances described below), under the rules, regulations and procedures
creating and affecting DTC and its operations (the "Rules"), DTC is required to
make book-entry transfers among Participants on whose behalf it acts with
respect to the Book-Entry Certificates and is required to receive and transmit
payments of principal of, and interest on, the Book-Entry Certificates.
Participants and indirect participants with whom Beneficial Owners have accounts
with respect to Book-Entry Certificates are similarly required to make
book-entry transfers and receive and transmit such distributions on behalf of
their respective Beneficial Owners. Accordingly, although Beneficial Owners will
not possess physical certificates, the Rules provide a mechanism by which
Beneficial Owners will receive payments and will be able to transfer their
interest.
Beneficial Owners will not receive or be entitled to receive Definitive
Certificates representing their respective interests in the Book-Entry
Certificates except under the limited circumstances described below. Unless and
until Definitive Certificates are issued, Beneficial Owners who are not
Participants may transfer ownership of Book-Entry Certificates only through
Participants and indirect participants by instructing such Participants and
indirect participants to transfer their interest by book-entry transfer, through
DTC for the account of the purchasers of such Certificates, which account is
maintained with their respective Participants. Under the Rules and in accordance
with DTC's normal procedures, transfer of ownership of
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Book-Entry Certificates will be executed through DTC and the accounts of the
respective Participants at DTC will be debited and credited. Similarly, the
Participants and indirect participants will make debits or credits, as the case
may be, on their records on behalf of the selling and purchasing Beneficial
Owners.
Because of time zone differences, credits of securities received in
Clearstream Luxembourg or Euroclear as a result of a transaction with a
Participant will be made during subsequent securities settlement processing and
dated the business day following the DTC settlement date. Such credits or any
transactions in such securities settled during such processing will be reported
to the relevant Euroclear or Clearstream Luxembourg Participants on such
business day. Cash received in Clearstream Luxembourg or Euroclear as a result
of sales of securities by or through a Clearstream Luxembourg Participant (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 Luxembourg or Euroclear cash account only as of the
business day following settlement in DTC. For information with respect to tax
documentation procedures relating to the Certificates, refer to "Federal Income
Tax Consequences -- Withholding with Respect to Certain Foreign Investors" and
"-- Backup Withholding" in the accompanying prospectus and "Global Clearance,
Settlement and Tax Documentation Procedures -- Certain U.S. Federal Income Tax
Documentation Requirements" in Annex I hereto.
Transfers between Participants will occur in accordance with DTC rules.
Transfers between Clearstream Luxembourg Participants and Euroclear Participants
will occur in accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Clearstream
Luxembourg Participants or Euroclear Participants, on the other, will be
effected in DTC in accordance with the DTC rules on behalf of the relevant
European international clearing system by the Relevant Depositary; however, such
cross market transactions will require delivery of instructions to the relevant
European international clearing system by the counterparty in such system in
accordance with its rules and procedures and within its established deadlines
(European time). The relevant European international clearing system will, if
the transaction meets its settlement requirements, deliver instructions to the
Relevant Depositary to take action to effect final settlement on its behalf by
delivering or receiving securities in DTC, and making or receiving payment in
accordance with normal procedures for same day funds settlement applicable to
DTC. Clearstream Luxembourg Participants and Euroclear Participants may not
deliver instructions directly to the European Depositaries.
DTC, which is a New York-chartered limited purpose trust company,
performs services for its participants, some of which (and/or their
representatives) own DTC. In accordance with its normal procedures, DTC is
expected to record the positions held by each DTC participant in the Book-Entry
Certificates, whether held for its own account or as a nominee for another
person. In general, beneficial ownership of Book-Entry Certificates will be
subject to the rules, regulations and procedures governing DTC and DTC
participants as in effect from time to time.
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Clearstream Luxembourg is incorporated under the laws of Luxembourg as a
professional depository. Clearstream Luxembourg holds securities for its
participating organizations ("Clearstream Luxembourg Participants") and
facilitates the clearance and settlement of securities transactions between
Clearstream Luxembourg Participants through electronic book-entry changes in
accounts of Clearstream Luxembourg Participants, thereby eliminating the need
for physical movement of certificates. Transactions may be settled in
Clearstream Luxembourg in any of various currencies, including United States
dollars. Clearstream Luxembourg provides to its Clearstream Luxembourg
Participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally-traded securities and securities
lending and borrowing. Clearstream Luxembourg interfaces with domestic markets
in several countries. As a professional depository, Clearstream Luxembourg is
subject to regulation by the Luxembourg Monetary Institute. Clearstream
Luxembourg Participants are recognized financial institutions around the world,
including underwriters, securities brokers and dealers, banks, trust companies,
clearing corporations and certain other organizations. Indirect access to
Clearstream Luxembourg is also available to others, such as banks, brokers,
dealers and trust companies that clear through or maintain a custodial
relationship with a Clearstream Luxembourg Participant, either directly or
indirectly.
Euroclear was created in 1968 to hold securities for its participants
("Euroclear Participants") and to clear and settle transactions between
Euroclear Participants through simultaneous electronic book-entry delivery
against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Transactions may be settled in any of various currencies, including United
States dollars. Euroclear includes various other services, including securities
lending and borrowing, and interfaces with domestic markets in several countries
generally similar to the arrangements for cross-market transfers with DTC
described above. Euroclear is operated by the Brussels, Belgium office of
JPMorgan Chase Bank (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 Euroclear are held on a fungible basis without
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attribution of specific certificates to specific securities clearance accounts.
The Euroclear Operator acts under the Terms and Conditions only on behalf of
Euroclear Participants, and has no record of or relationship with persons
holding through Euroclear Participants.
Payments on the Book-Entry Certificates will be made on each
Distribution Date by the Trustee to DTC. DTC will be responsible for crediting
the amount of such payments to the accounts of the applicable DTC participants
in accordance with DTC's normal procedures. Each DTC participant will be
responsible for disbursing such payment to the Beneficial Owners of the
Book-Entry Certificates that it represents and to each Financial Intermediary
for which it acts as agent. Each such Financial Intermediary will be responsible
for disbursing funds to the beneficial owners of the Book-Entry Certificates
that it represents.
Under a book-entry format, Beneficial Owners of the Book-Entry
Certificates may experience some delay in their receipt of payments, since such
payments will be forwarded by the Trustee to Cede & Co. Payments with respect to
Certificates held through Clearstream Luxembourg or Euroclear will be credited
to the cash accounts of Clearstream Luxembourg Participants or Euroclear
Participants in accordance with the relevant system's rules and procedures, to
the extent received by the Relevant Depositary. Such payments will be subject to
tax reporting in accordance with relevant United States tax laws and
regulations. See "Federal Income Tax Consequences -- Withholding with Respect to
Certain Foreign Investors" and "-- Backup Withholding Certificates" in the
accompanying prospectus.
Because DTC can only act on behalf of Financial Intermediaries, the
ability of a Beneficial Owner to pledge Book-Entry Certificates to persons or
entities that do not participate in the Depository system, or otherwise take
actions in respect of such Book-Entry Certificates, may be limited due to the
lack of physical certificates for such Book-Entry Certificates. In 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 reports will be made available by the Trustee to Cede & Co., as
nominee of DTC, and may be made available by Cede & Co. to Beneficial Owners
upon request, in accordance with the rules, regulations and procedures creating
and affecting the Depository, and to the Financial Intermediaries to whose DTC
accounts the Book-Entry Certificates of such Beneficial Owners are credited.
DTC has advised the Trustee that, unless and until Definitive
Certificates are issued, DTC will take any action permitted to be taken by the
holders of the Book-Entry Certificates under the Agreement only at the direction
of one or more Financial Intermediaries to whose DTC accounts the Book-Entry
Certificates are credited, to the extent that such actions are taken on behalf
of Financial Intermediaries whose holdings include such Book-Entry Certificates.
Clearstream Luxembourg or the Euroclear Operator, as the case may be, will take
any other action permitted to be taken by a Certificateholder under the Trust
Agreement on behalf of a Clearstream Luxembourg Participant or Euroclear
Participant only in accordance with its relevant rules and procedures and
subject to the ability of the Relevant Depositary to effect such actions on its
behalf through DTC. DTC may take actions, at the direction of the related
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Participants, with respect to some Book-Entry Certificates which conflict with
actions taken with respect to other Certificates.
Although DTC, Clearstream Luxembourg and Euroclear have agreed to the
foregoing procedures in order to facilitate transfers of Book-Entry Certificates
among participants of DTC, Clearstream Luxembourg and Euroclear, they are under
no obligation to perform or continue to perform such procedures and such
procedures may be discontinued at any time.
None of the Seller, the Depositor, the Servicer or the Trustee will have
any responsibility for any aspect of the records relating to or payments made on
account of beneficial ownership interests of the Book-Entry Certificates held by
Cede & Co., as nominee of DTC, or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interests.
Definitive Certificates will be issued to Beneficial Owners or their
nominees, respectively, rather than to DTC or its nominee, only under the
limited conditions set forth in the accompanying prospectus under "Description
of the Securities -- Book-Entry Registration of Securities." Upon the occurrence
of an event described in the penultimate paragraph thereunder, the Trustee is
required to direct DTC to notify Participants that have ownership of Book-Entry
Certificates as indicated on the records of DTC of the availability of
Definitive Certificates for the Book-Entry Certificates. Upon surrender by DTC
of the Definitive Certificates representing the Book-Entry Certificates, and
upon receipt of instruction from DTC for re-registration, the Trustee will
re-issue the Book-Entry Certificates as Definitive Certificates in the
respective principal balances owned by the individual Beneficial Owner and
thereafter the Trustee will recognize the holders of such Definitive
Certificates as certificateholders under the Trust Agreement.
For a description of the procedures generally applicable to the
Book-Entry Certificates, see "Description of the Securities -- Book-Entry
Registration of the Securities" in the accompanying prospectus.
PAYMENTS ON MORTGAGE LOANS; ACCOUNTS
On or prior to the Closing Date, the Servicer will establish and
maintain or cause to be established and maintained an account or accounts for
the collection of payments on the Mortgage Loans which will be separate from the
Servicer's other assets (each, a "Custodial Account"). On or prior to the
Closing Date, the Trustee will establish and maintain an account (the
"Distribution Account") in trust for the benefit of the Certificateholders. On
the 18th day of each month (or, if such 18th day is not a Business Day, on the
immediately preceding Business Day), the Servicer will remit all amounts on
deposit in the Custodial Account to the Distribution Account. On each
Distribution Date, to the extent of the Available Distribution Amount on deposit
in the Distribution Account, the Trustee will withdraw the Certificate
Distribution Amount to pay the Certificateholders. The "Certificate Distribution
Amount" for any Distribution Date will equal the sum of the (i) respective
Interest Distribution Amounts with respect to each class of Certificates, (ii)
the related Senior Principal Distribution Amount and (iii) the Subordinate
Principal Distribution Amount (as each such term is defined herein).
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Funds credited to the Custodial Account established by the Servicer may
be invested at the discretion of the Servicer for its own benefit in Permitted
Investments (as defined in the Servicing Agreement).
AVAILABLE DISTRIBUTION AMOUNT
Distributions of interest and principal on the Certificates will be made
on each Distribution Date from the "Available Distribution Amount" of the
related Mortgage Pool (in the case of the Senior Certificates other than the
Class X-B Certificates) and from the Available Distribution Amount of both
Mortgage Pools in the aggregate (in the case of the Class X-B Certificates and
the Subordinate Certificates) in the order of priority set forth below at "--
Priority of Distributions." The "Available Distribution Amount" with respect to
each Mortgage Pool and any Distribution Date, as more fully described in the
Trust Agreement, will generally equal the following amounts:
(1) all scheduled installments of interest (net of the Servicing
Fee) and principal collected on the related Mortgage Loans and due
during the related Due Period, together with any Monthly Advances in
respect thereof;
(2) all proceeds of any primary mortgage guaranty insurance
policies or any other insurance policies with respect to the related
Mortgage Loans, to the extent such proceeds are not applied to the
restoration or repair of the related mortgaged property or released to
the related mortgagor in accordance with the Servicer's normal servicing
procedures (collectively, "Insurance Proceeds");
(3) all other amounts received and retained in connection with
the liquidation of defaulted Mortgage Loans in such Mortgage Pool, by
foreclosure or otherwise ("Liquidation Proceeds") in the month preceding
the month of such Distribution Date, including, with respect to any
Additional Collateral Loans in such Mortgage Pool, all proceeds of the
related Additional Collateral, to the extent payable;
(4) all partial or full prepayments of principal, together with
any accrued interest thereon, identified as having been received on the
related Mortgage Loans during the calendar month immediately preceding
the Distribution Date (the "Prepayment Period"), plus any amounts
received from the Servicer in respect of Prepayment Interest Shortfalls
(as defined at "-- Distributions of Interest") on such Mortgage Loans;
and
(5) amounts received with respect to such Distribution Date as
the purchase price or a price adjustment in respect of a Defective
Mortgage Loan in such Mortgage Pool purchased or replaced by the Seller
as of such Distribution Date as a result of a breach of a representation
or warranty or a document defect.
minus:
- all charges and other amounts payable or reimbursable to the Trustee
under the Trust Agreement, up to an aggregate maximum amount equal
to the product of (a) the applicable Pool Percentage and (b)
$300,000 annually, or to the Servicer under the Servicing Agreement;
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- in the case of paragraphs (2) through (5) above, any related
unreimbursed expenses incurred in connection with a liquidation or
foreclosure and any related unreimbursed Monthly Advances or
servicing advances due to the Servicer;
- any related unreimbursed Monthly Advances or servicing advances
determined to be nonrecoverable; and
- in the case of paragraphs (1) through (4) above, any related amounts
collected which are determined to be attributable to a subsequent
Due Period or Prepayment Period.
The "Pool Percentage" for each Mortgage Pool and any Distribution Date
will be a fraction, expressed as a percentage, the numerator of which is the
aggregate Stated Principal Balance of the Mortgage Loans in such Mortgage Pool
for such date and the denominator of which is the aggregate Stated Principal
Balance of all of the Mortgage Loans (in the aggregate) as of such date.
DISTRIBUTIONS OF INTEREST
General. The "Interest Distribution Amount" on each Distribution Date
with respect to each class of Certificates will equal the Current Interest for
that class on that Distribution Date as reduced by such class' share of Net
Interest Shortfalls (as described below).
- "CURRENT INTEREST" for each class of Certificates on any
Distribution Date will equal the amount of interest accrued during
the related Accrual Period on the related Class Principal Amount
immediately prior to that Distribution Date (or, in the case of the
Class X-1A, Class X-1B, Class X-2 and Class X-B Certificates, the
related Class Notional Amount for that Distribution Date) at the
applicable Certificate Interest Rate.
- The "ACCRUAL PERIOD" applicable to the LIBOR Certificates with
respect to any Distribution Date, will be the period commencing on
the 20th day of the month immediately preceding the month in which
such Distribution Date occurs (or in the case of the first
Distribution Date, beginning on the Closing Date of this
transaction) and ending on 19th day of the month in which such
Distribution Date occurs. The "Accrual Period" applicable to all
other classes of Certificates will be the calendar month immediately
preceding the month in which the related Distribution Date occurs.
For each Distribution Date and each related Accrual Period, interest
on all classes of Certificates will be calculated and payable on the
basis of a 360-day year consisting of twelve 30-day months.
- The "CLASS NOTIONAL AMOUNT" of the Class X-1A Certificates with
respect to any Distribution Date will equal the product of (i) the
Class Principal Amount of the Class 1A Certificates immediately
before such Distribution Date and (ii) the Class X-1A Percentage for
such Distribution Date.
- The "CLASS NOTIONAL AMOUNT" of the Class X-1B Certificates with
respect to any Distribution Date will equal the product of (i) the
Class Principal Amount of the Class
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1A Certificates immediately before such Distribution Date and
(ii) the Class X-1B Percentage for such Distribution Date.
- The "CLASS NOTIONAL AMOUNT" of the Class X-2 Certificates with
respect to any Distribution Date will equal the sum of the Class
Principal Amounts of the Class 2A-1 and the Class 2A-2 Certificates
immediately before such Distribution Date.
- The "CLASS NOTIONAL AMOUNT" of the Class X-B Certificates with
respect to any Distribution Date will equal the sum of the Class
Principal Amounts of the Class B-1, Class B-2 and Class B-3
Certificates immediately before such Distribution Date.
- The "CLASS X-1A PERCENTAGE" for any Distribution Date will equal the
percentage equivalent of a fraction, the numerator of which is the
Stated Principal Balances (as defined below at "-- Certificate
Interest Rates") of the One Month LIBOR Loans in Pool 1 and the
denominator of which is the Stated Principal Balances of the Pool 1
Mortgage Loans. For purposes of determining the Class X-1A
Percentage for any Distribution Date, the Stated Principal Balance
of the Pool 1 Mortgage Loans shall be determined as of the first day
of the month preceding the month in which such Distribution Date
occurs.
- The "CLASS X-1B PERCENTAGE" for any Distribution Date will equal the
percentage equivalent of a fraction, the numerator of which is the
Stated Principal Balances of the Six-Month LIBOR Loans in Pool 1 and
the denominator of which is the Stated Principal Balances of the
Pool 1 Mortgage Loans. For purposes of determining the Class X-1B
Percentage for any Distribution Date, the Stated Principal Balance
of the Mortgage Loans shall be determined as of the first day of the
month preceding the month in which such Distribution Date occurs.
- The "CLASS PRINCIPAL AMOUNT" of each class of Certificates will be
equal to the aggregate Certificate Principal Amounts of the
Certificates of that class.
- The "CERTIFICATE PRINCIPAL AMOUNT" of any Certificate will equal its
Certificate Principal Amount as of the Closing Date of this
transaction as reduced by all amounts previously distributed on that
Certificate in respect of principal and the principal portion of any
Realized Losses (as defined at "-- Allocation of Realized Losses")
previously allocated to that Certificate. The Certificate Principal
Amount of a class of Subordinate Certificates may be additionally
reduced by allocation of any Subordinate Certificate Writedown
Amount (as defined at "-- Allocation of Realized Losses").
As described above, the Current Interest for each class of Certificates
for any Distribution Date will be reduced by the amount of Net Interest
Shortfalls experienced by (a) the related Mortgage Pool, in the case of the
Senior Certificates (other than the Class X-B Certificates) and (b) both
Mortgage Pools, in the case of the Subordinate Certificates and the Class X-B
Certificates. With respect to any Distribution Date and any Mortgage Pool, the
"NET INTEREST SHORTFALL" is equal to:
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- any Net Prepayment Interest Shortfalls for that Mortgage Pool and
Distribution Date; and
- the amount of interest that would otherwise have been received with
respect to any Mortgage Loan in such Mortgage Pool which was subject
to a (i) reduction in the amount of interest collectible as a result
of application of the Soldiers' and Sailors' Civil Relief Act of
1940, as amended (the "Relief Act") or similar state law (any such
reduction, a "Relief Act Reduction") or (ii) the interest portion of
any Special Hazard Loss, Fraud Loss, Debt Service Reduction or
Deficient Valuation, after the exhaustion of the respective amounts
of coverage provided by the Subordinate Certificates for those types
of losses (see "Certain Legal Aspects of the Loans -- Soldiers' and
Sailors' Civil Relief Act" in the accompanying prospectus and "--
Allocation of Realized Losses" below).
- "NET PREPAYMENT INTEREST SHORTFALLS" with respect to a
Mortgage Loan and any Distribution Date is the amount by
which a Prepayment Interest Shortfall for the related Due
Period exceeds the amount that the Servicer is obligated to
remit pursuant to the Servicing Agreement, to cover such
shortfall for such Due Period.
- A "PREPAYMENT INTEREST SHORTFALL" with respect to a Mortgage
Loan and any Distribution Date is the amount by which one
month's interest at the applicable Mortgage Rate on a
Mortgage Loan as to which a voluntary prepayment in full or
in part has been made, exceeds the amount of interest
actually received in connection with such prepayment.
- The "DUE PERIOD" with respect to a Mortgage Loan and any
Distribution Date is the period beginning on the second day of the
calendar month preceding the month in which such Distribution Date
occurs and ending on the first day of the calendar month in which
such Distribution Date occurs.
Net Interest Shortfalls for a Mortgage Pool on any Distribution Date
will be allocated among all classes of Senior Certificates of the related
Certificate Group and all classes of Subordinate Certificates entitled to
receive distributions of interest on such Distribution Date from such Mortgage
Pool proportionately based on (1) in the case of the Senior Certificates,
Current Interest otherwise distributable thereon on such Distribution Date and
(2) in the case of Subordinate Certificates, interest accrued on their
Apportioned Principal Balance before taking into account any reductions in such
amounts from Net Interest Shortfalls for that Distribution Date.
For purposes of allocating Net Interest Shortfalls for a Mortgage Pool
to the Subordinate Certificates on any Distribution Date, the "APPORTIONED
PRINCIPAL BALANCE" of any class of Subordinate Certificates for any Distribution
Date will be equal to the Class Principal Amount of that class immediately prior
to that Distribution Date multiplied by a fraction, the numerator of which is
the applicable Pool Subordinate Amount for that date and the denominator of
which is the sum of the Pool Subordinate Amounts (in the aggregate) for that
date; provided, however, that on any Distribution Date when any Certificates of
the related Certificate Group have been
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reduced to zero, the Net Interest Shortfalls for the related Mortgage Pool will
be allocated to the classes of Subordinate Certificates based on the amount of
interest each such class of Subordinate Certificates would otherwise be entitled
to receive on that Distribution Date.
- The "POOL SUBORDINATE AMOUNT" for each Mortgage Pool is as follows:
- The "POOL 1 SUBORDINATE AMOUNT" for any Distribution Date
shall equal the excess of the aggregate Stated Principal
Balance of the Pool 1 Mortgage Loans as of the first day of
the month preceding the month in which such Distribution
Date occurs over the sum of the Class Principal Amounts of
the Class 1A and Class A-R Certificates immediately before
such Distribution Date.
- The "POOL 2 SUBORDINATE AMOUNT" for any Distribution Date
shall equal the excess of the aggregate Stated Principal
Balance of the Pool 2 Mortgage Loans as of the first day of
the month preceding the month in which such Distribution
Date occurs over the sum of the Class Principal Amounts of
the Class 2A-1 and Class 2A-2 Certificates immediately
before such Distribution Date.
If on a particular Distribution Date, the Available Distribution Amount
for a Mortgage Pool applied in the order described below under "--Priority of
Distributions" is not sufficient to make a full distribution of Current Interest
on the Certificates in the related Certificate Group (an "Interest Shortfall"),
interest will be distributed on each Certificate of equal priority within such
Certificate Group based on the pro rata amount of interest it would otherwise
have been entitled to receive in the absence of such shortfall. Any unpaid
interest amount will be carried forward and added to the amount which holders of
each such class of Certificates will be entitled to receive on the next
Distribution Date. An Interest Shortfall could occur, for example, if losses
realized on the Mortgage Loans in that Mortgage Pool were exceptionally high or
were concentrated in a particular month. Any unpaid interest amount so carried
forward will not bear interest. Unlike Basis Risk Shortfall Amounts, such
Interest Shortfalls are not covered by amounts in the Basis Risk Reserve Fund.
Certificate Interest Rates. The Certificate Interest Rate for each
Accrual Period for each class of Certificates is as follows:
(A) CERTIFICATE INTEREST RATES FOR LIBOR CERTIFICATES. The
"Certificate Interest Rate" for each class of LIBOR Certificates will be
the applicable annual rate described below:
- CLASS 1A CERTIFICATES: the least of (i) LIBOR plus 0.40%
(the "A1 Margin"), (ii) the Pool 1 Net WAC and (iii) 11.75%;
- CLASS 2A-1 CERTIFICATES: the least of (i) LIBOR plus 0.38%
(the "2A-1 Margin"), (ii) the Pool 2 Net WAC and (iii)
11.75%;
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- CLASS 2A-2 CERTIFICATES: the least of (i) LIBOR plus 0.68%
(the "2A-2 Margin"), (ii) the Pool 2 Net WAC and (iii)
11.75%;
- CLASS B-1 CERTIFICATES: the least of (i) LIBOR plus 0.80%
(the "B-1 Margin"), (ii) the Subordinate Net WAC and (iii)
11.75%;
- CLASS B-2 CERTIFICATES: the least of (i) LIBOR plus 0.80%
(the "B-2 Margin"), (ii) the Subordinate Net WAC and (iii)
11.75%; and
- CLASS B-3 CERTIFICATES: the least of (i) LIBOR plus 1.40%
(the "B-3 Margin"), (ii) the Subordinate Net WAC and (iii)
11.75%.
As described at "-- Optional Clean-Up Redemption of the Certificates,"
if the option to sell the Mortgage Loans and redeem the Certificates is not
exercised by the Depositor on the Clean-Up Call Date, then on such Distribution
Date, and all succeeding Distribution Dates, the A1 Margin will be increased to
0.80%, the 2A-1 Margin will be increased to 0.76%, the 2A-2 Margin will be
increased to 1.36%, the B-1 Margin will be increased to 1.20%, the B-2 Margin
will be increased to 1.20% and the B-3 Margin will be increased to 2.10%.
(B) CERTIFICATE INTEREST RATES FOR THE CLASS X-1A, CLASS X-1B,
CLASS X-2 AND CLASS X-B CERTIFICATES. The "Certificate Interest Rate"
applicable to each of the Class X-1A, Class X-1B, Class X-2 and Class
X-B Certificates will be a per annum rate equal to:
- In the case of the Class X-1A Certificates, the excess of
the Net WAC of the One-Month LIBOR Loans in Pool 1 over the
Certificate Interest Rate on the Class 1A Certificates;
- In the case of the Class X-1B Certificates, the excess of
the Net WAC of the Six-Month LIBOR Loans in Pool 1 over the
Certificate Interest Rate on the Class 1A Certificates;
- In the case of the Class X-2 Certificates, the excess of the
Pool 2 Net WAC over the weighted average of the Certificate
Interest Rates on the Class 2A-1 and Class 2A-2
Certificates; and
- In the case of the Class X-B Certificates, the excess of the
Subordinate Net WAC over the weighted average of the
Certificate Interest Rates on the Class B-1, Class B-2 and
Class B-3 Certificates;
Notwithstanding the foregoing, on each Distribution Date, the Interest
Distribution Amounts that would otherwise be distributable to the holders of the
Class X-1A, Class X-1B, Class X-2 and Class X-B Certificates, based on the
applicable Certificate Interest Rates described above, may be reduced by the
amount, if any, that is necessary to fund payment of any Basis Risk Shortfalls
or unpaid Basis Risk Shortfalls to the holders of the related LIBOR Certificates
(see "Basis Risk Reserve Fund" below).
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(C) CERTIFICATE INTEREST RATES FOR THE CLASS B-4, CLASS B-5 AND
CLASS B-6 CERTIFICATES. The Certificate Interest Rate applicable to each
of the Class B-4, Class B-5 and Class B-6 Certificates will equal the
Subordinate Net WAC.
(D) CERTIFICATE INTEREST RATE FOR THE CLASS A-R CERTIFICATE. The
Certificate Interest Rate applicable to the Class A-R Certificate will
equal the Pool 1 Net WAC.
- The "NET WAC" of the Mortgage Loans (or any group of
Mortgage Loans or any portion thereof) for each Distribution
Date will be the weighted average of the Net Mortgage Rates
of the related Mortgage Loans or portion thereof, as of the
first day of the calendar month immediately preceding the
calendar month of such Distribution Date, weighted on the
basis of their Stated Principal Balances.
- The "POOL 1 NET WAC" and "POOL 2 NET WAC" as of any
Distribution Date will in each case be the weighted average
of the Net Mortgage Rates of the Mortgage Loans in the
related Pool as of the first day of the calendar month
immediately preceding the calendar month of such
Distribution Date, weighted on the basis of their Stated
Principal Balances.
- The "SUBORDINATE NET WAC" as of any Distribution Date will
equal the weighted average of the Pool 1 Net WAC and the
Pool 2 Net WAC, in each case weighted on the basis of the
relative Pool Subordinate Amounts for Pool 1 and Pool 2,
respectively, immediately prior to such Distribution Date.
- The "NET MORTGAGE RATE" as to any Mortgage Loan and any
Distribution Date will equal the Mortgage Rate reduced by
the Servicing Fee Rate.
- The "MORTGAGE RATE" with respect to any Mortgage Loan is the
annual rate of interest borne by the related mortgage note
from time to time, as of the related due date.
- The "STATED PRINCIPAL BALANCE" of a Mortgage Loan at any Due
Date is equal to the unpaid principal balance of such
Mortgage Loan as of such Due Date as specified in the
amortization schedule at the time relating thereto (before
any adjustment to such amortization schedule by reason of
any moratorium or similar waiver or grace period) after
giving effect to any previous principal prepayments and
Liquidation Proceeds allocable to principal and to the
payment of principal due on such Due Date and irrespective
of any delinquency in payment by the related mortgagor.
- The "DUE DATE" of a Mortgage Loan is the date specified in
the related Mortgage Note on which the monthly scheduled
payment of interest and principal (or interest only during
the applicable interest-only period following origination)
is due, which is the first day of the calendar month in the
case of the Mortgage Loans.
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Basis Risk Shortfalls. For any class of LIBOR Certificates and any
Distribution Date, the "Basis Risk Shortfalls" for such class will equal the sum
of:
(i) the excess, if any, of an amount that would have been the Current
Interest for such class if the Certificate Interest Rate for such
class were calculated without regard to clause (ii) in the
definition thereof, over the actual Current Interest for such class
for such Distribution Date;
(ii) any excess described in clause (i) above remaining unpaid from prior
Distribution Dates; and
(iii) interest for the applicable Accrual Period on the amount described
in clause (ii) above based on the applicable Certificate Interest
Rate (determined without regard to clause (ii) in the definition
thereof).
Basis Risk Reserve Fund. Pursuant to the terms of the Trust Agreement,
the Trustee will establish an account (the "Basis Risk Reserve Fund"), which
will be held in trust by the Trustee on behalf of the holders of the LIBOR
Certificates and the Class X-1A, Class X-1B, Class X-2 and Class X-B
Certificates. The Basis Risk Reserve Fund will not be an asset of either REMIC.
The Basis Risk Reserve Fund will be the sole source of payments to the holders
of the LIBOR Certificates with respect to any Basis Risk Shortfalls on such
Certificates.
The Basis Risk Reserve Fund will be comprised of two sub-accounts: the
"Class X-A Sub-Account," and the "Class X-B Sub-Account." On each Distribution
Date, Current Interest that would otherwise be distributable with respect to the
Class X-1A, Class X-1B, and Class X-2 Certificates will be deposited instead in
the Class X-A Sub-Account, and Current Interest that would otherwise be
distributable with respect to the Class X-B Certificates will be deposited
instead into the Class X-B Sub-Account, to the extent of the applicable
"Required Reserve Fund Deposit" for each such class in the manner described
below.
For any Distribution Date, the Required Reserve Fund Deposit for the
Class X-1A, Class X-1B, and Class X-2 Certificates will be an amount equal to
the lesser of (i) the Current Interest for the Class X-1A, Class X-1B, and Class
X-2 Certificates for such Distribution Date and (ii) the amount required to
bring the balance on deposit in the Class X-A Sub-Account up to an amount equal
to the sum of (a) the Basis Risk Shortfalls for such Distribution Date with
respect to the Class 1A, Class 2A-1 and Class 2A-2 Certificates and (b) $8,000.
For any Distribution Date for which the Required Reserve Fund Deposit for the
Class X-1A, Class X-1B, and Class X-2 Certificates is less than the sum of the
Current Interest for each such class for such Distribution Date, the Class X-1A,
Class X-1B, and Class X-2 Certificates shall each fund a portion of the Required
Reserve Fund Deposit in proportion to the relative amounts of Current Interest
for each such class for such Distribution Date.
For any Distribution Date, the Required Reserve Fund Deposit for the
Class X-B Certificates will be an amount equal to the lesser of (i) the Current
Interest for the Class X-B Certificates for such Distribution Date and (ii) the
amount required to bring the balance on deposit in the Class X-B Sub Account up
to an amount equal to the sum of (a) the Basis Risk
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Shortfalls for such Distribution Date with respect to the Class B-1, Class B-2
and Class B-3 Certificates and (b) $2,000.
On any Distribution Date for which a Basis Risk Shortfall exists with
respect to the Class 1A, Class 2A-1, or Class 2A-2 Certificates, the Trustee
shall withdraw from the Class X-A Sub-Account the amount of such Basis Risk
Shortfall for distribution on such Distribution Date as described herein under
"-- Priority of Distributions."
On any Distribution Date for which a Basis Risk Shortfall exists with
respect to the Class B-1, Class B-2 or Class B-3 Certificates, the Trustee shall
withdraw from the Class X-B Sub Account the amount of such Basis Risk Shortfall
for distribution on such Distribution Date as described herein under "--
Priority of Distributions."
Determination of LIBOR. On the second LIBOR Business Day (as defined
below) preceding the commencement of each Accrual Period (each such date, a
"LIBOR Determination Date"), the Trustee will determine LIBOR based on the
"Interest Settlement Rate" for U.S. dollar deposits of one-month maturity set by
the British Bankers' Association (the "BBA") as of 11:00 a.m. (London time) on
the LIBOR Determination Date ("LIBOR").
The BBA's Interest Settlement Rates are currently displayed on the Dow
Jones Telerate Service page 3750 (such page, or such other page as may replace
page 3750 on that service or such other service as may be nominated by the BBA
as the information vendor for the purpose of displaying the BBA's Interest
Settlement Rates for deposits in U.S. dollars, the "Designated Telerate Page").
Such Interest Settlement Rates are also currently available on Reuters Monitor
Money Rates Service page "LIBOR01" and Bloomberg L.P. page "BBAM." The BBA's
Interest Settlement Rates currently are rounded to five decimal places.
A "LIBOR Business Day" is any day on which banks in London and New York
are open for conducting transactions in foreign currency and exchange.
With respect to any LIBOR Determination Date, if the BBA's Interest
Settlement Rate does not appear on the Designated Telerate Page as of 11:00 a.m.
(London time) on such date, or if the Designated Telerate Page is not available
on such date, the Trustee will obtain such rate from the Reuters or Bloomberg
page. If such rate is not published for such LIBOR Determination Date, LIBOR for
such date will be the most recently published Interest Settlement Rate. In the
event that the BBA no longer sets an Interest Settlement Rate, the Trustee will
designate an alternative index that has performed, or that the Trustee expects
to perform, in a manner substantially similar to the BBA's Interest Settlement
Rate. The Trustee will select a particular index as the alternative index only
if it receives an opinion of counsel (furnished at the Trust Fund's expense)
that the selection of such index will not cause any of the REMICs to lose their
classification as REMICs for federal income tax purposes.
The establishment of LIBOR on each LIBOR Determination Date by the
Trustee and the Trustee's calculation of the Certificate Interest Rate
applicable to each class of LIBOR Certificates for the related Accrual Period
will (in the absence of manifest error) be final and binding.
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LIBOR for the first Distribution Date will be determined two Business
Days prior to the Closing Date.
DISTRIBUTIONS OF PRINCIPAL
General. All payments and other amounts received in respect of principal
on the Mortgage Loans will be allocated between the Senior Certificates and the
Subordinate Certificates as follows:
Senior Principal Distribution Amount. On each Distribution Date, the
related Pool's Available Distribution Amount remaining after the payment of the
applicable Interest Distribution Amount for the related Certificate Group, up to
the amount of such Senior Principal Distribution Amount, will be distributed as
principal on the Senior Certificates of such Certificate Group.
- The "SENIOR PRINCIPAL DISTRIBUTION AMOUNT" for a Certificate Group
for each Distribution Date is equal to the sum of:
(1) the product of (a) the related Senior Percentage and (b) the
principal portion of each Scheduled Payment (without giving effect to
any Debt Service Reduction occurring prior to the Bankruptcy Coverage
Termination Date (see -- "Allocation of Realized Losses" below)) on each
Mortgage Loan in the related Mortgage Pool due during the related Due
Period;
(2) the product of (a) the related Senior Prepayment Percentage
and (b) each of the following amounts: (i) the principal portion of each
full and partial principal prepayment made by a borrower on a Mortgage
Loan in the related Mortgage Pool during the related Prepayment Period;
(ii) each other unscheduled collection, including Insurance Proceeds and
net Liquidation Proceeds (other than with respect to any Mortgage Loan
in the related Mortgage Pool that was finally liquidated during the
related Prepayment Period) representing or allocable to recoveries of
principal of the related Mortgage Loans received during the related
Prepayment Period; and (iii) the principal portion of the purchase price
of each Mortgage Loan purchased by the Seller or any other person
pursuant to the Mortgage Loan Purchase Agreement due to a defect in
documentation or a material breach of a representation and warranty with
respect to such Mortgage Loan or, in the case of a permitted
substitution of a Defective Mortgage Loan in the related Mortgage Pool,
the amount representing any principal adjustment in connection with any
such replaced Mortgage Loan in the related Mortgage Pool with respect to
the related Prepayment Period;
(3) with respect to unscheduled recoveries allocable to principal
of any Mortgage Loan in the related Mortgage Pool that was fully
liquidated during the related Prepayment Period, the lesser of (a) the
net Liquidation Proceeds allocable to principal and (b) the product of
(i) the related Senior Prepayment Percentage for that date and (ii) the
related remaining Stated Principal Balance of the related Mortgage Loan
at the time of liquidation; and
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(4) any amounts described in clauses (1) through (3) above that
remain unpaid with respect to the Certificate Group from prior
Distribution Dates.
On any Distribution Date after a Senior Termination Date has occurred with
respect to a Mortgage Pool, the Senior Principal Distribution Amount will be
calculated pursuant to the above formula based on all of the Mortgage Loans, as
opposed to the Mortgage Loans in the related Mortgage Pool.
- A "SCHEDULED PAYMENT" with respect to a Mortgage Loan means the
scheduled monthly payment on a Mortgage Loan on any Due Date
allocable to principal or interest which, unless otherwise specified
in the Servicing Agreement, shall give effect to any related Debt
Service Reduction and any related Deficient Valuation (as each such
term is defined at "--Allocation of Realized Losses") that has the
effect of reducing the monthly payment due on such Mortgage Loan.
- Except as provided below, the "SENIOR PERCENTAGE" for each Mortgage
Pool for any Distribution Date occurring prior to the Distribution
Date in October 2012 is 100%. For any Distribution Date (i)
occurring before the Distribution Date in October 2012 but in or
after October 2005 on which the "Two Times Test" is satisfied or
(ii) in or after October 2012, the related Senior Percentage will be
the related "Pro Rata Senior Percentage." For any Distribution Date
occurring prior to October 2005 on which the Two Times Test is
satisfied, the related Senior Percentage for each Mortgage Pool will
be equal to the related Pro Rata Senior Percentage plus 50% of an
amount equal to 100% minus the related Pro Rata Senior Percentage.
With respect to any Distribution Date after the Senior Termination
Date, the related Senior Percentage for such Mortgage Pool will be
0%. Since all of the Mortgage Loans provide for payments solely of
interest (and not scheduled principal) for the first ten years
following origination, Certificateholders of the related Certificate
Group are not expected to receive any payments of scheduled
principal during the first ten-year period.
- The "SENIOR TERMINATION DATE" is the date on which the aggregate
Class Principal Amount of the Senior Certificates related to a
Mortgage Pool is reduced to zero.
- The "TWO TIMES TEST" will be satisfied on any Distribution Date if
all the following conditions are met:
- the Aggregate Subordinate Percentage is at least two times the
Aggregate Subordinate Percentage as of the Closing Date;
- the condition described in clause first of the definition of
"Step-Down Test" (described below) is satisfied; and
- cumulative Realized Losses with respect to the Mortgage Loans do
not exceed 20% of the aggregate Class Principal Amount of the
Subordinate Certificates as of the Closing Date.
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- The "AGGREGATE SUBORDINATE PERCENTAGE" for any Distribution Date is
the percentage equivalent of a fraction the numerator of which is
the aggregate Class Principal Amount of the Subordinate Certificates
immediately prior to that date and the denominator of which is the
Pool Balance.
- The "POOL BALANCE" for any Distribution Date will equal the
aggregate of the Stated Principal Balances of the Mortgage Loans
outstanding on the Due Date of the month preceding the month of that
Distribution Date.
- The "PRO RATA SENIOR PERCENTAGE" for each Distribution Date and
each Mortgage Pool is the percentage equivalent of a fraction the
numerator of which is the aggregate Class Principal Amount of the
class or classes of the related Certificate Group immediately prior
to such Distribution Date and the denominator of which is the
aggregate Stated Principal Balance of all Mortgage Loans in that
Mortgage Pool; provided, however, that on any Distribution Date
after a Senior Termination Date has occurred with respect to a
Mortgage Pool, the Pro Rata Senior Percentage of the remaining
Senior Certificates is the percentage equivalent of a fraction, the
numerator of which is the aggregate of the Class Principal Amount of
the remaining class of Senior Certificates immediately prior to such
date and the denominator of which is the aggregate Class Principal
Amount of all classes of Certificates, immediately prior to such
date.
- The "SENIOR PREPAYMENT PERCENTAGE" for any Distribution Date
occurring before the Distribution Date in October 2012 and any
Mortgage Pool is 100%. Thereafter, the Senior Prepayment Percentage
for any Mortgage Pool will be subject to gradual reduction as
described in the following paragraphs. This disproportionate
allocation of unscheduled payments of principal to the Senior
Certificates of a Certificate Group (other than the Class 2A-2
Certificates) will have the effect of accelerating the amortization
of such Senior Certificates while, in the absence of Realized
Losses, increasing the interest in the principal balance of the
Mortgage Loans evidenced by the Subordinate Certificates. Increasing
the interest of the Subordinate Certificates relative to that of the
Senior Certificates of a Certificate Group is intended to preserve
the availability of the subordination provided by the Subordinate
Certificates.
- The "SENIOR PREPAYMENT PERCENTAGE" of each class of Senior
Certificates of a Certificate Group for any Distribution Date
occurring in or after October 2012, will be as follows:
- for any Distribution Date occurring in or after October 2012 but
before October 2013, the related Senior Percentage plus 70% of
the related Subordinate Percentage for that date;
- for any Distribution Date occurring in or after October 2013 but
before October 2014, the related Senior Percentage plus 60% of
the related Subordinate Percentage for that date;
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- for any Distribution Date occurring in or after October 2014 but
before October 2015, the related Senior Percentage plus 40% of
the related Subordinate Percentage for that date;
- for any Distribution Date occurring in or after October 2015 but
before October 2016, the related Senior Percentage plus 20% of
the related Subordinate Percentage for that date; and
- for any Distribution Date occurring in October 2016 or
thereafter, the related Senior Percentage for that date.
Notwithstanding the preceding paragraphs, no decrease in the Senior
Prepayment Percentage for any Mortgage Pool will occur unless the Step-Down Test
is satisfied on such Distribution Date.
- As to any Distribution Date, the "STEP-DOWN TEST" will be satisfied
if both of the following conditions are met:
first, the outstanding principal balance of all Mortgage Loans
delinquent 60 days or more (including Mortgage Loans in foreclosure and
REO property), averaged over the preceding six-month period, as a
percentage of the aggregate Class Principal Amounts on such Distribution
Date (without giving effect to any payments on such Distribution Date)
of the Subordinate Certificates, does not equal or exceed 50%; and
second, cumulative Realized Losses on the Mortgage Loans do not
exceed:
- for each Distribution Date occurring in the period from October 2012
to September 2013, 30% of the aggregate Class Principal Amounts of
the Subordinate Certificates as of the Closing Date (the "Original
Subordinate Class Principal Amount");
- for each Distribution Date occurring in the period from October 2013
to September 2014, 35% of the Original Subordinate Class Principal
Amount;
- for each Distribution Date occurring in the period from October 2014
to September 2015, 40% of the Original Subordinate Class Principal
Amount;
- for each Distribution Date occurring in the period from October 2015
to September 2016, 45% of the Original Subordinate Class Principal
Amount; and
- for the Distribution Date in October 2016 and thereafter, 50% of the
Original Subordinate Class Principal Amount.
Notwithstanding the preceding paragraphs, if on any Distribution Date,
the Two Times Test is satisfied, the Senior Prepayment Percentage for each
Mortgage Pool will equal the related Senior Percentage. However, if, on any
Distribution Date occurring on or after the Distribution Date in October 2012,
the Pro Rata Senior Percentage for a Mortgage Pool exceeds the Pro Rata
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Senior Percentage on the Closing Date, the related Senior Prepayment Percentage
for that date will once again equal 100%.
If on any Distribution Date the allocation to the Senior Certificates
then entitled to distributions of principal of related full and partial
principal prepayments and other amounts in the percentage required above would
reduce the sum of the Class Principal Amounts of those Certificates below zero,
the distribution to the class or classes of Certificates of the related Senior
Prepayment Percentage of these amounts for such Distribution Date will be
limited to the percentage necessary to reduce the related Class Principal
Amounts to zero.
The Class 2A-2 Certificates. With respect to any Distribution Date prior
to the Credit Support Depletion Date, the Class 2A-2 Certificates will not be
entitled to distribution of their pro rata percentage of the Senior Principal
Distribution Amount for Group 2, but rather will be entitled to distributions of
the "Class 2A-2 Principal Distribution Amount" for such date. The Class 2A-2
Principal Distribution Amount for any Distribution Date prior to the Credit
Support Depletion Date will be determined in the same manner as the Senior
Principal Distribution Amount for Group 2 for such Distribution Date, except
that (A) the related "Subordinate Percentage" will be substituted in each case
for the related "Senior Percentage" in clause (i) of such definition and the
"Subordinate Prepayment Percentage" will be substituted in each case for the
"Senior Prepayment Percentage" in clauses (2) and (3) of such definition and (B)
the amount determined pursuant to clause (A) will be multiplied by a fraction
(expressed as a percentage), the numerator of which is (a) the Class Principal
Amount of the Class 2A-2 Certificates immediately prior to such Distribution
Date and the denominator of which is (b) the sum of the Class Principal Amounts
of the Class 2A-1 and Class 2A-2 Certificates immediately prior to such
Distribution Date; provided, however, on and after the Distribution Date on
which the Class Principal Amount of the Class 2A-1 Certificates has been reduced
to zero, all of the Senior Principal Distribution Amount for Group 2 will be
allocated to the Class 2A-2 Certificates.
As a consequence of the above allocations of the Pool 2 Senior
Distribution Amount between the Class 2A-1 and Class 2A-2 Certificates, unless
certain performance triggers are satisfied or the Class Principal Amount of the
Class 2A-1 Certificates has been paid in full, no scheduled or unscheduled
principal payments from the Mortgage Loans in Pool 2 will be distributed to the
Class 2A-2 Certificates prior to the Distribution Date in October 2012, all such
payments, if any, being distributed to the Class 2A-1 Certificates.
Subordinate Principal Distribution Amount. Except as provided in the
next paragraph, from the Available Distribution Amount remaining after the
payment of interest and principal to the Senior Certificates and any Subordinate
Certificate ranking in higher priority as described at "-- Priority of
Distributions," each class of Subordinate Certificates will be entitled to
receive on each Distribution Date, first, payments in respect of interest and
second, its pro rata share of each Subordinate Principal Distribution Amount.
Distributions of principal on the Subordinate Certificates will be made on each
Distribution Date sequentially to the classes of Subordinate Certificates in
order of their numerical class designations, beginning with the Class B-1
Certificates, until each such class has received its pro rata share for that
Distribution Date. Distributions of each such class' share of the Subordinate
Principal Distribution Amount will be made only after payment of interest and
principal to each class ranking senior to such class, and interest to such
class, have been paid. See "-- Priority of Distributions."
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With respect to each class of Subordinate Certificates, if on any
Distribution Date the sum of the Class Subordination Percentage of that class
and the aggregate Class Subordination Percentage of all classes of Subordinate
Certificates which have higher numerical class designations than that class is
less than the Applicable Credit Support Percentage for that class on the date of
issuance of the Certificates, no distribution of principal prepayments will be
made to any such classes and the amount otherwise distributable to those classes
in respect of principal prepayments will be allocated among the remaining
classes of Subordinate Certificates, pro rata, based upon their respective Class
Principal Amounts, and distributed in the order described above.
- The "APPLICABLE CREDIT SUPPORT PERCENTAGE" for each class of
Subordinate Certificates and any Distribution Date will equal the
sum of the Class Subordination Percentage of that class and the
aggregate Class Subordination Percentage of all other classes of
Subordinate Certificates having higher numerical class designations
than that class.
- The "CLASS SUBORDINATION PERCENTAGE" for any Distribution Date and
each class of Subordinate Certificates will equal a fraction
(expressed as a percentage) the numerator of which is the Class
Principal Amount of that class immediately before that Distribution
Date and the denominator of which is the aggregate Class Principal
Amount of all classes of Certificates immediately before that
Distribution Date.
The approximate original Applicable Credit Support Percentages for the
Subordinate Classes of Certificates on the date of issuance of such Certificates
are expected to be as follows:
Class B-1................................... 3.25%
Class B-2................................... 2.05%
Class B-3................................... 1.25%
Class B-4................................... 0.80%
Class B-5................................... 0.55%
Class B-6................................... 0.35%
- The "SUBORDINATE PRINCIPAL DISTRIBUTION AMOUNT" for any Mortgage
Pool and for each Distribution Date is equal to the sum of:
(1) the product of (a) the related Subordinate Percentage and
(b) the principal portion of each related Scheduled Payment (without
giving effect to any Debt Service Reduction occurring prior to the
Bankruptcy Coverage Termination Date) on each Mortgage Loan in the
related Mortgage Pool due during the related Due Period;
(2) the product of (a) the related Subordinate Prepayment
Percentage and (b) each of the following amounts: (i) the principal
portion of each full and partial principal prepayment made by a borrower
on a Mortgage Loan in the related Mortgage Pool during the related
Prepayment Period, (ii) each other unscheduled collection, including
Insurance Proceeds and net Liquidation Proceeds (other than with respect
to any Mortgage Loan in the related Mortgage Pool that was finally
liquidated during the related Prepayment Period), representing or
allocable to recoveries of principal of Mortgage Loans in the related
Mortgage Pool received during the related Prepayment Period and
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(iii) the principal portion of the purchase price of each Mortgage Loan
in the related Mortgage Pool that was purchased by the Seller or any
other person pursuant to the Mortgage Loan Purchase Agreement due to a
defect in documentation or a material breach of a representation or
warranty with respect to such Mortgage Loan or, in the case of a
permitted substitution of a Defective Mortgage Loan in the related
Mortgage Pool, the amount representing any principal adjustment in
connection with any such replaced Mortgage Loan in the related Mortgage
Pool with respect to such Distribution Date;
(3) with respect to unscheduled recoveries allocable to
principal of any Mortgage Loan in the related Mortgage Pool that was
finally liquidated during the related Prepayment Period, the related net
Liquidation Proceeds allocable to principal, to the extent not
distributed pursuant to clause (3) of the definition of Senior Principal
Distribution Amount); and
(4) any amounts described in clauses (1) through (3) for any
previous Distribution Date that remain unpaid;
Minus the sum of:
(A) if the aggregate Class Principal Amount of any Certificate
Group has been reduced to zero, principal paid from the Available
Distribution Amount from the related Mortgage Pool to the remaining
Certificate Group, as described under "--Limited
Cross-Collateralization;" and
(B) the amounts paid from the Available Distribution Amount for
an Overcollateralized Group to the Senior Certificates related to an
Undercollateralized Group, as described under "-- Limited
Cross-Collateralization."
On any Distribution Date after a Senior Termination Date has occurred
with respect to a Mortgage Pool, the Subordinate Principal Distribution Amount
will not be calculated with respect to a Mortgage Pool, but will equal the
amount calculated pursuant to the formula set forth above based on the
Subordinate Percentage or Subordinate Prepayment Percentage, as applicable, for
the Subordinate Certificates for such Distribution Date with respect to all of
the Mortgage Loans as opposed to the Mortgage Loans in the related Mortgage Pool
only.
- The "SUBORDINATE CLASS PERCENTAGE" for each class of Subordinate
Certificates for each Distribution Date is equal to the percentage
obtained by dividing the Class Principal Amount of such class
immediately prior to such Distribution Date by the aggregate Class
Principal Amount of all classes of Subordinate Certificates
immediately prior to such date.
- The "SUBORDINATE PREPAYMENT PERCENTAGE" for any Distribution Date
and for any Mortgage Pool is the difference between 100% and the
related Senior Prepayment Percentage for such Distribution Date.
- The "SUBORDINATE PERCENTAGE" with respect to each Mortgage Pool and
any Distribution Date will be equal to the difference between 100%
and the related Senior
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Percentage for such Mortgage Pool on such Distribution Date;
provided, however, that on any Distribution Date after a Senior
Termination Date has occurred with respect to a Mortgage Pool, the
Subordinate Percentage will represent the entire interest of the
Subordinate Certificates in the Mortgage Loans and will be equal to
the difference between the 100% and the Senior Percentage related to
the Mortgage Loans in the aggregate for such Distribution Date.
PRIORITY OF DISTRIBUTIONS
On each Distribution Date, the Available Distribution Amount from the
related Mortgage Pool (in the case of the Senior Certificates other than the
Class X-B Certificates) and both Mortgage Pools in the aggregate (in the case of
the Subordinate Certificates and the Class X-B Certificates) will be allocated
among the classes of Senior Certificates and Subordinate Certificates in the
following order of priority:
(1) Concurrently, to the payment of the Interest Distribution
Amount and any accrued but unpaid Interest Shortfalls on each class of
Senior Certificates; provided, however, that on each Distribution Date,
to the extent of the Basis Risk Reserve Fund Deposit for such date, the
proportionate amount of the Interest Distribution Amount that would
otherwise be payable to the Class X-1A, Class X-1B, Class X-2 and Class
X-B Certificates will be deposited in the Basis Risk Reserve Fund and
will not be distributed to such class;
(2) Concurrently, to the Senior Certificates from the Available
Distribution Amount remaining in the related Mortgage Pool after
application of priority (1) above, as follows:
(a) sequentially to the Class A-R and Class 1A
Certificates, in that order, the Senior Principal
Distribution Amount for Pool 1, until their
respective Class Principal Amounts have been
reduced to zero; and
(b) concurrently to the Class 2A-1 Certificates and the
Class 2A-2 Certificates, an amount up to the Senior
Principal Distribution Amount for Pool 2 as
follows:
(i) to the Class 2A-2 Certificates, the Class 2A-2
Principal Distribution Amount for such
Distribution Date until the Class Principal
Amount of such class has been reduced to zero;
and
(ii)to the Class 2A-1 Certificates, any remaining
Senior Principal Distribution Amount for Pool 2
after application of clause 2(b)(i), until the
Class Principal Amount of such class has been
reduced to zero.
(3) From the Available Distribution Amount from the Mortgage
Pools in the aggregate remaining after the application of priorities (1)
and (2) above, to the Class B-1,
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Class B-2 and Class B-3 Certificates, sequentially, in that order, the
payment of their respective Interest Distribution Amount and any
outstanding Interest Shortfalls;
(4) From the Available Distribution Amount from the Mortgage
Pools in the aggregate remaining after application of priorities (1)
through (3) above, to the Class B-1, Class B-2 and Class B-3
Certificates, sequentially, in that order, each such class' Subordinate
Class Percentage of the Subordinate Principal Distribution Amount for
each Pool, until its Class Principal Amount has been reduced to zero;
(5) From the Class X-A Sub-Account of the Basis Risk Reserve
Fund, for payment to the Class 1A, Class 2A-1, and Class 2A-2
Certificates, concurrently, in proportion to any Basis Risk Shortfalls
related to such classes for such date, and from the Class X-B
Sub-Account of the Basis Risk Reserve Fund, for payment to the Class
B-1, Class B-2, and Class B-3 Certificates`, sequentially in that order,
any Basis Risk Shortfalls related to such classes for such date;
(6) From the remaining Available Distribution Amount from the
Mortgage Pools in the aggregate remaining after application of
priorities (1) through (5) above:
(a) to the Class B-4 Certificates, the payment of its
applicable Interest Distribution Amount and any
outstanding Interest Shortfalls;
(b) to the Class B-4 Certificates, such class' Subordinate
Class Percentage of the Subordinate Principal
Distribution Amount for each Pool, until its Class
Principal Amount has been reduced to zero;
(c) to the Class B-5 Certificates, the payment of its
applicable Interest Distribution Amount and any
outstanding Interest Shortfalls;
(d) to the Class B-5 Certificates, such class' Subordinate
Class Percentage of the Subordinate Principal
Distribution Amount for each Pool, until its Class
Principal Amount has been reduced to zero;
(e) to the Class B-6 Certificates, the payment of its
applicable Interest Distribution Amount and any
outstanding Interest Shortfalls;
(f) to the Class B-6 Certificates, such class' Subordinate
Class Percentage of the Subordinate Principal
Distribution Amount for each Pool, until its Class
Principal Amount has been reduced to zero; and
(7) To the Class A-R Certificate, any remaining amount of the
Available Distribution Amount from the Mortgage Pools in the aggregate.
On each Distribution Date on and after the Credit Support Depletion Date
(as defined at "-- Allocation of Realized Losses"), the Available Distribution
Amount for each Mortgage Pool
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will be distributed to the remaining classes of Certificates of a Certificate
Group, on a pro rata basis, first, to pay the Interest Distribution Amount and
any accrued but unpaid Interest Shortfalls; second, to pay the Senior Principal
Distribution Amount for such Mortgage Pool; third, to pay any related Basis Risk
Shortfall or any related unpaid Basis Risk Shortfall; and fourth, to the Class
A-R Certificate, any remaining Available Distribution Amount from such Mortgage
Pool.
LIMITED CROSS-COLLATERALIZATION
The priority of distributions described above in "-- Priority of
Distributions" will be subject to change if a Mortgage Pool is either subject to
rapid prepayments or disproportionately high Realized Losses, as described
below.
a. Cross-Collateralization Due to Rapid Prepayments in a Mortgage Pool.
The priority of distributions will change in the case where a Mortgage Pool is
experiencing rapid prepayments provided all the following conditions are met:
- the aggregate Class Principal Amount of a Certificate Group has been
reduced to zero;
- there are still Subordinate Certificates Outstanding; and
- either (i) the Aggregate Subordinate Percentage on that date is less
than 200% of the Aggregate Subordinate Percentage as of the Closing
Date or (ii) the outstanding principal balance of the Mortgage Loans
in a Mortgage Pool delinquent 60 days or more averaged over the last
six months, as a percentage of such Mortgage Pool's applicable Pool
Subordinate Amount, is greater than or equal to 50%.
When all of these three conditions are satisfied, all principal received
or advanced with respect to the Mortgage Loans in the Mortgage Pool relating to
the Certificate Group that has been paid in full, will be applied as a
distribution of principal to the remaining Senior Certificates of the other
Certificate Group (on a pro rata basis) rather than applied as a principal
distribution to the Subordinate Certificates. Such principal would be
distributed in the same priority as those Senior Certificates would receive
other distributions of principal.
b. Cross-Collateralization Due to Disproportionate Realized Losses in a
Mortgage Pool. Realized Losses in a Mortgage Pool are allocated generally to the
Class B Certificates and not just to the portion of the Class B Certificates
representing an interest in the Mortgage Pool that incurred the loss. Therefore,
if Realized Losses in any Mortgage Pool that are allocated to the Class B
Certificates exceed the related Pool Subordinate Amount for that Mortgage Pool,
the principal balance of the Mortgage Loans of that Mortgage Pool will be less
than the principal balance of the related Certificate Group. That is, the amount
of collateral in that Mortgage Pool will be less than the Class Principal Amount
of the Certificate Group being supported by that collateral and, therefore, the
related Certificate Group is undercollateralized. In that situation, payments on
the Mortgage Loans in the other Mortgage Pool will be used to make interest and
then principal distributions to the Senior Certificates related to the
undercollateralized Certificate Group to the extent described below.
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If, on any Distribution Date, the aggregate Class Principal Amount of
any Certificate Group is greater than the aggregate Stated Principal Balance of
the Mortgage Loans in the related Mortgage Pool (such Certificate Group, the
"Undercollateralized Group" and the other Certificate Group, the
"Overcollateralized Group"), then the priority of distributions described in
this prospectus supplement under "-- Priority of Distributions" will be altered
as follows: The Available Distribution Amount for the Overcollateralized Group,
to the extent remaining following distributions of interest and principal to the
related Senior Certificates of that Group will be paid in the following
priority: (1) first, such amount, up to an amount for the Undercollateralized
Group (the "Total Transfer Amount") equal to the sum of the Interest Transfer
Amount and the Principal Transfer Amount for the Undercollateralized Group will
be distributed first to the Senior Certificates related to the
Undercollateralized Group in payment of accrued but unpaid interest, if any, and
then to those Senior Certificates as principal in the same order and priority as
they would receive other distributions of principal; and (2) second, any
remaining amount will be distributed pursuant to paragraphs (6) and (7) under
"-- Priority of Distributions" in this prospectus supplement.
On each Distribution Date, the "Interest Transfer Amount" for the
Undercollateralized Group will equal one month's interest on the applicable
Principal Transfer Amount at such Pool's weighted average Net Mortgage Rate,
plus any shortfall of interest on the Senior Certificates of the
Undercollateralized Group from prior Distribution Dates.
On each Distribution Date, the "Principal Transfer Amount" for the
Undercollateralized Group will equal the excess of the aggregate Class Principal
Amount of the Senior Certificates related to that Undercollateralized Group over
the aggregate Stated Principal Balance of the Mortgage Loans in that Mortgage
Pool.
In the event that the weighted average Certificate Interest Rate of the
Senior Certificates related to an Undercollateralized Group is greater than the
weighted average Net Mortgage Rate of the related Mortgage Pool, the payment of
interest to the Certificates related to the Undercollateralized Group from the
interest collected on the Overcollateralized Group may cause a shortfall in the
amount of principal and interest otherwise distributable to the Subordinate
Certificates. In addition, after the aggregate principal balance of the
Subordinate Certificates has been reduced to zero, this may cause a shortfall of
principal that would be allocated to the Senior Certificates related to the
Undercollateralized Group.
SUBORDINATION OF THE PAYMENT OF THE SUBORDINATE CERTIFICATES
The rights of the holders of the Subordinate Certificates to receive
payments with respect to the Mortgage Loans will be subordinated to the rights
of the holders of the Senior Certificates and the rights of the holders of each
class of Subordinate Certificates (other than the Class B-1 Certificates) to
receive such payments will be further subordinated to the rights of the class or
classes of Subordinate Certificates with lower numerical class designations, in
each case only to the extent described in this prospectus supplement. The
subordination of the Subordinate Certificates to the Senior Certificates and the
further subordination among the Subordinate Certificates is intended to provide
the Certificateholders having higher relative payment priority with protection
against Realized Losses other than Excess Losses. In addition, the Subordinate
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Certificates will provide limited protection against Special Hazard Losses,
Fraud Losses and Bankruptcy Losses as discussed at "-- Allocation of Realized
Losses" below.
ALLOCATION OF REALIZED LOSSES
If a Realized Loss occurs on the Mortgage Loans, then, on each
Distribution Date the principal portion of that Realized Loss, other than an
Excess Loss, will be allocated first, to reduce the Class Principal Amount of
each class of Subordinate Certificates, in inverse order of priority, until the
Class Principal Amount thereof has been reduced to zero (that is, such Realized
Losses will be allocated to the Class B-6 Certificates while those Certificates
are outstanding, then to the Class B-5 Certificates, and so forth) and second,
to the Senior Certificates related to the Mortgage Pool sustaining such losses,
on the basis of their respective Certificate Principal Amounts; provided,
however, that all Realized Losses attributable to Pool 2 that would otherwise be
allocated to the Class 2A-1 Certificates will first be allocated to the Class
2A-2 Certificates until the Class Principal Amount of the Class 2A-2
Certificates has been reduced to zero.
On each Distribution Date, the principal portion of any Excess Loss
(other than a Debt Service Reduction) for a Mortgage Pool will be allocated
proportionately to the Senior Certificates of the related Certificate Group on
the basis of their Class Principal Amounts and to the classes of Subordinate
Certificates on the basis of their Apportioned Principal Balance; provided,
however, that on any Distribution Date on and after the Credit Support Depletion
Date, any Excess Loss will be allocated pro rata among the related classes of
Senior Certificates, based on their respective Class Principal Amounts
immediately prior to such Distribution Date; provided, further, that any such
Excess Loss that would otherwise be allocable to the Class 2A-1 Certificates
will first be allocated to the Class 2A-2 Certificates until the Class Principal
Amount of the Class 2A-2 Certificates has been reduced to zero.
The Class Principal Amount of the lowest ranking class of Subordinate
Certificates then outstanding will also be reduced by the amount, if any, by
which the total Certificate Principal Amount of all the Certificates on any
Distribution Date (after giving effect to distributions of principal and
allocation of Realized Losses on that date) exceeds the total Stated Principal
Balance of the Mortgage Loans for the related Distribution Date (a "Subordinate
Certificate Writedown Amount").
- In general, a "REALIZED LOSS" means (a) with respect to a Liquidated
Mortgage Loan, the amount by which the remaining unpaid principal
balance of that Mortgage Loan plus all accrued and unpaid interest
thereon and any related expenses exceeds the amount of Liquidation
Proceeds applied to the principal balance of that Mortgage Loan, or
(b) the amount by which, in the event of bankruptcy of a borrower, a
bankruptcy court reduces the secured debt to the value of the
related Mortgaged Property (a "Deficient Valuation"). In determining
whether a Realized Loss is a loss of principal or of interest,
Liquidation Proceeds and other recoveries on a Mortgage Loan will be
applied first to outstanding expenses incurred with respect to such
Mortgage Loan, then to accrued, unpaid interest, and finally to
principal.
- "BANKRUPTCY LOSSES" are losses that are incurred as a result of
Deficient Valuations and any reduction, in a bankruptcy proceeding,
of the amount of the Scheduled
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Payment on a Mortgage Loan other than as a result of a Deficient
Valuation (a "Debt Service Reduction"). The principal portion of
Debt Service Reductions will not be allocated in reduction of the
Certificate Principal Amounts of any Certificates.
- "SPECIAL HAZARD LOSSES" are, in general terms, Realized Losses
arising out of certain direct physical loss or damage to Mortgaged
Properties that are not covered by a standard hazard insurance
policy, but excluding, among other things, faulty design or
workmanship and normal wear and tear.
- "FRAUD LOSSES" are losses sustained on a Liquidated Mortgage Loan by
reason of a default arising from fraud, dishonesty or
misrepresentation.
- A "LIQUIDATED MORTGAGE LOAN" generally is a defaulted Mortgage Loan
as to which the Mortgage Loan or related REO Property has been
disposed of and all amounts expected to be recovered in respect of
that Mortgage Loan have been received by the related Servicer.
- The "CREDIT SUPPORT DEPLETION DATE" is the date on which the
aggregate Class Principal Amount of the Subordinate Certificates has
been reduced to zero.
The principal portion of Special Hazard Losses, Bankruptcy Losses (other
than Debt Service Reductions) and Fraud Losses on the Mortgage Loans that exceed
the "Special Hazard Loss Limit," "Bankruptcy Loss Limit," and "Fraud Loss
Limit," respectively ("Excess Losses"), will be allocated as described above.
The "Special Hazard Loss Limit" will initially be approximately $11,240,000; the
"Bankruptcy Loss Limit" will initially be approximately $163,046; and the "Fraud
Loss Limit" will initially be approximately $31,500,308.
The Special Hazard Loss Limit will be reduced, from time to time, to an
amount equal on any Distribution Date to the lesser of (a) the greatest of (1)
1% of the aggregate of the Stated Principal Balances of the Mortgage Loans, (2)
twice the Stated Principal Balance of the Mortgage Loan having the highest
Stated Principal Balance and (3) the aggregate Stated Principal Balance of the
Mortgage Loans secured by Mortgaged Properties located in the single California
postal zip code area having the highest aggregate Stated Principal Balance of
any such zip code area and (b) the Special Hazard Loss Limit as of the Closing
Date less the amount, if any, of the Special Hazard Losses incurred since the
Closing Date.
The Bankruptcy Loss Limit will be reduced, from time to time, by the
amount of Bankruptcy Loses allocated to the Certificates. The date on which the
Bankruptcy Loss Limit has been reduced to zero is the "Bankruptcy Coverage
Termination Date."
As of the Cut-off Date, the Fraud Loss Limit will equal 3.00% of the sum
of the aggregate principal balance of the Mortgage Loans on the Closing Date.
The Fraud Loss Limit will be reduced, from time to time, by the amount of Fraud
Losses allocated to the Certificates. In addition, on each anniversary of the
Cut-off Date, the Fraud Loss Limit will be reduced:
- on the first anniversary of the Cut-off Date, to the lesser of:
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(a) 2.00% of the aggregate principal balance of the Mortgage
Loans as of the Due Date in the preceding month, and
(b) the excess of the Fraud Loss Limit as of the Cut-off Date,
over the cumulative amount of Fraud Losses allocated to the Certificates
since the Cut-off Date,
- on the second, third and fourth anniversaries of the Cut-off Date,
to the lesser of:
(c) 1.00% of the aggregate principal balance of the Mortgage
Loans as of the Due Date in the preceding month, and
(d) the excess of the Fraud Loss Limit as of the immediately
preceding anniversary of the Cut-off Date over the cumulative amount of
Fraud Losses allocated to the Certificates since such date,
- on the fifth anniversary of the Cut-off Date, to zero.
In the event that any amount is recovered in respect of principal of a
Liquidated Mortgage Loan after any related Realized Loss has been allocated as
described herein, such amount will be distributed to the Certificates still
outstanding, proportionately, on the basis of any Realized Losses previously
allocated thereto. It is generally not anticipated that any such amounts will be
recovered.
REPORTS TO CERTIFICATEHOLDERS
On each Distribution Date, the Trustee will make available to each
Certificateholder and will forward to the rating agencies a statement (based on
information received from each Servicer) generally setting forth, among other
things:
- the amount of the distributions, separately identified, with respect
to each class of Certificates;
- the amount of the distributions set forth in the first clause above
allocable to principal, separately identifying the aggregate amount
of any principal prepayments or other unscheduled recoveries of
principal included in that amount;
- the amount of the distributions set forth in the first clause above
allocable to interest and how it was calculated;
- the amount of any unpaid Interest Shortfall, Basis Risk Shortfall or
unpaid Basis Risk Shortfall (if applicable) and the related accrued
interest thereon, with respect to each class of Certificates;
- the Class Principal Amount of each class of Certificates after
giving effect to the distribution of principal on that Distribution
Date;
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- the Pool Balance, the Stated Principal Balance of the Mortgage Loans
in each Mortgage Pool, and the applicable Net WAC of the Mortgage
Loans in each Mortgage Pool at the end of the related Prepayment
Period;
- the Stated Principal Balance of the Mortgage Loans in each Mortgage
Pool whose Mortgage Rates adjust on the basis of the One-Month LIBOR
index and the Six-Month LIBOR index at the end of the related
Prepayment Period;
- the Pro Rata Senior Percentage, Senior Percentage and Subordinate
Percentage for each Mortgage Pool for the following Distribution
Date;
- the Senior Prepayment Percentage and Subordinate Prepayment
Percentage for each Mortgage Pool for the following Distribution
Date;
- in the aggregate and with respect to each Mortgage Pool, the amount
of the Servicing Fee paid to or retained by the Servicer;
- in the aggregate and with respect to each Mortgage Pool, the amount
of Monthly Advances for the related Due Period;
- in the aggregate and with respect to each Mortgage Pool, the number
and aggregate principal balance of the Mortgage Loans that were (A)
delinquent (exclusive of Mortgage Loans in foreclosure) (1) 30 to 59
days, (2) 60 to 89 days and (3) 90 or more days, (B) in foreclosure
and delinquent (1) 30 to 59 days, (2) 60 to 89 days and (3) 90 or
more days and (C) in bankruptcy as of the close of business on the
last day of the calendar month preceding that Distribution Date;
- in the aggregate and with respect to each Mortgage Pool, for any
Mortgage Loan as to which the related Mortgaged Property was an REO
property during the preceding calendar month, the loan number, the
principal balance of that Mortgage Loan as of the close of business
on the last day of the related Due Period and the date of
acquisition of the REO property;
- in the aggregate and with respect to each Mortgage Pool, the total
number and principal balance of any REO properties as of the close
of business on the last day of the preceding Due Period;
- in the aggregate and with respect to each Mortgage Pool, the amount
of Realized Losses incurred during the preceding calendar month;
- in the aggregate and with respect to each Mortgage Pool, the
cumulative amount of Realized Losses incurred since the Closing
Date;
- the aggregate amount of Special Hazard Losses, Bankruptcy Losses and
Fraud Losses incurred during the preceding calendar month;
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- the cumulative amount of Special Hazard Losses, Bankruptcy Losses
and Fraud Losses incurred since the Closing Date;
- the Special Hazard Limit, the Fraud Loss Limit and the Bankruptcy
Loss Coverage Amount, in each case as of the related determination
date;
- the Realized Losses and Excess Losses, if any, allocated to each
class of Certificates on that Distribution Date; and
- the Certificate Interest Rate for each class of Certificates for
that Distribution Date;
The Trustee may make available each month, to any interested party, the
monthly statement to Certificateholders via the Trustee's website. The Trustee's
website will be located at www.ctslink.com, and 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 notifying
the Trustee at the following address: Wells Fargo Bank Minnesota, National
Association, 9062 Old Annapolis Road, Columbia, Maryland 21045. The Trustee will
have the right to change the way such reports are distributed in order to make
such distributions more convenient and/or more accessible, and the Trustee will
provide timely and adequate notification to such parties regarding any such
changes.
In addition, within a reasonable period of time after the end of each
calendar year, the Trustee will, upon request, prepare and deliver to each
holder of a Certificate of record during the previous calendar year a statement
containing information necessary to enable holders of the Certificates to
prepare their tax returns. These statements will not have been examined and
reported upon by an independent public accountant.
FINAL SCHEDULED DISTRIBUTION DATE
The "Final Scheduled Distribution Date" for the Offered Certificates is
the Distribution Date in October 2027, which is the Distribution Date in the
month after the scheduled maturity date for the latest maturing Mortgage Loan.
The actual final Distribution Date of any class of Certificates may be earlier
or later, and could be substantially earlier, than such class's Final Scheduled
Distribution Date.
OPTIONAL CLEAN-UP REDEMPTION OF THE CERTIFICATES
On any Distribution Date on or after the Distribution Date (the
"Clean-Up Call Date") on which the aggregate outstanding principal balance of
the Mortgage Loans as of the related Due Date is equal to or less than 10% of
the aggregate principal balance of the Mortgage Loans (in the aggregate) as of
the Cut-off Date, the Depositor will have the option to sell the Mortgage Loans
and apply the proceeds to redeem the Certificates at a price equal to 100% of
the then aggregate outstanding Class Principal Amount of all the Certificates,
plus accrued interest thereon through the end of the Accrual Period immediately
preceding the related Distribution Date (excluding the amount of any unpaid
Basis Risk Shortfalls). Upon such redemption of the
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Certificates, any funds or property remaining in the Trust Fund will be
liquidated and the Trust Fund will terminate.
If the Depositor does not exercise its optional clean-up redemption
right on the initial Clean-Up Call Date and redeem the Certificates, then on the
immediately succeeding Distribution Date and each Distribution Date thereafter,
the applicable margin specified in clause (i) of the definition of Certificate
Interest Rate for the LIBOR Certificates will increase as described at
"Description of the Certificates -- Distributions of Interest."
THE TRUSTEE
Wells Fargo Bank Minnesota, National Association will be the Trustee
under the Trust Agreement. The Trustee will be entitled to retain as
compensation for its services any interest or other income earned on funds on
deposit in the Distribution Account prior to their distribution to
Certificateholders on the related Distribution Date. The Trustee will also be
entitled to reimbursement for certain expenses and other amounts prior to
payment of any amounts to Certificateholders. The Trustee's "Corporate Trust
Office" for purposes of presentment and for transfers and exchanges is located
at 6th Avenue and Marquette, Minneapolis, Minnesota 55479 (Attention: Sequoia
Mortgage Trust 10), and for all other purposes is located at P.O. Box 98,
Columbia, Maryland 21046 (or for overnight deliveries, 9062 Old Annapolis Road,
Columbia, Maryland 21045) or at such other addresses as the Trustee may
designate from time to time.
VOTING RIGHTS
The Class X-1A, Class X-1B, Class X-2 and Class X-B Certificates will be
allocated 3% of all voting rights and the other classes of Certificates will be
allocated 97% of all voting rights under the Trust Agreement. Voting rights will
be allocated among the classes of Certificates in proportion to their respective
Class Principal Amounts or Class Notional Amounts, and among Certificates of
such class in proportion to their Percentage Interests. The "Percentage
Interest" of a Certificate will be a fraction, expressed as a percentage, the
numerator of which is that Certificate's Certificate Principal Amount or
notional amount, and the denominator of which is the applicable Class Principal
Amount or Class Notional Amount.
THE SERVICER
Cendant, as servicer (the "Servicer"), will initially have primary
responsibility for servicing the Mortgage Loans, including, but not limited to,
all collection, advancing and loan-level reporting obligations, maintenance of
escrow accounts, maintenance of insurance and enforcement of foreclosure
proceedings with respect to the Mortgage Loans and related Mortgaged Properties.
Cendant's executive offices are located at 3000 Leadenhall Road, Mt. Laurel, New
Jersey 08054 and its telephone number is (856) 439-6000.
The delinquency, foreclosure and loss experience set forth below for
Cendant has been provided by Cendant and represents the historical experience of
the Servicer's entire portfolio of one-to four-family residential mortgage loans
for the periods indicated. No representation is made by Cendant, the Depositor,
the Trustee or any other entity that the delinquency and/or loss experience of
the Mortgage Loans will be similar to that of the servicing portfolio, nor is
any
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representation made by such servicer as to the rate at which losses may be
experienced on liquidation of defaulted Mortgage Loans.
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DELINQUENCY AND FORECLOSURE EXPERIENCE IN CENDANT'S PORTFOLIO
OF ONE-TO FOUR-FAMILY, RESIDENTIAL MORTGAGE LOANS(1)
AS OF AS OF AS OF
DECEMBER 31, 2000* DECEMBER 31, 2001 JUNE 30, 2002
----------------------- ----------------------- ------------------------
NUMBER PRINCIPAL NUMBER PRINCIPAL NUMBER PRINCIPAL
OF LOANS BALANCE OF LOANS BALANCE OF LOANS BALANCE
Total Portfolio ........... 623,196* $ 82,187 717,251 $ 97,205 754,304 $105,948
Period of Delinquency(2)(3)
30 to 59 days ............. 16,708 $ 1,917 19,594 $ 2,281 16,200 $ 1,877
Percent Delinquent ........ 2.7% 2.3% 2.7% 2.3% 2.1% 1.8%
60 to 89 days ............. 3,753 $ 374 4,174 $ 440 3,237 $ 336
Percent Delinquent ........ 0.6% 0.5% 0.6% 0.5% 0.4% 0.3%
90 day or more ............ 4,294 $ 396 3,900 $ 378 3,545 349
Percent Delinquent ........ 0.7% 0.5% 0.5% 0.4% 0.5% 0.3%
Total Delinquencies(4)..... 24,755 $ 2,687 27,668 $ 3,099 22,982 $ 2,562
Total Delinquencies by
Percent of Total Portfolio.. 4.0% 3.3% 3.9% 3.2% 3.0% 2.4%
Foreclosures, Bankruptcies
or Real Estate Owned ....... 4,561 $ 403 7,651 $ 696 7,167 661
Percent of Total Portfolio
in Foreclosure, Bankruptcy
or Real Estate Owned(5)..... 0.7% 0.5% 1.1% 0.7% 1.0% 0.6%
- ----------------------
* Includes approximately 46,982 MLCC Mortgage Loans subserviced by Cendant.
(1) The table shows mortgage loans which were delinquent or for which
foreclosure proceedings had been instituted as of the date indicated. All
dollar amounts are in millions and have been rounded to the nearest whole
number.
(2) No mortgage loan is included in this table as delinquent until it is 30
days past due.
(3) Bankruptcies are included in the delinquency calculations and also in the
"Foreclosure, Bankruptcies or Real Estate Owned" category. The Foreclosures
and Real Estate Owned categories are excluded from the delinquency
calculations.
(4) Entries may not add up to total due to rounding.
(5) Percentages stated are of the total servicing portfolio.
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While the above foreclosure and delinquency experience is typical of
Cendant's recent experience, there can be no assurance that the foreclosure and
delinquency experience on the Mortgage Loans will be similar. As a result of the
rapid growth experienced by Cendant, including its purchase of MLCC's first lien
mortgage servicing portfolio in April 2000, Cendant's servicing portfolio is
relatively unseasoned. Accordingly, the above information should not be
considered to reflect the credit quality of the Mortgage Loans, or as a basis
for assessing the likelihood, amount or severity of losses on the Mortgage
Loans. The statistical data in the table is based on all of the loans in
Cendant's servicing portfolio. The Mortgage Loans may be more recently
originated than, and also have other characteristics which distinguish them
from, the majority of the loans in Cendant's servicing portfolio.
Recent Developments. Pursuant to a merger with HFS Incorporated ("HFS")
in April 1997, PHH Corporation, the Servicer's parent, became a wholly-owned
subsidiary of HFS. On December 17, 1997, pursuant to a merger between CUC
International, Inc. ("CUC") and HFS, HFS was merged into CUC with CUC surviving
and changing its name to Cendant Corporation.
On April 15, 1998, Cendant Corporation announced that in the course of
transferring responsibility for its accounting functions from Cendant
Corporation personnel associated with CUC prior to the merger to Cendant
Corporation personnel associated with HFS before the merger and preparing for
the report of first quarter 1998 financial results, Cendant Corporation
discovered accounting irregularities in some of the CUC business units. As a
result, Cendant Corporation, together with its counsel and assisted by auditors,
immediately began an intensive investigation. As a result of the findings of the
investigation, Cendant Corporation restated its previously reported financial
results for 1997, 1996 and 1995 and the six months ended June 30, 1998.
After the April 15, 1998 announcement of the discovery of accounting
irregularities in the former CUC business units, approximately 70 lawsuits
claiming to be class actions, three lawsuits claiming to be brought derivatively
on behalf of Cendant Corporation and several other lawsuits and arbitration
proceedings were filed in various courts against Cendant Corporation and other
defendants.
In addition, the SEC and the United States Attorney for the District of
New Jersey conducted investigations relating to accounting irregularities. The
investigation of the SEC as to Cendant Corporation concluded on June 14, 2000
when Cendant Corporation consented to an entry of an Order Instituting Public
Administrative Proceedings in which the SEC found that Cendant Corporation had
violated certain record-keeping provisions of the federal securities laws,
Sections 13(a) and 13(b) of the Exchange Act and Rules 12b-20, 13a-1, 13a-13 and
13b2-1, and ordered Cendant Corporation to cease and desist from committing or
causing any violation and any future violation of those provisions.
On December 7, 1999, Cendant Corporation announced that it reached an
agreement in principle to settle the principal securities class action pending
against it in the United States District Court for the District of New Jersey.
In a settlement agreement executed March 17, 2000, Cendant Corporation agreed to
pay the class members approximately $2.85 billion in cash. On August 15, 2000,
the District Court approved the settlement and the plan of allocation of the
settlement proceeds and awarded fees and expenses to counsel for the class.
Certain parties who
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objected to the settlement, the plan of allocation or the award of attorneys'
fees and expenses appealed the District Court's orders to the United States
Court of Appeals for the Third Circuit. In August 2001, the Third Circuit
affirmed the District Court's order approving the settlement and plan of
allocation. On January 2, 2002, one party who had objected to the plan of
allocation before the District Court and unsuccessfully appealed the District
Court's approval of the plan of allocation filed a petition for a writ of
certiorari in the United States Supreme Court seeking review of the Third
Circuit's decision affirming the approval of the plan of allocation. The Supreme
Court denied the petition in an order dated March 18, 2002.
Cendant Corporation has since made payments totaling the settlement
amount of $2.85 billion, plus interest, to a fund established for the benefit of
the plaintiffs in this lawsuit.
The accounting irregularities described above did not include PHH
Corporation or any of its subsidiaries, including the Servicer.
SERVICING OF THE MORTGAGE LOANS
SERVICING AND COLLECTION PROCEDURES
The Servicer and the Seller are parties to two servicing agreements, one
governing the servicing of the Mortgage Loans and the other servicing of any
applicable Additional Collateral with respect to Additional Collateral Loans
(collectively, the "Servicing Agreement"), which agreement will be assigned by
the Seller to the Depositor and by the Depositor to the Trust Fund on the
Closing Date. Servicing functions to be performed by the Servicer under the
Servicing Agreement include collection and remittance of principal and interest
payments, administration of mortgage escrow accounts, collection of certain
insurance claims and, if necessary, foreclosure, administering the Additional
Collateral, and, as required, realizing upon the Additional Collateral for those
Additional Collateral Loans which come into and continue in default. The
Servicer may contract with subservicers to perform some or all of such
Servicer's servicing duties, but the Servicer will not thereby be released from
its obligations under the Servicing Agreement. When used herein with respect to
servicing obligations, the term Servicer includes a subservicer.
The Servicer will make reasonable efforts to collect all payments called
for under the Mortgage Loans and will, consistent with the Servicing Agreement
and any primary mortgage insurance policy, follow such collection procedures as
are customary with respect to mortgage loans that are comparable to the Mortgage
Loans. Consistent with the above, the Servicer may, in its discretion, (i) waive
any assumption fee, late payment or other charge in connection with a Mortgage
Loan and (ii) to the extent not consistent with the coverage of such Mortgage
Loan by a primary mortgage insurance policy, arrange with a mortgagor a schedule
for the liquidation of delinquencies. The Depositor's prior approval or consent
will be required for certain servicing activities such as modification of the
terms of any Mortgage Loan and the sale of any defaulted Mortgage Loan or REO
Property.
Pursuant to the Servicing Agreement, the Servicer will deposit
collections on the Mortgage Loans into the Custodial Account established by it.
The Custodial Account is required to be kept segregated from operating accounts
of the Servicer and to meet the eligibility criteria
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set forth in the Servicing Agreement. Under the Servicing Agreement, amounts on
deposit in the Custodial Account may be invested in certain permitted
investments described therein. Any losses resulting from such investments are
required to be reimbursed to the Custodial Account by the Servicer out of its
own funds.
On or before the Closing Date, the Trustee, on behalf of the Trust Fund,
will establish the Distribution Account into which the Servicer will remit all
amounts required to be deposited therein pursuant to the Servicing Agreement
(net of such Servicer's servicing compensation) on the 18th day of each month
(or, if the 18th is not a Business Day, on the immediately preceding Business
Day). Not later than the 15th day of each month (a "Determination Date"), the
Servicer will furnish to the Trustee information with respect to loan level
remittance data for such month's remittance.
Events of default under the Servicing Agreement include (i) any failure
of the Servicer to remit to the Distribution Account any required payment which
continues unremedied for a specified period after the giving of written notice
of such failure to the Servicer; (ii) any failure by the Servicer to make a
Monthly Advance as required under the Servicing Agreement, unless cured as
specified therein; (iii) any failure by the Servicer duly to observe or perform
in any material respect any of its other covenants or agreements in the
Servicing Agreement which continues unremedied for a specified period after the
giving of written notice of such failure to the Servicer; and (iv) certain
events of insolvency, readjustment of debt, marshalling of assets and
liabilities or similar proceeding and certain actions by or on behalf of the
Servicer indicating its insolvency, reorganization or inability to pay its
obligations.
In the event of a default by the Servicer, the Trustee will have the
right to remove the Servicer and will exercise that right if it considers such
removal to be in the best interest of the Certificateholders. In the event that
the Trustee removes the Servicer, the Trustee will act as successor servicer
under the Servicing Agreement or will appoint a successor servicer reasonably
acceptable to the Depositor. In connection with the removal of the Servicer, the
Trustee will be entitled to be reimbursed from the assets of the Trust Fund for
all of its reasonable costs associated with the termination of the Servicer and
the transfer of servicing to a successor servicer.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
The Servicer shall be entitled to receive, from interest actually
collected on each Mortgage Loan serviced by it, a servicing fee (the "Servicing
Fee") equal to the product of (1) the principal balance of such Mortgage Loan as
of the first day of the related Due Period and (2) a per annum rate (the
"Servicing Fee Rate") of 0.25%. The Servicer is also entitled to receive, as
additional servicing compensation, all late payment fees, assumption fees and
other similar charges and all reinvestment income earned on amounts on deposit
in the Custodial Accounts.
The amount of the Servicing Fee is subject to adjustment with respect to
prepaid Mortgage Loans, as described below under "-- Adjustment to Servicing
Fees in Connection with Certain Prepaid Mortgage Loans."
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ADJUSTMENT TO SERVICING FEES IN CONNECTION WITH CERTAIN PREPAID MORTGAGE LOANS
When a borrower prepays a Mortgage Loan in full or in part between Due
Dates, the borrower is required to pay interest on the amount prepaid only to
the date of prepayment and not thereafter. Principal prepayments by borrowers
received by the Servicer during the related Prepayment Period for a Distribution
Date will be distributed to Certificateholders on the related Distribution Date.
Thus, less than one month's interest may have been collected on Mortgage Loans
that have been prepaid in full or in part with respect to any Distribution Date.
Pursuant to the Servicing Agreement, the Servicing Fee for any month will be
reduced (but not below zero) by the amount of any Prepayment Interest Shortfall.
The amount of interest available to be paid to Certificateholders will be
reduced by any uncompensated Prepayment Interest Shortfalls.
ADVANCES
Subject to the limitations described in the following paragraph, the
Servicer will be required to advance prior to each Distribution Date, from its
own funds, or funds in its Custodial Account that are not otherwise required to
be remitted to the Distribution Account for such Distribution Date, an amount
equal to the scheduled payment of interest at the related Mortgage Rate (less
the Servicing Fee Rate) and scheduled principal payment on each Mortgage Loan
which were due on the related Due Date and which were not received prior to the
related Determination Date (any such advance, a "Monthly Advance").
Monthly Advances are intended to maintain a regular flow of scheduled
interest and principal payments on the Certificates rather than to guarantee or
insure against losses. The Servicer is obligated to make Monthly Advances with
respect to delinquent payments of interest and principal on each Mortgage Loan
serviced by it, to the extent that such Monthly Advances are, in its reasonable
judgment, recoverable from future payments and collections or insurance payments
or proceeds of liquidation of the related Mortgage Loans. Any failure by the
Servicer to make a Monthly Advance as required under the Servicing Agreement
will constitute a default thereunder, in which case the Trustee will be
required, as successor servicer, to make a Monthly Advance in accordance with
the terms of the Trust Agreement; provided, however, that in no event will the
Trustee be required to make a Monthly Advance that is not, in its reasonable
judgment, recoverable from future payments and collections or insurance payments
or proceeds of liquidation of the related Mortgage Loan. If the Servicer
determines on any Determination Date to make a Monthly Advance, such Monthly
Advance will be included with the payment to Certificateholders on the related
Distribution Date.
EVIDENCE AS TO COMPLIANCE
The Servicing Agreement provides that on or before a specified date in
each year, a firm of independent public accountants will furnish a statement to
the Depositor and the Trustee to the effect that, on the basis of the
examination by such firm conducted substantially in compliance with the Uniform
Single Attestation Program for Mortgage Bankers, the servicing by or on behalf
of the Servicer was conducted in compliance with its Servicing Agreement, except
for any significant exceptions or errors in records that, in the opinion of the
firm, the Uniform Single Attestation Program for Mortgage Bankers requires it to
report.
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The Servicing Agreement also provides for delivery to the Depositor and
the Trustee, on or before a specified date in each, of an annual officer's
certificate to the effect that the Servicer has fulfilled its obligations under
its Servicing Agreement throughout the preceding year.
RESIGNATION OF SERVICER; ASSIGNMENT AND MERGER
The Servicer may not resign from its obligations and duties under the
Servicing Agreement or assign or transfer its rights, duties or obligations
except (i) upon a determination that its duties thereunder are no longer
permissible under applicable law, (ii) in certain cases, upon the sale of
substantially all of its assets or (iii) upon a sale of its servicing rights
with respect to the Mortgage Loans with the prior written consent of the
Depositor, which consent may not be unreasonably withheld. No such resignation
will become effective until the Trustee or a successor servicer approved by it
has assumed the Servicer's obligations and duties under the Servicing Agreement.
Any person into which the Servicer may be merged or consolidated, any
person resulting from any merger or consolidation to which the Servicer is a
party, any person succeeding to the business of the Servicer or any person to
whom the Servicer assigns or transfers its duties and obligations, will be the
successor of the Servicer under the Servicing Agreement.
YIELD, PREPAYMENT AND WEIGHTED AVERAGE LIFE
GENERAL
The yields to maturity (or to early termination) of the Offered
Certificates will be affected by the rate of principal payments (including
prepayments, which may include amounts received by virtue of purchase,
condemnation, insurance or foreclosure) on the Mortgage Loans in the related
Mortgage Pool. Yields will also be affected by the extent to which Mortgage
Loans in the related Mortgage Pool bearing higher Mortgage Rates prepay at a
more rapid rate than Mortgage Loans with lower Mortgage Rates, the amount and
timing of borrower delinquencies and defaults resulting in Realized Losses, the
purchase price for the Offered Certificates and other factors.
Principal prepayments may be influenced by a variety of economic,
geographic, demographic, social, tax, legal and other factors. All of the
Mortgage Loans may be voluntarily prepaid in full or in part without the payment
of any penalty or premium. In general, if prevailing interest rates fall below
the interest rates on the Mortgage Loans, the Mortgage Loans are likely to be
subject to higher prepayments than if prevailing rates remain at or above the
interest rates on the Mortgage Loans. Conversely, if prevailing interest rates
rise above the interest rates on the Mortgage Loans, the rate of prepayment
would be expected to decrease. Other factors affecting prepayment of the
Mortgage Loans include such factors as changes in borrowers' housing needs, job
transfers, unemployment, borrowers' net equity in the mortgaged properties,
changes in the value of the mortgaged properties, mortgage market interest rates
and servicing decisions. The Mortgage Loans generally have due-on-sale clauses.
As of the Cut-off Date, approximately 61.32% and 38.68% of the Mortgage
Loans are Six-Month LIBOR Loans and One-Month LIBOR Loans, respectively.
Increases and decreases
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in the Mortgage Rate on a Mortgage Loan will be limited (except in the case of
the first rate adjustment) by the maximum Mortgage Rate and the minimum Mortgage
Rate, if any, and will be based on the applicable index in effect on the
applicable date prior to the related interest rate adjustment date plus the
applicable gross margin. The applicable index may not rise and fall consistently
with Mortgage Rates. As a result, the Mortgage Rates on the Mortgage Loans at
any time may not equal the prevailing mortgage interest rates for similar
adjustable rate loans, and accordingly the prepayment rate may be lower or
higher than would otherwise be anticipated. Moreover, some borrowers who prefer
the certainty provided by fixed rate mortgage loans may nevertheless obtain
adjustable rate mortgage loans at a time when they regard the mortgage interest
rates (and, therefore, the payments) on fixed rate mortgage loans as
unacceptably high. These borrowers may be induced to refinance adjustable rate
loans when the mortgage interest rates and monthly payments on comparable fixed
rate mortgage loans decline to levels which these borrowers regard as
acceptable, even though such mortgage interest rates and monthly payments may be
significantly higher than the current mortgage interest rates and monthly
payments on the borrowers' adjustable rate mortgage loans. The ability to
refinance a Mortgage Loan will depend on a number of factors prevailing at the
time refinancing is desired, including, without limitation, real estate values,
the borrower's financial situation, prevailing mortgage interest rates, the
borrower's equity in the related mortgaged property, tax laws and prevailing
general economic conditions.
The rate of principal payments on the Mortgage Loans will also be
affected by the amortization schedules of the Mortgage Loans, the rate and
timing of prepayments thereon, liquidations of defaulted Mortgage Loans and
purchases of Mortgage Loans due to certain breaches of representations and
warranties or defective documentation. The timing of changes in the rate of
prepayments, liquidations and purchases of the related Mortgage Loans may, and
the timing of Realized Losses will, significantly affect the yield to an
investor, even if the average rate of principal payments experienced over time
is consistent with an investor's expectation. Because the rate and timing of
principal payments on the Mortgage Loans will depend on future events and on a
variety of factors, no assurance can be given as to such rate or the timing of
principal payments on the Offered Certificates. In general, the earlier a
prepayment of principal of the related Mortgage Loans, the greater the effect on
an investor's yield. The effect on an investor's yield of principal payments
occurring at a rate higher (or lower) than the rate anticipated by the investor
during the period immediately following the issuance of the Certificates may not
be offset by a subsequent like decrease (or increase) in the rate of principal
payments.
From time to time, areas of the United States may be affected by
flooding, severe storms, landslides, wildfires, earthquakes or other natural
disasters. Under the Mortgage Loan Purchase Agreement, the Seller will represent
and warrant that as of the Closing Date each Mortgaged Property was free of
material damage. In the event of an uncured breach of this representation and
warranty that materially and adversely affects the interests of
Certificateholders, the Seller will be required to repurchase the affected
Mortgage Loan or substitute another mortgage loan therefor. If any damage caused
by flooding, storms, wildfires, landslides or earthquakes (or other cause)
occurs after the Closing Date, the Seller will not have any repurchase
obligation. In addition, the standard hazard policies covering the Mortgaged
Properties generally do not cover damage caused by earthquakes, flooding and
landslides, and earthquake, flood or landslide insurance may not have been
obtained with respect to such Mortgaged Properties. As a
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consequence, Realized Losses could result. To the extent that the insurance
proceeds received with respect to any damaged Mortgage Properties are not
applied to the restoration thereof, the proceeds will be used to prepay the
related Mortgage Loans in whole or in part. Any purchases or repayments of the
Mortgage Loans may reduce the weighted average lives of the Offered Certificates
and will reduce the yields on the Offered Certificates to the extent they are
purchased at a premium.
Prepayments, liquidations and purchases of the Mortgage Loans will
result in distributions to Certificateholders of principal amounts that would
otherwise be distributed over the remaining terms of such Mortgage Loans. The
rate of defaults on the Mortgage Loans will also affect the rate and timing of
principal payments on the Mortgage Loans. In general, defaults on Mortgage Loans
are expected to occur with greater frequency in their early years.
As described herein, none of the Mortgage Loans provide for monthly
payments of principal for the first ten years following origination. Instead,
only monthly payments of interest are due during such period. Other
considerations aside, due to such characteristics, borrowers may be disinclined
to prepay the Mortgage Loans during such 10-year period. In addition, because no
principal is due on the Mortgage Loans during the initial 10-year period, the
Certificates will amortize at a slower rate during such period than would
otherwise be the case. Thereafter, when the monthly payments on the Mortgage
Loans are recalculated on the basis of a 15 year level payment amortization
schedule, as described herein, principal payments on the Certificates are
expected to increase correspondingly, and, in any case, at a faster rate than if
payments on the Mortgage Loans were calculated on the basis of a 25 year
amortization schedule. Notwithstanding the foregoing, no assurance can be given
as to any prepayment rate on the Mortgage Loans.
As described under "Description of the Certificates -- Distributions of
Principal" herein, scheduled and unscheduled principal payments on the Mortgage
Loans in a Mortgage Pool will generally be allocated disproportionately to the
Senior Certificates (other than the Class 2A-2 Certificates) of the related
Certificate Group during the first ten years following the Closing Date (except
as described herein) or if certain conditions are met. Such allocation will
initially accelerate the amortization of the Senior Certificates. Because the
allocation of the Senior Principal Distribution Amount with respect to Pool 2
will be determined applying the same shifting interest rules used to determine
principal allocations between the Senior and Subordinate classes of
certificates, with limited exceptions, the Class 2A-2 Certificates generally
will not be entitled to its pro rata share of the Senior Percentage of scheduled
principal payments and Senior Prepayment Percentage of unscheduled principal
payments until the Distribution Date in October 2012.
The yields on the Offered Certificates may also be adversely affected by
Net Prepayment Interest Shortfalls. The Certificate Interest Rates and the
yields on the LIBOR Certificates, Class X-1A, Class X-1B, Class X-2 and Class
X-B Certificates will be affected by the level of LIBOR from time to time.
Likewise, the yield on each class of Offered Certificates will be affected by
the Mortgage Rates of the Mortgage Loans in the related Mortgage Pool from time
to time, as described under "Risk Factors -- Your Yield May Be Affected by
Changes in Interest Rates." No prediction can be made as to future levels of
One-Month LIBOR or Six-Month LIBOR or as to the timing of any changes therein.
S-88
The yields to investors in the Offered Certificates will be affected by
the exercise of the Depositor's option to redeem the Certificates, as described
herein. See "Description of the Certificates -- Optional Clean-Up Redemption of
the Certificates." If the purchaser of a Certificate offered at a discount from
its initial principal amount calculates its anticipated yield to maturity (or
early termination) based on an assumed rate of payment of principal that is
faster than that actually experienced on the related Mortgage Loans, the actual
yield may be lower than that so calculated.
Conversely, if the purchaser of a Class X-1A, Class X-1B, Class X-2 or
Class X-B Certificate or another Certificate offered at a premium, calculates
its anticipated yield based on an assumed rate of payment of principal that is
slower than that actually experienced on the related Mortgage Loans, the actual
yield may be lower than that so calculated.
The effective yield to holders of the Offered Certificates will be lower
than the yield otherwise produced by the applicable Certificate Interest Rate
and the related purchase price because monthly distributions will not be payable
to such holders until the 20th day of the month (or the immediately following
Business Day if such day is not a Business Day) following the month in which
interest accrues on the Mortgage Loans (without any additional distribution of
interest or earnings thereon in respect of such delay).
Prospective purchasers of the Class X-1A, Class X-1B, Class X-2 and
Class X-B Certificates should carefully consider the risk that a rapid rate of
principal payments on the Mortgage Loans could result in the failure of such
purchasers to recover their initial investments.
SUBORDINATION OF THE OFFERED SUBORDINATE CERTIFICATES
On each Distribution Date, the holders of classes of Certificates having
a relatively higher priority of distribution will have a preferential right to
receive amounts of interest and principal due them on such Distribution Date
before any distributions are made on any class of Certificates subordinate to
such higher ranking class. As a result, the yields to maturity and the aggregate
amount of distributions on the Class B-1, Class B-2 and Class B-3 Certificates
will be more sensitive than the yields of higher ranking Certificates to the
rate of delinquencies and defaults on the Mortgage Loans.
As more fully described herein, the principal portion of Realized Losses
(other than excess losses) on the Mortgage Loans will be allocated first to the
lower ranking class of Subordinate Certificates, then to the higher ranking
class of Subordinate Certificates, in inverse order of priority, until the Class
Principal Amount of each such class has been reduced to zero, before any such
Realized Losses will be allocated to the Senior Certificates; provided, however,
in the case of Group 2, on and after the Credit Support Depletion Date, Realized
Losses that would otherwise be allocated to the Class 2A-1 Certificates shall
first be allocated to the Class 2A-2 Certificates until the Class Principal
Amount of such class has been reduced to zero. The interest portion of Realized
Losses on the Mortgage Loans (other than excess losses) will reduce the amount
available for distribution on the related Distribution Date to the lowest
ranking related class outstanding on such date.
S-89
WEIGHTED AVERAGE LIFE
Weighted average life refers to the average amount of time that will
elapse from the date of issuance of a security to the date of distribution to
the investor of each dollar distributed in net reduction of principal of such
security (assuming no losses). The weighted average lives of the Offered
Certificates will be influenced by, among other things, the rate at which
principal of the related Mortgage Loans is paid, which may be in the form of
scheduled amortization, prepayments or liquidations.
For a discussion of the factors which may influence the rate of payments
(including prepayments) of the Mortgage Loans, see "Risk Factors -- Prepayments
are Unpredictable and Affect Yield" in the accompanying prospectus.
Prepayments of mortgage loans are commonly measured relative to a
prepayment standard or model. The model used in this prospectus supplement for
the Mortgage Loans is a Constant Prepayment Rate ("CPR"). CPR represents an
assumed constant rate of prepayment each month, relative to the then outstanding
principal balance of a pool of mortgage loans, for the life of such mortgage
loans.
CPR DOES NOT PURPORT TO BE EITHER A HISTORICAL DESCRIPTION OF THE
PREPAYMENT EXPERIENCE OF ANY POOL OF MORTGAGE LOANS OR A PREDICTION OF THE
ANTICIPATED RATE OF PREPAYMENT OF ANY POOL OF MORTGAGE LOANS, INCLUDING THE
MORTGAGE LOANS.
The tables beginning on page S-94 of this prospectus supplement were
prepared on the basis of the following assumptions (collectively, the
"Structuring Assumptions"): (i) distributions in respect of the Certificates are
received in cash on the 20th day of each month commencing in October 2002, (ii)
the Mortgage Loans prepay at the indicated percentages of CPR, (iii) no defaults
or delinquencies occur in the payment by borrowers of principal and interest on
the Mortgage Loans, and no shortfalls are incurred due to the application of the
Relief Act, (iv) the Seller is not required to purchase or substitute for any
Mortgage Loan, (v) scheduled monthly payments on the Mortgage Loans are received
on the first day of each month commencing in October 2002 and are computed prior
to giving effect to any prepayments received in the prior month, (vi)
prepayments are allocated as described herein without giving effect to loss and
delinquency tests, (vii) prepayments represent prepayments in full of individual
Mortgage Loans and are received on the last day of each month, commencing in
September 2002 and include 30 days' interest, (viii) the scheduled monthly
payment for each Mortgage Loan has been calculated based on the assumed mortgage
loan characteristics described in item (xiv) below such that each such Mortgage
Loan will amortize in amounts sufficient to repay the principal balance of such
assumed mortgage loan by its remaining term to maturity (taking into account any
interest-only period), (ix) interest accrues on each class of Certificates at
the applicable Certificate Interest Rate described under "Description of the
Certificates -- Distributions of Interest" in this prospectus supplement, (x)
the initial Class Principal Amount of each class of Certificates is as described
in this prospectus supplement, (xi) Six-Month LIBOR is 1.830% and One-Month
LIBOR is 1.820% at all times; (xii) no exercise of any optional clean-up
redemption will occur, except that this assumption does not apply to the
calculation of weighted average lives to the optional clean-up redemption,
(xiii) the Closing Date of the sale of the
S-90
Offered Certificates is September 26, 2002 and (xiv) the Mortgage Loans in each
Mortgage Pool are aggregated into assumed Mortgage Loans having the following
characteristics:
S-91
ASSUMED MORTGAGE LOAN CHARACTERISTICS
ORIGINAL REMAINING INTEREST-
CURRENT NET TERM TO TERM TO ONLY MAXIMUM MINIMUM NEXT RATE
MORTGAGE PRINCIPAL MORTGAGE MORTGAGE MATURITY MATURITY REMAINING GROSS MORTGAGE MORTGAGE ADJUSTMENT
POOL LOAN TYPE BALANCE($) RATE(%) RATE(%) (MONTHS) (MONTHS) (MONTHS) MARGIN(%) RATE(%) RATE(%) (MONTHS)
- -------- --------- ---------- -------- -------- -------- -------- --------- ---------- -------- --------- ----------
Pool 1 Six-Month LIBOR $244,170,498 3.767 3.517 300 299 119 1.836 12.000 1.836 5
Pool 1 Six-Month LIBOR $ 25,232,609 3.863 3.613 300 298 118 1.863 12.000 1.863 4
Pool 1 Six-Month LIBOR $174,441,524 3.604 3.354 300 300 120 1.825 12.000 1.825 6
Pool 1 One-Month LIBOR $406,162,466 3.598 3.348 300 299 119 1.767 12.000 1.767 1
Pool 2 Six-Month LIBOR $112,186,077 3.757 3.507 300 299 119 1.835 12.000 1.835 5
Pool 2 Six-Month LIBOR $ 12,673,991 3.859 3.609 300 298 118 1.866 12.000 1.866 4
Pool 2 Six-Month LIBOR $ 75,143,097 3.630 3.380 300 300 120 1.840 12.000 1.840 6
S-92
The actual characteristics and the performance of the Mortgage Loans
will differ from the assumptions used in constructing the tables set forth
below, which are hypothetical in nature and are provided only to give a general
sense of how the principal cash flows might behave under varying prepayment
scenarios. For example, it is not expected that the Mortgage Loans will prepay
at a constant rate until maturity, that all of the Mortgage Loans will prepay at
the same rate or that there will be no defaults or delinquencies on the Mortgage
Loans. Moreover, the diverse remaining terms to maturity and the Mortgage Rates
of the Mortgage Loans could produce slower or faster principal distributions
than indicated in the tables at the various percentages of CPR specified, even
if the weighted average remaining term to maturity and weighted average Mortgage
Rate of the Mortgage Loans are assumed. Any difference between such assumptions
and the actual characteristics and performance of the Mortgage Loans, or actual
prepayment or loss experience, will cause the percentages of initial Class
Principal Amounts outstanding over time and the weighted average lives of the
Offered Certificates to differ (which difference could be material) from the
corresponding information in the tables for each indicated percentage of CPR.
Subject to the foregoing discussion and assumptions, the following
tables indicate the weighted average lives of the Offered Certificates and set
forth the percentages of the initial Class Principal Amounts of the Offered
Certificates that would be outstanding after each of the Distribution Dates
shown at various percentages of CPR.
The weighted average life of an Offered Certificate is determined by (1)
multiplying the net reduction, if any, of the applicable Class Principal Amount
by the number of years from the date of issuance of the Offered Certificate to
the related Distribution Date, (2) adding the results and (3) dividing the sum
by the aggregate of the net reductions of Class Principal Amount described in
(1) above.
S-93
PERCENTAGE OF INITIAL CLASS PRINCIPAL AMOUNT OF THE OFFERED CERTIFICATES
OUTSTANDING AT THE FOLLOWING CPR
CLASS 1A CERTIFICATES
------------------------------------------
DISTRIBUTION DATE 10% 15% 20% 25% 30%
----------------- --- --- --- --- ---
Initial Percentage.......... 100% 100% 100% 100% 100%
September 2003.............. 90 84 79 74 69
September 2004.............. 80 71 63 55 47
September 2005.............. 72 60 50 41 33
September 2006.............. 64 51 40 30 23
September 2007.............. 58 43 32 23 16
September 2008.............. 52 36 25 17 11
September 2009.............. 46 31 20 13 8
September 2010.............. 42 26 16 10 5
September 2011.............. 37 22 13 7 4
September 2012.............. 34 19 10 5 3
September 2013.............. 29 15 8 4 2
September 2014.............. 24 12 6 3 1
September 2015.............. 21 10 4 2 1
September 2016.............. 17 8 3 1 1
September 2017.............. 14 6 2 1 *
September 2018.............. 12 5 2 1 *
September 2019.............. 10 4 1 * *
September 2020.............. 8 3 1 * *
September 2021.............. 6 2 1 * *
September 2022.............. 5 1 * * *
September 2023.............. 3 1 * * *
September 2024.............. 2 1 * * *
September 2025.............. 1 * * * *
September 2026.............. 1 * * * *
September 2027.............. 0 0 0 0 0
Weighted Average Life in Years
to maturity............... 7.79 5.63 4.28 3.37 2.73
to Optional Clean-Up
Redemption of the
Certificates............ 7.48 5.28 3.96 3.08 2.48
-------------------
* Indicates a value between 0.0% and 0.5%
S-94
PERCENTAGE OF INITIAL CLASS PRINCIPAL AMOUNT OF THE OFFERED CERTIFICATES
OUTSTANDING AT THE FOLLOWING CPR
CLASS 2A-1 CERTIFICATES
------------------------------------------
DISTRIBUTION DATE 10% 15% 20% 25% 30%
----------------- --- --- --- --- ---
Initial Percentage.......... 100% 100% 100% 100% 100%
September 2003.............. 89 84 79 74 68
September 2004.............. 80 71 62 54 46
September 2005.............. 71 59 49 40 32
September 2006.............. 64 50 39 30 22
September 2007.............. 57 42 31 22 16
September 2008.............. 51 36 25 17 11
September 2009.............. 45 30 20 13 8
September 2010.............. 41 26 16 9 5
September 2011.............. 37 22 13 7 4
September 2012.............. 33 19 10 5 3
September 2013.............. 28 15 8 4 2
September 2014.............. 24 12 6 3 1
September 2015.............. 20 10 4 2 1
September 2016.............. 17 8 3 1 *
September 2017.............. 14 6 2 1 *
September 2018.............. 12 5 2 1 *
September 2019.............. 9 4 1 * *
September 2020.............. 8 3 1 * *
September 2021.............. 6 2 1 * *
September 2022.............. 5 1 * * *
September 2023.............. 3 1 * * *
September 2024.............. 2 1 * * *
September 2025.............. 1 * * * *
September 2026.............. 1 * * * *
September 2027.............. 0 0 0 0 0
Weighted Average Life in Years
to maturity............... 7.70 5.56 4.23 3.32 2.69
to Optional Clean-Up
Redemption of the
Certificates............ 7.39 5.22 3.91 3.04 2.44
-------------------
* Indicates a value between 0.0% and 0.5%
S-95
PERCENTAGE OF INITIAL CLASS PRINCIPAL AMOUNT OF THE OFFERED
CERTIFICATES OUTSTANDING AT THE FOLLOWING CPR
CLASS 2A-2 CERTIFICATES
------------------------------------------
DISTRIBUTION DATE 10% 15% 20% 25% 30%
----------------- --- --- --- --- ---
Initial Percentage.......... 100% 100% 100% 100% 100%
September 2003.............. 100 100 100 100 100
September 2004.............. 100 100 100 100 98
September 2005.............. 100 100 100 91 82
September 2006.............. 100 100 80 68 57
September 2007.............. 100 86 64 51 40
September 2008.............. 100 73 51 38 28
September 2009.............. 93 62 41 29 20
September 2010.............. 84 53 33 21 14
September 2011.............. 75 45 26 16 10
September 2012.............. 68 38 21 12 7
September 2013.............. 58 31 16 9 4
September 2014.............. 49 25 12 6 3
September 2015.............. 41 20 9 4 2
September 2016.............. 35 16 7 3 1
September 2017.............. 29 12 5 2 1
September 2018.............. 24 10 4 1 1
September 2019.............. 19 7 3 1 *
September 2020.............. 16 6 2 1 *
September 2021.............. 12 4 1 * *
September 2022.............. 9 3 1 * *
September 2023.............. 7 2 1 * *
September 2024.............. 5 1 * * *
September 2025.............. 3 1 * * *
September 2026.............. 1 * * * *
September 2027.............. 0 0 0 0 0
Weighted Average Life in Years
to maturity............... 12.80 9.45 7.26 6.06 5.19
to Optional Clean-Up
Redemption of the
Certificates............ 12.17 8.74 6.60 5.40 4.55
-----------------------
* Indicates a value between 0.0% and 0.5%
S-96
PERCENTAGE OF INITIAL CLASS PRINCIPAL AMOUNT OF THE OFFERED CERTIFICATES
OUTSTANDING AT THE FOLLOWING CPR
CLASS B-1, CLASS B-2, CLASS B-3 CERTIFICATES
--------------------------------------------
DISTRIBUTION DATE 10% 15% 20% 25% 30%
----------------- --- --- --- --- ---
Initial Percentage.......... 100% 100% 100% 100% 100%
September 2003.............. 100 100 100 100 100
September 2004.............. 100 100 100 100 100
September 2005.............. 100 100 100 92 84
September 2006.............. 100 100 83 69 59
September 2007.............. 100 90 66 52 41
September 2008.............. 100 76 53 39 29
September 2009.............. 96 65 43 29 20
September 2010.............. 86 55 34 22 14
September 2011.............. 78 47 27 16 10
September 2012.............. 70 40 22 12 7
September 2013.............. 59 32 16 9 5
September 2014.............. 50 26 12 6 3
September 2015.............. 43 20 9 4 2
September 2016.............. 36 16 7 3 1
September 2017.............. 30 13 5 2 1
September 2018.............. 24 10 4 1 1
September 2019.............. 20 8 3 1 *
September 2020.............. 16 6 2 1 *
September 2021.............. 12 4 1 * *
September 2022.............. 9 3 1 * *
September 2023.............. 7 2 1 * *
September 2024.............. 5 1 * * *
September 2025.............. 3 1 * * *
September 2026.............. 1 * * * *
September 2027.............. 0 0 0 0 0
Weighted Average Life in Years
to maturity............... 12.98 9.68 7.42 6.11 5.26
to Optional Clean-Up
Redemption of the
Certificates............ 12.33 8.94 6.74 5.45 4.61
-----------------------
* Indicates a value between 0.0% and 0.5%
S-97
SENSITIVITY OF THE CLASS X-1A, CLASS X-1B, CLASS X-2 AND CLASS X-B CERTIFICATES
The yields to maturity of the Class X-1A, Class X-1B, Class X-2 and
Class X-B Certificates will be highly sensitive to the prepayment, repurchase
and default experience of both the One-Month LIBOR Loans and Six-Month LIBOR
Loans. Investors should carefully consider the associated risks, including the
risk that a rapid rate of principal prepayments on the related Mortgage Loans or
purchases of such Mortgage Loans could result in the failure of investors in
such Certificates to recover their initial investment.
The following tables (the "Yield Tables") were prepared on the basis of
the Structuring Assumptions, but assuming the exercise of the optional clean-up
redemption, and demonstrate the sensitivity of the pre-tax yields on the Class
X-1A, Class X-1B, Class X-2 and Class X-B Certificates to various constant rates
of prepayment by projecting the aggregate payments of interest on such
Certificates and the corresponding pre-tax yields on a corporate bond equivalent
("CBE") basis, assuming distributions on the Mortgage Loans are made as set
forth in the Trust Agreement.
PRE-TAX YIELD (%) ON THE CLASS X-1A CERTIFICATES
(PRICED TO CALL)
ASSUMED CPR
PURCHASE PRICE (%)* 10% 15% 20% 25% 30% 35%
- ------------------- ---- ---- ---- --- ---- -----
1.55987 65.7 58.2 50.6 42.4 33.6 24.0
2.30987 39.0 32.2 25.0 17.0 8.1 (1.6)
3.05987 26.0 19.4 12.2 4.0 (5.3) (15.3)
- ----------------------
* The price shown does not include accrued interest. Accrued interest has
been added to such price for calculating the yields set forth in the table
above.
PRE-TAX YIELD (%) ON THE CLASS X-1B CERTIFICATES
(PRICED TO CALL)
ASSUMED CPR
PURCHASE PRICE (%)* 10% 15% 20% 25% 30% 35%
- ------------------- ---- ---- ---- --- ---- -----
1.72894 63.1 55.8 48.1 40.0 31.2 21.7
2.47894 39.0 32.2 25.0 17.0 8.1 (1.6)
3.22894 26.7 20.0 12.8 4.7 (4.6) (14.6)
- ----------------------
* The price shown does not include accrued interest. Accrued interest has
been added to such price for calculating the yields set forth in the table
above.
S-98
PRE-TAX YIELD (%) ON THE CLASS X-2 CERTIFICATES
(PRICED TO CALL)
CPR
ASSUMED 10% 15% 20% 25% 30% 35%
PURCHASE PRICE (%)* ---- ---- ---- --- ---- -----
1.76574 62.7 55.3 47.7 39.5 30.7 21.1
2.51574 39.1 32.2 25.0 17.0 8.0 (1.7)
3.26574 26.8 20.2 12.9 4.8 (4.5) (14.6)
- ----------------------
* The price shown does not include accrued interest. Accrued interest has
been added to such price for calculating the yields set forth in the
table above.
PRE-TAX YIELD (%) ON THE CLASS X-B CERTIFICATES
(PRICED TO CALL)
CPR
ASSUMED 10% 15% 20% 25% 30% 35%
PURCHASE PRICE (%)* ---- ---- ---- --- ---- -----
1.32429 53.4 51.8 48.8 45.7 42.3 38.0
2.07429 31.9 29.2 25.0 20.6 16.0 10.5
2.82429 21.6 18.1 13.1 7.9 2.3 (3.9)
- ----------------------
* The price shown does not include accrued interest. Accrued interest has
been added to such price for calculating the yields set forth in the table
above.
The pre-tax yields set forth in the preceding tables were calculated by
determining the monthly discount rates which, when applied to the assumed
streams of cash flows to be paid on the Class X-1A, Class X-1B, Class X-2 and
Class X-B Certificates, would cause the discounted present value of such assumed
stream of cash flows to the Closing Date to equal the assumed purchase prices
(plus accrued interest), and converting such monthly rates to CBE rates. Such
calculation does not take into account the interest rates at which funds
received by Certificateholders as distributions on the Class X-1A, Class X-1B,
Class X-2 and Class X-B Certificates may be reinvested and consequently does not
purport to reflect the return on any investment in such Certificates when such
reinvestment rates are considered.
It is highly unlikely that the related Mortgage Loans will prepay at the
same rate until maturity or that all of the Mortgage Loans will prepay at the
same rate or time or that prepayments will be spread evenly among Mortgage Loans
with differing gross margins. As a result of these factors, the pre-tax yields
on the Class X-1A, Class X-1B, Class X-2 and Class X-B Certificates are likely
to differ from those shown in such tables, even if all of the related Mortgage
Loans prepay at the indicated percentages of CPR. No representation is made as
to the actual rate of principal payments on the Mortgage Loans (or the Mortgage
Rates thereon) for any period or over the lives of the Class X-1A, Class X-1B,
Class X-2 and Class X-B Certificates or as to the yields on such Certificates.
Investors must make their own decisions as to the appropriate prepayment
assumptions to be used in deciding whether to purchase such Certificates.
S-99
USE OF PROCEEDS
The net proceeds from the sale of the Offered Certificates will be
applied by the Depositor to pay for the acquisition of the Mortgage Loans from
the Seller. See "Use of Proceeds" in the accompanying prospectus and "Method of
Distribution" in this prospectus supplement.
FEDERAL INCOME TAX CONSEQUENCES
For federal income tax purposes, the Trust Fund will be deemed to
include two segregated asset pools referred to as the Upper-Tier REMIC and the
Lower-Tier REMIC. The Lower Tier REMIC will hold as its assets the assets
included in the Trust Fund other than the Additional Collateral and the Basis
Risk Reserve Fund. The Upper Tier REMIC will hold as its assets the several
uncertificated regular interests in the Lower-Tier REMIC. Elections will be made
to treat each pool as a separate REMIC for federal income tax purposes. The
Certificates, other than the Class A-R Certificate, will represent ownership of
regular interests in the Upper-Tier REMIC, and the Class A-R Certificate will
represent ownership of the residual interest in the Upper-Tier REMIC and the
Class LT-R Certificate will represent ownership of the residual interest in the
Lower-Tier REMIC. All prospective investors should review the discussion under
"Federal Income Tax Consequences" in the accompanying prospectus.
The regular interests may be treated as having been issued with original
issue discount. The prepayment assumption that will be used for purposes of
computing original issue discount, if any, for federal income tax purposes is a
CPR of 20%. No representation is made that the Mortgage Loans will, in fact,
prepay at any of those rates or any other rate.
Under federal income tax law, a Certificateholder, beneficial owner,
financial intermediary or other recipient of a payment on behalf of a beneficial
owner may be subject to backup withholding at a rate generally equal to the
fourth lowest rate of income tax then in effect. See "Federal Income Tax
Consequences -- Backup Withholding" in the accompanying prospectus for a general
discussion of the mechanics of backup withholding.
ADDITIONAL TAX CONSIDERATIONS APPLICABLE TO THE LIBOR CERTIFICATES
Each LIBOR Certificate will represent a beneficial interest in the right
to receive payments from the Basis Risk Reserve Fund pursuant to the provisions
of the Trust Agreement. For information reporting purposes, the Trustee will
treat the entitlement to such payments as an interest in interest rate cap
contracts written by the Class X-1A, Class X-1B, Class X-2 and Class X-B
Certificateholders in favor of the holders of the related LIBOR Certificates
(the "Interest Rate Cap Agreements"), and, under the terms of the Trust
Agreement, each holder of a LIBOR Certificate and the Class X-1A, Class X-1B,
Class X-2 and Class X-B Certificateholders will agree, by virtue of their
purchase of such Certificates, to adopt a tax reporting position consistent with
that characterization. Alternative characterizations of such rights are,
however, possible. For instance, the right to receive such payments could be
classified for federal income tax purposes as an interest in a partnership
formed among the affected Certificateholders to share cash flows from the Class
X-1A, Class X-1B, Class X-2 and Class X-B Certificates. Such an alternative
characterization would result in tax treatment of payments of Basis Risk
Shortfalls that would differ from that which is described below. Prospective
investors in the LIBOR
S-100
Certificates should consult their tax advisors regarding the tax treatment of
the rights of the holders of such Certificates to receive payments in respect of
Basis Risk Shortfalls.
A holder of a LIBOR Certificate must allocate its purchase price for
such Certificate between its two components -- the regular interest component
and the Interest Rate Cap Agreements component. For information reporting
purposes, the Trustee will assume that, with respect to a LIBOR Certificate, the
Interest Rate Cap Agreements component will have only nominal value relative to
the value of the regular interest component. The IRS could argue, however, that
the Interest Rate Cap Agreements component has significant value, and if that
argument were to be sustained, the regular interest component could be viewed as
having been issued with an additional amount of original issue discount ("OID")
(which could cause the total amount of discount to exceed a statutorily defined
de minimis amount). See "Federal Income Tax Consequences -- REMIC Securities --
Taxation of Regular Interest Securities -- Original Issue Discount" in the
accompanying prospectus.
Upon the sale, exchange, or other disposition of a LIBOR Certificate,
the holder must allocate the amount realized between the two components of such
Certificate based on the relative fair market values of those components at the
time of sale. Assuming that a LIBOR Certificate is held as a capital asset
within the meaning of Section 1221 of the Code, gain or loss on the disposition
of an interest in the Interest Rate Cap Agreements component should be capital
gain or loss, and, gain or loss on the disposition of the regular interest
component should, subject to the limitation described below, be capital gain or
loss. Except for any amounts of accrued but unrecognized market discount, and
except as provided in this paragraph, any gain or loss on the sale or exchange
of the regular interest component of a LIBOR Certificate realized by an investor
who holds such Certificate as a capital asset will be capital gain or loss and
will be long-term or short-term depending on whether the Certificate has been
held for the long-term capital gain holding period (currently more than one
year). Such gain will be treated as ordinary income (i) if the Certificate is
held as part of a conversion transaction, as described in Code Section 1258(c),
up to the amount of interest that would have accrued on the holder's net
investment in the conversion transaction at 120% of the appropriate applicable
Federal rate under Code Section 1274(d) in effect at the time the holder entered
into the transaction minus any amount previously treated as ordinary income with
respect to any prior disposition of property that was held as a part of such
transaction, (ii) in the case of a non-corporate taxpayer, to the extent such
taxpayer has made an election under Code Section 163(d)(4) to have net capital
gains taxed as investment income at ordinary income rates, or (iii) to the
extent that such gain does not exceed the excess, if any, of (a) the amount that
would have been includable in the gross income of the holder if its yield on
such Certificate were 110% of the applicable Federal rate as of the date of
purchase, over (b) the amount of income actually includable in the gross income
of such holder with respect to such Certificate. In addition, gain or loss
recognized from the sale of a LIBOR Certificate by certain banks or thrift
institutions will be treated as ordinary income or loss pursuant to Code Section
582(c). Long-term capital gains of certain non-corporate taxpayers are subject
to a lower minimum tax rate than ordinary income of such taxpayers for property
held for more than one year. The maximum tax rate for corporations is the same
with respect to both ordinary income and capital gains.
As indicated above, a portion of the purchase price paid by a holder to
acquire a LIBOR Certificate will be attributable to the Interest Rate Cap
Agreements component of such Certificate. The portion of the overall purchase
price attributable to the Interest Rate Cap Agreements component must be
amortized over the life of such LIBOR Certificate, taking into
S-101
account the declining balance of the related regular interest component.
Treasury regulations concerning notional principal contracts provide alternative
methods for amortizing the purchase price of an interest rate cap contract.
Under one method -- the level yield constant interest method -- the price paid
for an interest rate cap agreement is amortized over the life of the cap as
though it were the principal amount of a loan bearing interest at a reasonable
rate. Certificateholders are urged to consult their tax advisors concerning the
methods that can be employed to amortize the portion of the purchase price paid
for the Interest Rate Cap Agreements component of a LIBOR Certificate.
Any payments made to a holder of a LIBOR Certificate from the Basis Risk
Reserve Fund will be treated as periodic payments on an interest rate cap
agreement. To the extent the sum of such periodic payments for any year exceed
that year's amortized cost of the Interest Rate Cap Agreements component, such
excess is ordinary income. If for any year the amount of that year's amortized
cost exceeds the sum of the periodic payments, such excess is allowable as an
ordinary deduction. A beneficial owner's ability to recognize a net deduction
with respect to the Interest Rate Cap Agreement component is limited under
Sections 67 and 68 of the Code in the case of (i) estates and trusts and (ii)
individuals owning an interest in such component directly or through a
"pass-through entity" (other than in connection with such individual's trade or
business). Pass-through entities include partnerships, S corporations, grantor
trusts, REMICs and non-publicly offered regulated investment companies, but do
not include estates, nongrantor trusts, cooperatives, real estate investment
trusts and publicly-offered regulated investment companies. Further, such a
beneficial owner will not be able to recognize a net deduction with respect to
the Interest Rate Cap Agreement component in computing the beneficial owner's
alternative minimum tax liability.
The regular interest component of each LIBOR Certificate will be treated
as (i) assets described in Section 7701(a)(19)(C) of the Internal Revenue Code
of 1986, as amended (the "Code") and (ii) "real estate assets" under Section
856(c)(4)(A) of the Code, in the same proportion that the assets of the Trust
Estate, exclusive of the Basis Risk Reserve Fund, would be so treated. The
Interest Rate Cap Agreements component of the LIBOR Certificates will not be
treated as assets described in Section 7701(a)(19)(C) of the Code or "real
estate assets" under Section 856(c)(4)(A) of the Code.
THE CLASS A-R CERTIFICATES
Special tax considerations apply to an investment in the Class A-R
Certificates. In certain circumstances, the Class A-R Certificates can produce a
significantly less favorable after-tax return for a beneficial owner than would
be the case if (i) the Class A-R Certificate were taxable as a debt instrument,
or (ii) no portion of taxable income allocated to the Class A-R Certificate were
"excess inclusion" income. See "Federal Income Tax Consequences --REMIC
Securities--Taxation of Holders of Residual Interest Securities" in the
Prospectus.
Under applicable Treasury regulations, if a Class A-R Certificate is a
"noneconomic residual interest," as described in the Prospectus, the transfer of
a Class A-R Certificate to a U.S. Person will be disregarded for all federal tax
purposes unless no significant purpose of the transfer was to impede the
assessment of collection of tax. The Prospectus describes a safe harbor set out
under existing regulations under which certain transfers of Class A-R
Certificates would be presumed not to have a significant purpose of impeding the
assessment or collection of tax. Under final regulations issued by the Treasury
Department on July 19, 2002 (the "FINAL REGULATIONS") a transfer of a
noneconomic residual interest will not qualify under this safe
S-102
harbor unless either (a) the present value of the anticipated tax liabilities
associated with holding the residual interest does not exceed the present value
of the sum of (i) any consideration given to the transferee to acquire the
interest, (ii) expected future distributions on the interest, and (iii) any
anticipated tax savings associated with holding the interest as the REMIC
generates losses or (b) the transfer is to certain domestic taxable corporations
with large amounts of gross and net assets where an agreement is made that all
future transfers will be to taxable domestic corporations in transactions that
qualify for one of the "safe harbor" provisions. Part (b) of this safe harbor is
not available if the facts and circumstances known to the transferor reasonably
indicate that the taxes associated with the noneconomic residual interest will
not be paid.
In addition, under the Final Regulations, the safe harbor applies only
if the transferee represents that income from the Class A-R Certificate will not
be attributed to a foreign permanent establishment or fixed base of the
transferee or another U.S. taxpayer. The Final Regulations generally apply to
transfers of noneconomic residual interests after February 3, 2000, and thus
generally will apply to transfers of the Class A-R Certificates. The Final
Regulations contain additional detail regarding their application, and
prospective investors in the Class A-R Certificates should consult their own tax
advisors regarding the application of the Final Regulations to a transfer of the
Class A-R Certificates.
ERISA MATTERS
The Employee Retirement Income Security Act of 1974, as amended
("ERISA") and the Code impose requirements on certain employee benefit plans --
and on certain other retirement plans and arrangements, including individual
retirement accounts and annuities, Keogh plans and collective investment funds
and separate accounts in which plans, accounts or arrangements are invested --
and on persons who are fiduciaries with respect to these types of plans and
arrangements (together, "Plans").
ERISA prohibits "parties in interest" with respect to a Plan from
engaging in certain transactions involving the Plan and its assets unless a
statutory, regulatory or administrative exemption applies to the transaction.
Section 4975 of the Code imposes certain excise taxes on prohibited transactions
involving plans described under that section; ERISA authorizes the imposition of
civil penalties for prohibited transactions involving plans not covered under
Section 4975 of the Code. Any Plan fiduciary which proposes to cause a Plan to
acquire any of the Offered Certificates should consult with its counsel with
respect to the potential consequences under ERISA and the Code of the Plan's
acquisition and ownership of such Certificates. See "ERISA Considerations" in
the accompanying prospectus.
Certain employee benefit plans, including governmental plans and certain
church plans, are not subject to ERISA's requirements. Accordingly, assets of
those plans may be invested in the Offered Certificates without regard to the
ERISA considerations described in this prospectus supplement and in the
accompanying prospectus, subject to the provisions of other applicable federal
and state law. Any such plan which is qualified and exempt from taxation under
Sections 401(a) and 501(a) of the Code may nonetheless be subject to the
prohibited transaction rules set forth in Section 503 of the Code.
Investments by Plans that are subject to ERISA are subject to ERISA's
general fiduciary requirements, including the requirement of investment prudence
and diversification and the requirement that a Plan's investments be made in
accordance with the documents governing the
S-103
Plan. A fiduciary which decides to invest the assets of a Plan in the Offered
Certificates should consider, among other factors, the extreme sensitivity of
the investments to the rate of principal payments (including prepayments) on the
Mortgage Loans.
The U.S. Department of Labor has granted to Merrill Lynch, Prohibited
Transaction Exemption ("PTE") 90-29 (55 Fed. Reg. 21459 (1990)), as amended by
PTE 2000-58 (65 Fed. Reg. 67765 (2000)) and PTE 2002-41 (67 Fed. Reg. 54487
(2002)) (the "Underwriter's Exemption"), which exempts from the application of
the prohibited transaction rules transactions relating to:
- the acquisition, holding and sale by Plans of certain securities
issued by a trust with respect to which Merrill Lynch or any of its
affiliates is the sole underwriter or the manager or co-manager of
the underwriting syndicate, and
- the servicing, operation and management of such trusts,
provided that the general conditions and certain other requirements set forth in
the exemption are satisfied.
Each of the conditions listed below must be satisfied for the exemption
to apply:
- The acquisition of the Offered Certificates by a Plan is on terms
(including the price for the Certificates) that are at least as
favorable to the Plan as they would be in an arm's length
transaction with an unrelated party.
- The Offered Certificates acquired by the Plan have received a rating
at the time of such acquisition that is one of the four highest
generic rating categories from a rating agency identified in the
exemption, such as S&P, Fitch Ratings or Moody's.
- The Trustee must not be an affiliate of any other member of the
"restricted group" (as defined below in the second following
paragraph) other than the Underwriters.
- The sum of all payments made to and retained by the Underwriters in
connection with the distribution of the Offered Certificates
represents not more than reasonable compensation for Underwriting
the Offered Certificates; the sum of all payments made to and
retained by the Seller and the Depositor pursuant to the assignment
of the trust assets to the Trust Fund represents not more than the
fair market value of such assets; the sum of all payments made to
and retained by the Servicer represents not more than reasonable
compensation for the Servicer's services under the Servicing
Agreement and reimbursements of such person's reasonable expenses in
connection therewith.
- The Plan investing in the Offered Certificates is an "accredited
investor" as defined in Rule 501(a)(1) of Regulation D of the SEC
under the Securities Act of 1933.
The Trust Fund must also meet each of the requirements listed below:
- The Mortgage Pool must consist solely of assets of the type that
have been included in other investment pools.
S-104
- Certificates representing beneficial ownership in such other
investment pools must have been rated in one of the three highest
generic rating categories (four, if the investment pool contains
certain types of assets) by a rating agency for at least one year
prior to the Plan's acquisition of Offered Certificates.
- Certificates evidencing beneficial ownership in such other
investment pools must have been purchased by investors other than
Plans for at least one year prior to any Plan's acquisition of
Offered Certificates.
Moreover, the exemption provides relief from certain
self-dealing/conflict of interest prohibited transactions that may occur when
the Plan fiduciary causes a Plan to acquire indebtedness of a trust holding
receivables as to which the fiduciary (or its affiliate) is an obligor provided,
among other requirements, that:
- in the case of an acquisition in connection with the initial
issuance of Certificates, at least 50% of each class of Certificates
in which Plans have invested and at least 50% of the aggregate
interests in the trust is acquired by persons independent of the
restricted group;
- such fiduciary (or its affiliate) is an obligor with respect to not
more than 5% of the fair market value of the obligations contained
in the trust;
- the Plan's investment in Offered Certificates of any class does not
exceed 25% of all of the Certificates of that class outstanding at
the time of the acquisition; and
- immediately after the acquisition, no more than 25% of the assets of
any Plan with respect to which such person is a fiduciary are
invested in securities representing indebtedness of one or more
issuers containing assets sold or serviced by the same entity.
This relief does not apply to Plans sponsored by members of the "restricted
group" consisting of the Depositor, the Servicer, the Trustee, any indemnitor or
any obligor with respect to Mortgage Loans included in the assets of the Trust
Fund constituting more than 5% of the aggregate unamortized principal balance of
the assets of the Trust Fund, or any affiliate of these parties.
It is expected that the exemption will apply to the acquisition and
holding by Plans of the Offered Certificates (except for the Class A-R
Certificate) and that all conditions of the exemption other than those within
the control of the investors will be met.
The rating of a class of Offered Certificates may change. If a class of
Offered Certificates no longer has a rating of at least "BBB-," Certificates of
that class will no longer be eligible for relief under the exemption, and
consequently may not be purchased by or sold to a Plan (although a Plan that had
purchased the Certificate when it had an investment-grade rating would not be
required by the exemption to dispose of it).
BECAUSE THE CHARACTERISTICS OF THE CLASS A-R CERTIFICATE MAY NOT MEET
THE REQUIREMENTS OF THE EXEMPTION DISCUSSED ABOVE OR ANY OTHER ISSUED EXEMPTION
UNDER ERISA INCLUDING PROHIBITED TRANSACTION CLASS EXEMPTION ("PTCE") 83-1, THE
PURCHASE AND HOLDING OF THE CLASS A-R CERTIFICATE BY A PLAN OR BY INDIVIDUAL
RETIREMENT
S-105
ACCOUNTS OR OTHER PLANS SUBJECT TO SECTION 4975 OF THE CODE MAY RESULT IN
PROHIBITED TRANSACTIONS OR THE IMPOSITION OF EXCISE TAXES OR CIVIL PENALTIES.
CONSEQUENTLY, THE INITIAL ACQUISITION AND TRANSFER OF THE CLASS A-R CERTIFICATE
WILL NOT BE REGISTERED BY THE TRUSTEE UNLESS THE TRUSTEE RECEIVES:
- a representation from the acquiror or transferee of the Class A-R
Certificate to the effect that the transferee is not an employee
benefit plan subject to section 406 of ERISA or a plan or
arrangement subject to section 4975 of the Code, nor a person acting
on behalf of any such plan or arrangement nor using the assets of
any such plan or arrangement to effect such transfer, or
- if the purchaser is an insurance company, a representation that the
purchaser is an insurance company which is purchasing the Class A-R
Certificate with funds contained in an "insurance company general
account" (as such term is defined in Section V(e) of PTCE 95-60) and
that the purchase and holding of the Class A-R Certificate are
covered under Section I and III of PTCE 95-60.
Prospective Plan investors should consult with their legal advisors
concerning the impact of ERISA and the Code, the applicability of the exemption
described above and PTCE 83-1 described in the prospectus, and the potential
consequences in their specific circumstances prior to making an investment in
the Offered Certificates. Moreover, each Plan fiduciary should determine whether
under the general fiduciary standards of investment prudence and
diversification, an investment in the Offered Certificates is appropriate for
the Plan, taking into account the overall investment policy of the Plan and the
composition of the Plan's investment portfolio.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting
Agreement among Redwood Trust, Inc., the Seller, the Depositor and Merrill Lynch
and Greenwich Capital Markets, Inc. (together, the "Underwriters"), the
Depositor has agreed to sell to the Underwriters, and the Underwriters have
agreed to purchase from the Depositor, the initial Class Principal Amount of
each class of Offered Certificates, as set forth below. Distribution of the
Offered Certificates will be made by the Underwriters from time to time in
negotiated transactions or otherwise at varying prices to be determined at the
time of sale. In connection with the sale of the Offered Certificates, the
Underwriters may be deemed to have received compensation from the Depositor in
the form of underwriting discounts.
S-106
MERRILL LYNCH,
FENNER & SMITH GREENWICH CAPITAL
CLASS INCORPORATED MARKETS, INC.
1A $657,900,000 $164,475,000
2A-1 $152,000,000 $ 38,000,000
2A-2 $ 2,800,000 $ 700,000
X-1A $392,959,800(1) --
X-1B $429,415,200(1) --
X-2 $193,500,000(1) --
X-B $ 25,725,000(1) --
A-R $ 100 --
B-1 $ 12,600,000 --
B-2 $ 8,400,000 --
B-3 $ 4,725,000 --
---------------------
(1) Indicates the Initial Class Notional Amount of such interest-only
class.
Merrill Lynch has agreed to sell the Class X-1A, Class X-1B, Class X-2
and Class X-B Certificates to an affiliate of the Depositor on the Closing Date.
The Underwriters intend to make a secondary market in the Offered
Certificates, but have no obligation to do so. There can be no assurance that a
secondary market for the Offered Certificates will develop or, if it does
develop, that it will continue or that it will provide Certificateholders with a
sufficient level of liquidity of investment. The Offered Certificates will not
be listed on any national securities exchange.
Immediately prior to the sale of the Mortgage Loans to the Depositor,
the Mortgage Loans were subject to financing provided by affiliates of Merrill
Lynch. A portion of the proceeds from the sale of the Mortgage Loans to the
Depositor will be applied to repay such financings.
The Depositor and the Seller have agreed to indemnify the Underwriters
against, or make contributions to the Underwriters with respect to, certain
liabilities, including liabilities under the Securities Act of 1933, as amended.
Expenses incurred by the Depositor in connection with this offering are
expected to be approximately $1,000,000.
LEGAL MATTERS
The validity of the Certificates will be passed upon for the Depositor
by Tobin & Tobin, a professional corporation, San Francisco, California. Certain
tax matters will be passed upon for the Depositor by GnazzoThill, A Professional
Corporation, San Francisco, California. McKee Nelson LLP, Washington, D.C., will
act as counsel for the Underwriters.
S-107
RATINGS
It is a condition of the issuance of the Senior Certificates that they
be rated "AAA" by each of Fitch Ratings ("Fitch Ratings") and Standard and
Poor's Rating Services, a division of The McGraw-Hill Companies, Inc. ("S&P")
and "Aaa" by Moody's Investors Service, Inc. ("Moody's" and collectively with
Fitch Ratings and S&P, the "Rating Agencies"). It is a condition to the issuance
of the Class B-1 Certificates that they be rated "AA" by each of Fitch Ratings
and S&P and "Aa2" by Moody's. It is a condition to the issuance of the Class B-2
Certificates that they be rated "A" by each of Fitch Ratings and S&P and "A2" by
Moody's. It is a condition to the issuance of the Class B-3 Certificates that
they be rated "BBB" by each of Fitch Ratings and S&P and "Baa2" by Moody's.
The ratings assigned to mortgage pass-through certificates address the
likelihood of the receipt of all payments on the mortgage loans by the related
certificateholders under the agreements pursuant to which such certificates are
issued. Such ratings take into consideration the credit quality of the related
mortgage pool, including any credit support providers, structural and legal
aspects associated with such certificates, and the extent to which the payment
stream on the mortgage pool is adequate to make the payments required by such
certificates. Ratings on such certificates do not, however, constitute a
statement regarding frequency of prepayments of the mortgage loans.
The ratings do not address the likelihood that any Basis Risk Shortfalls
or unpaid Basis Risk Shortfalls will be repaid to holders of the Offered
Certificates.
The ratings assigned to the Offered Certificates should be evaluated
independently from similar ratings on other types of securities. A rating is not
a recommendation to buy, sell or hold securities and may be subject to revision
or withdrawal at any time by the Rating Agencies.
The Depositor has not requested a rating of the Offered Certificates by
any rating agency other than the Rating Agencies; there can be no assurance,
however, as to whether any other rating agency will rate the Offered
Certificates or, if it does, what rating would be assigned by such other rating
agency. The rating assigned by such other rating agency to the Offered
Certificates could be lower than the respective ratings assigned by the Rating
Agencies.
S-108
INDEX OF CERTAIN DEFINITIONS
2A-1 Margin............................. S-58
2A-2 Margin............................. S-58
A1 Margin............................... S-58
Accrual Period.......................... S-55
Additional Collateral................... S-20
Additional Collateral Loans............. S-20
Aggregate Cut-off Date Balance.......... S-17
Aggregate Subordinate Percentage........ S-64
Applicable Credit Support Percentage.... S-67
Apportioned Principal Balance........... S-57
Available Distribution Amount........... S-54
B-1 Margin.............................. S-58
B-2 Margin.............................. S-59
B-3 Margin.............................. S-59
Bankruptcy Coverage Termination Date.... S-75
Bankruptcy Loss Limit................... S-75
Bankruptcy Losses....................... S-74
Basis Risk Reserve Fund................. S-61
Basis Risk Shortfalls................... S-60
BBA..................................... S-62
BBAM.................................... S-62
Beneficial Owner........................ S-48
Book-Entry Certificates................. S-48
Business Day............................ S-48
CBE..................................... S-97
Cendant................................. S-43
Certificate Distribution Amount......... S-53
Certificate Group....................... S-47
Certificate Interest Rate............... S-58
Certificate Principal Amount............ S-56
Certificateholder....................... S-48
Class 2A-2 Principal Distribution
Amount............................... S-67
Class Notional Amount................... S-55
Class Principal Amount.................. S-56
Class Subordination Percentage.......... S-68
Class X-1 Sub-Account................... S-61
Class X-1A Percentage................... S-56
Class X-1B Percentage................... S-56
Class X-2 Sub-Account................... S-61
Class X-B Sub-Account................... S-61
Clean-Up Call Date...................... S-78
Clearstream Luxembourg.................. S-49
Clearstream Luxembourg
Participants......................... S-50
Closing Date............................ S-46
Code.................................... S-101
Cooperative............................. S-51
Corporate Trust Office.................. S-78
CPR..................................... S-89
Credit Scores........................... S-20
Credit Support Depletion Date........... S-75
Current Interest........................ S-55
Custodial Account....................... S-53
Cut-off Date............................ S-17
Debt Service Reduction.................. S-74
Defective Mortgage Loan................. S-41
Deficient Valuation..................... S-74
Definitive Certificates................. S-48
Deleted Mortgage Loan................... S-42
Depositor............................... S-46
Designated Telerate Page................ S-62
Determination Date...................... S-83
Distribution Account.................... S-53
Distribution Date....................... S-48
DTC..................................... S-48
DTI..................................... S-44
Due Date................................ S-60
Due Period.............................. S-57
Effective Loan-to-Value Ratio........... S-20
ERISA.................................. S-102
Euroclear............................... S-49
Euroclear Operator...................... S-51
Euroclear Participants.................. S-51
European Depositaries................... S-49
Excess Losses........................... S-75
Final Regulations...................... S-101
Final Scheduled Distribution Date....... S-78
Financial Intermediary.................. S-49
Fitch Ratings.......................... S-106
Fraud Loss Limit........................ S-75
Fraud Losses............................ S-74
Global Certificates.................... S-A-1
Group 1 Certificates.................... S-47
Group 2 Certificates.................... S-47
Insurance Proceeds...................... S-54
Interest Distribution Amount............ S-55
S-109
Interest Rate Cap Agreements............ S-99
Interest Settlement Rate................ S-62
Interest Shortfall...................... S-58
Interest Transfer Amount................ S-73
IRS.................................... S-A-4
LIBOR................................... S-62
LIBOR Business Day...................... S-62
LIBOR Certificates...................... S-46
LIBOR Determination Date................ S-62
LIBOR01................................. S-62
Limited Purpose Surety Bond............. S-21
Liquidated Mortgage Loan................ S-75
Liquidation Proceeds.................... S-54
Loan-to-Value Ratio..................... S-19
Merrill Lynch........................... S-43
ML & Co................................. S-43
MLCC.................................... S-18
Monthly Advance......................... S-84
Moody's................................ S-107
Mortgage................................ S-41
Mortgage File........................... S-42
Mortgage Loan Purchase Agreement........ S-19
Mortgage Loans.......................... S-17
Mortgage Note........................... S-41
Mortgage Pool........................... S-17
Mortgage Rate........................... S-60
Mortgaged Property...................... S-17
Net Interest Shortfall.................. S-56
Net Mortgage Rate....................... S-60
Net Prepayment Interest Shortfalls...... S-57
Net WAC................................. S-60
Offered Certificates.................... S-46
OID..................................... S-100
One-Month LIBOR......................... S-41
One-Month LIBOR Loans................... S-18
Original Subordinate Class Principal
Amount................................ S-66
Overcollateralized Group................ S-72
Parent Power(R) Loans................... S-20
Participant............................. S-49
Percentage Interest..................... S-79
Plans.................................. S-102
Pool 1.................................. S-17
Pool 1 Mortgage Loans................... S-18
Pool 1 Net WAC.......................... S-60
Pool 1 Subordinate Amount............... S-58
Pool 2.................................. S-17
Pool 2 Mortgage Loans................... S-18
Pool 2 Net WAC.......................... S-60
Pool 2 Subordinate Amount............... S-58
Pool Balance............................ S-64
Pool Percentage......................... S-55
Pool Subordinate Amount................. S-58
Prepayment Interest Shortfall........... S-57
Prepayment Period....................... S-54
Principal Transfer Amount............... S-73
Privately-Offered Certificates.......... S-46
Pro Rata Senior Percentage.............. S-64
PTE.................................... S-103
Rating Agencies........................ S-107
Realized Loss........................... S-74
Record Date............................. S-48
Relevant Depositary..................... S-49
Relief Act.............................. S-57
Relief Act Reduction.................... S-57
Replacement Mortgage Loan............... S-42
Required Reserve Fund Deposit........... S-61
Rules................................... S-49
S&P.................................... S-107
Scheduled Payment....................... S-64
Seller.................................. S-41
Senior Certificates..................... S-46
Senior Percentage....................... S-64
Senior Prepayment Percentage............ S-65
Senior Principal Distribution Amount.... S-4
Senior Termination Date................. S-64
Servicer................................ S-79
Servicing Agreement..................... S-82
Servicing Fee........................... S-83
Servicing Fee Rate...................... S-83
Six-Month LIBOR......................... S-41
Six-Month LIBOR Loans................... S-18
Special Hazard Loss Limit............... S-75
Special Hazard Losses................... S-74
Stated Principal Balance................ S-60
Step-Down Test.......................... S-66
Structuring Assumptions................. S-89
Subordinate Certificate Writedown
Amount............................... S-74
Subordinate Certificates................ S-46
Subordinate Class Percentage............ S-69
Subordinate Classes..................... S-46
S-110
Subordinate Net WAC..................... S-60
Subordinate Percentage.................. S-69
Subordinate Prepayment Percentage....... S-69
Subordinate Principal Distribution
Amount................................ S-4
Terms and Conditions.................... S-51
TIN.................................... S-A-5
Total Transfer Amount................... S-72
Trust Agreement......................... S-46
Trust Fund.............................. S-47
Trustee................................. S-46
Two Times Test.......................... S-64
Undercollateralized Group............... S-72
Underwriter's Exemption................ S-103
Underwriters........................... S-105
Yield Tables............................ S-97
S-111
ANNEX I:
GLOBAL CLEARANCE, SETTLEMENT AND
TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered Sequoia
Mortgage Trust 10 Mortgage Pass-Through Certificates (the "Global Certificates")
will be available only in book-entry form. Investors in the Global Certificates
may hold such Global Certificates through any of DTC, Clearstream Luxembourg or
Euroclear. The Global Certificates will be tradeable as home market instruments
in both the European and U.S. domestic markets. Initial settlement and all
secondary trades will settle in same-day funds.
Secondary market trading between investors holding Global Certificates
through Clearstream Luxembourg and Euroclear will be conducted in the ordinary
way in accordance with their normal rules and operating procedures and in
accordance with conventional eurocertificate practice (i.e., seven calendar day
settlement).
Secondary market trading between investors holding Global Certificates
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations and prior collateralized mortgage certificate
issues.
Secondary cross-market trading between Clearstream Luxembourg or
Euroclear and DTC Participants holding Certificates will be effected on a
delivery-against-payment basis through the respective Depositaries of
Clearstream Luxembourg and Euroclear (in such capacity) and as DTC Participants.
A holder that is not a United States person (as described below) of
Global Certificates will be subject to U.S. withholding taxes unless such
holders meet certain requirements and deliver appropriate U.S. tax documents to
the securities clearing organizations or their participants.
INITIAL SETTLEMENT
All Global Certificates will be held in book-entry form by DTC in the
name of Cede & Co. as nominee of DTC. Investors' interests in the Global
Certificates will be represented through financial institutions acting on their
behalf as direct and indirect Participants in DTC. As a result, Clearstream
Luxembourg and Euroclear will hold positions on behalf of their participants
through their respective Relevant Depositaries, which in turn will hold such
positions in accounts as DTC Participants.
Investors electing to hold their Global Certificates through DTC will
follow the settlement practices applicable to prior mortgage pass-through
certificate issues. Investor securities custody accounts will be credited with
their holdings against payment in same-day funds on the settlement date.
Investors electing to hold their Global Certificates through Clearstream
Luxembourg or Euroclear accounts will follow the settlement procedures
applicable to conventional
S-A-1
eurocertificates, except that there will be no temporary global certificate and
no "lock-up" or restricted period. Global Certificates will be credited to the
securities custody accounts on the settlement date against payment in same-day
funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
TRADING BETWEEN DTC PARTICIPANTS. Secondary market trading between DTC
Participants will be settled using the procedures applicable to prior
collateralized mortgage certificate issues in same-day funds.
TRADING BETWEEN CLEARSTREAM LUXEMBOURG AND/OR EUROCLEAR PARTICIPANTS.
Secondary market trading between Clearstream Luxembourg Participants or
Euroclear Participants will be settled using the procedures applicable to
conventional eurocertificates in same-day funds.
TRADING BETWEEN DTC SELLER AND CLEARSTREAM LUXEMBOURG OR EUROCLEAR
PURCHASER. When Global Certificates are to be transferred from the account of a
DTC Participant to the account of a Clearstream Luxembourg Participant or a
Euroclear Participant, the purchaser will send instructions to Clearstream I-1
Luxembourg or Euroclear through a Clearstream Luxembourg Participant or
Euroclear Participant at least one business day prior to settlement. Clearstream
Luxembourg or Euroclear will instruct the respective Relevant Depositary, as the
case may be, to receive the Global Certificates against payment. Payment will
include interest accrued on the Global Certificates from and including the last
coupon Distribution Date to and excluding the settlement date, on the basis of
either the actual number of days in such accrual period and a year assumed to
consist of 360 days or a 360-day year of twelve 30-day months as applicable to
the related class of Global Certificates. For transactions settling on the 31st
of the month, payment will include interest accrued to and excluding the first
day of the following month. Payment will then be made by the respective Relevant
Depositary of the DTC Participant's account against delivery of the Global
Certificates. After settlement has been completed, the Global Certificates will
be credited to the respective clearing system and by the clearing system, in
accordance with its usual procedures, to the Clearstream Luxembourg
Participant's or Euroclear Participant's account. The securities credit will
appear the next day (European time) and the cash debt will be back-valued to,
and the interest on the Global Certificates will accrue from, the value date
(which would be the preceding day when settlement occurred in New York). If
settlement is not completed on the intended value date (i.e., the trade fails),
the Clearstream Luxembourg or Euroclear cash debt will be valued instead as of
the actual settlement date.
Clearstream Luxembourg Participants and Euroclear Participants will need
to make available to the respective clearing systems the funds necessary to
process same-day funds settlement. The most direct means of doing so is to
preposition funds for settlement, either from cash on hand or existing lines of
credit, as they would for any settlement occurring within Clearstream Luxembourg
or Euroclear. Under this approach, they may take on credit exposure to
Clearstream Luxembourg or Euroclear until the Global Certificates are credited
to their accounts one day later.
S-A-2
As an alternative, if Clearstream Luxembourg or Euroclear has extended a
line of credit to them, Clearstream Luxembourg Participants or Euroclear
Participants can elect not to preposition funds and allow that credit line to be
drawn upon the finance settlement. Under this procedure, Clearstream Luxembourg
Participants or Euroclear Participants purchasing Global Certificates would
incur overdraft charges for one day, assuming they cleared the overdraft when
the Global Certificates were credited to their accounts. However, interest on
the Global Certificates would accrue from the value date. Therefore, in many
cases the investment income on the Global Certificates earned during that
one-day period may substantially reduce or offset the amount of such overdraft
charges, although this result will depend on each Clearstream Luxembourg
Participant's or Euroclear Participant's particular cost of funds.
Since the settlement is taking place during New York business hours, DTC
Participants can employ their usual procedures for sending Global Certificates
to the respective European Depositary for the benefit of Clearstream Luxembourg
Participants or Euroclear Participants. The sale proceeds will be available to
the DTC seller on the settlement date. Thus, to the DTC Participants a
cross-market transaction will settle no differently than a trade between two DTC
Participants.
TRADING BETWEEN CLEARSTREAM LUXEMBOURG OR EUROCLEAR SELLER AND DTC
PURCHASER. Due to time zone differences in their favor, Clearstream Luxembourg
Participants and Euroclear Participants may employ their customary procedures
for transactions in which Global Certificates are to be transferred by the
respective clearing system, through the respective Relevant Depositary, to a DTC
Participant. The seller will send instructions to Clearstream Luxembourg or
Euroclear through a Clearstream Luxembourg Participant or Euroclear Participant
at least one business day prior to settlement. In these cases Clearstream
Luxembourg or Euroclear will instruct the respective Relevant Depositary, as
appropriate, to deliver the Global Certificates to the DTC Participant's account
against payment. Payment will include interest accrued on the Global
Certificates from and including the last coupon payment to and excluding the
settlement date on the basis of either the actual number of days in such accrual
period and a year assumed to consist of 360 days or a 360-day year of twelve
30-day months as applicable to the related class of Global Certificates. For
transactions settling on the 31st of the month, payment will include interest
accrued to and excluding the first day of the following month. The payment will
then be reflected in the account of the Clearstream Luxembourg Participant or
Euroclear Participant the following day, and receipt of the cash proceeds in the
Clearstream Luxembourg Participant's or Euroclear Participant's account would be
back-valued to the value date (which would be the preceding day, I-2 when
settlement occurred in New York). Should the Clearstream Luxembourg Participant
or Euroclear Participant have a line of credit with its respective clearing
system and elect to be in debt in anticipation of receipt of the sale proceeds
in its account, the back-valuation will extinguish any overdraft incurred over
that one day period. If settlement is not completed on the intended value date
(i.e., the trade fails), receipt of the cash proceeds in the Clearstream
Luxembourg Participant's or Euroclear Participant's account would instead be
valued as of the actual settlement date.
Finally, day traders that use Clearstream Luxembourg or Euroclear and
that purchase Global Certificates from DTC Participants for delivery to
Clearstream Luxembourg Participants or Euroclear Participants should note that
these trades would automatically fail on the sale side
S-A-3
unless affirmative action were taken. At least three techniques should be
readily available to eliminate this potential problem:
(a) borrowing through Clearstream Luxembourg or Euroclear for
one day (until the purchase side of the day trade is reflected in their
Clearstream Luxembourg or Euroclear accounts) in accordance with the
clearing system's customary procedures;
(b) borrowing the Global Certificates in the U.S. from a DTC
Participant no later than one day prior to the settlement, which would
give the Global Certificates sufficient time to be reflected in their
Clearstream Luxembourg or Euroclear account in order to settle the sale
side of the trade; or
(c) staggering the value dates for the buy and sell sides of the
trade so that the value date for the purchase from the DTC Participant
is at least one day prior to the value date for the sale to the
Clearstream Luxembourg or Euroclear Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A holder that is not a "United States person" within the meaning of
Section 7701(a)(30) of the Internal Revenue Code of 1986 holding a book-entry
certificate through Clearstream, Euroclear or DTC may be subject to U.S.
withholding tax at a rate of 30% unless such holder provides certain
documentation to the Trustee or to the U.S. entity required to withhold tax (the
"U.S. withholding agent") establishing an exemption from withholding. A holder
that is not a United States person may be subject to 30% withholding unless:
I. the Trustee or the U.S. withholding agent receives a statement --
(a) from the holder on Internal Revenue Service ("IRS") Form
W-8BEN (or any successor form) that --
(i) is signed by the certificateholder under penalty of
perjury,
(ii) certifies that such owner is not a United States
person, and (iii) provides the name and address of the
certificateholder, or
(b) from a securities clearing organization, a bank or other
financial institution that holds customers' securities in the ordinary
course of its trade or business that --
(i) is signed under penalties of perjury by an
authorized representative of the financial institution,
(ii) states that the financial institution has received
an IRS Form W-8BEN (or any successor form) from the
certificateholder or that another financial institution acting
on behalf of the certificateholder has received such IRS Form
W-8BEN (or any successor form),
(iii) provides the name and address of the
certificateholder, and
S-A-4
(iv) attaches the IRS Form W-8BEN (or any successor
form) provided by the certificateholder;
II. the holder claims an exemption or reduced rate based on a treaty and
provides a properly executed IRS Form W-8BEN (or any successor form) to the
Trustee or the U.S. withholding agent;
III. the holder claims an exemption stating that the income is
effectively connected to a U.S. trade or business and provides a properly
executed IRS Form W-8ECI (or any successor form) to the Trustee or the U.S.
withholding agent; or
IV. the holder is a "nonwithholding partnership" and provides a properly
executed IRS Form W-8IMY (or any successor form) with all necessary attachments
to the Trustee or the U.S. withholding agent. Certain pass-through entities that
have entered into agreements with the Internal Revenue Service (for example
"qualified intermediaries") may be subject to different documentation
requirements; it is recommended that such holders consult with their tax
advisors when purchasing the Certificates.
A holder holding book-entry certificates through Clearstream or
Euroclear provides the forms and statements referred to above by submitting them
to the person through which he holds an interest in the book-entry certificates,
which is the clearing agency, in the case of persons holding directly on the
books of the clearing agency. Under certain circumstances a Form W-8BEN, if
furnished with a taxpayer identification number, ("TIN"), will remain in effect
until the status of the beneficial owner changes, or a change in circumstances
makes any information on the form incorrect. A Form W-8BEN, if furnished without
a TIN, and a Form W-8ECI will remain in effect for a period starting on the date
the form is signed and ending on the last day of the third succeeding calendar
year, unless a change in circumstances makes any information on the form
incorrect.
In addition, all holders holding book-entry certificates through
Clearstream, Euroclear or DTC may be subject to backup withholding unless the
holder:
I. provides a properly executed IRS Form W-8BEN, Form W-8ECI or Form
W-8IMY(or any successor forms) if that person is not a United States person;
II. provides a properly executed IRS Form W-9 (or any substitute form)
if that person is a United States person; or
III. is a corporation, within the meaning of Section 7701(a) of the
Internal Revenue Code of 1986, or otherwise establishes that it is a recipient
exempt from United States backup withholding.
This summary does not deal with all aspects of federal income tax
withholding or backup withholding that may be relevant to investors that are not
"United States persons" within the meaning of Section 7701(a)(30) of the
Internal Revenue Code. Such investors are advised to consult their own tax
advisors for specific tax advice concerning their holding and disposing of the
book-entry certificates.
S-A-5
The term "United States person" means (1) a citizen or resident of the
United States, (2) a corporation or partnership organized in or under the laws
of the United States or any state or the District of Columbia (other than a
partnership that is not treated as a United States person under any applicable
Treasury regulations), (3) an estate the income of which is includible in gross
income for United States tax purposes, regardless of its source, or (4) a trust
if a court within the United States is able to exercise primary supervision over
the administration of the trust and one or more United States persons have
authority to control all substantial decisions of the trust. Notwithstanding the
preceding sentence, to the extent provided in regulations, certain trusts in
existence on August 20, 1996 and treated as United States persons prior to such
date that elect to continue to be so treated also shall be considered United
States persons.
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 Certificates.
Investors are advised to consult their own tax advisors for specific tax
advice concerning their holding and disposing of the Global Certificates.
S-A-6
PROSPECTUS
SEQUOIA MORTGAGE FUNDING CORPORATION
OR
SEQUOIA RESIDENTIAL FUNDING, INC.
(DEPOSITOR)
$3,042,051,600
(AGGREGATE AMOUNT)
ASSET-BACKED SECURITIES
(ISSUABLE IN SERIES)
PLEASE CAREFULLY CONSIDER
OUR DISCUSSION OF SOME OF
THE RISKS OF INVESTING IN
THE SECURITIES UNDER "RISK
FACTORS" BEGINNING ON PAGE
7.
THE SECURITIES WILL
REPRESENT OBLIGATIONS OF
OR INTERESTS IN THE
RELATED TRUST ONLY AND DO
NOT REPRESENT AN INTEREST
IN OR OBLIGATION OF EITHER
SEQUOIA MORTGAGE FUNDING
CORPORATION OR SEQUOIA
RESIDENTIAL FUNDING, INC.,
AS THE DEPOSITOR, OR ANY
OF THEIR AFFILIATES.
THE TRUSTS
Each trust will be established to hold the assets transferred to it by the
depositor, either Sequoia Mortgage Funding Corporation or Sequoia Residential
Funding, Inc. The assets of each trust will be specified in the prospectus
supplement and may consist of:
- - fixed rate mortgage loans secured by senior and junior liens on one- to
four-family residential properties;
- - adjustable rate mortgage loans secured by senior and junior liens on one- to
four-family residential properties;
- - mortgage pass-through securities issued or guaranteed by Ginnie Mae, Fannie
Mae or Freddie Mac;
- - private mortgage-backed securities; and
- - other assets described in the prospectus supplement.
THE SECURITIES
The depositor, either Sequoia Mortgage Funding Corporation or Sequoia
Residential Funding, Inc., will sell the securities pursuant to a prospectus
supplement. The securities will be grouped into one or more series, each having
its own distinct designation. Each series will be issued in one or more classes
and each class will evidence beneficial ownership of a specified portion of
future payments on the assets in the trust that the series relates to. A
prospectus supplement for a series will specify all of the terms of the series
and of each of the classes in the series.
OFFERS OF SECURITIES
The securities may be offered through several different methods, including
offerings through underwriters.
------------------------
THE SEC AND STATE SECURITIES REGULATORS HAVE NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
June 26, 2002
TABLE OF CONTENTS
<Table>
Summary of Prospectus....................................... 4
Risk Factors................................................ 7
The Depositor............................................... 10
The Trust................................................... 11
Use of Proceeds............................................. 21
Loan Program................................................ 21
Description of the Securities............................... 23
Credit Enhancement.......................................... 34
Yield and Prepayment Considerations......................... 39
The Agreements.............................................. 40
Certain Legal Aspects of the Loans.......................... 52
Federal Income Tax Consequences............................. 60
State Tax Considerations.................................... 74
ERISA Considerations........................................ 74
Legal Investment............................................ 78
Method of Distribution...................................... 80
Legal Matters............................................... 80
Financial Information....................................... 80
Available Information....................................... 81
Incorporation of Certain Documents by Reference............. 81
Rating...................................................... 81
Index of Defined Terms...................................... 83
</Table>
2
IMPORTANT NOTICE ABOUT INFORMATION IN THIS PROSPECTUS AND EACH ACCOMPANYING
PROSPECTUS SUPPLEMENT
Information about each series of securities is contained in two separate
documents:
- this prospectus, which provides general information, some of which may
not apply to a particular series; and
- the accompanying prospectus supplement for a particular series, which
describes the specific terms of the securities of that series.
The prospectus supplement will contain information about a particular
series that supplements the information contained in this prospectus, and you
should rely on that supplementary information in the prospectus supplement.
IF THE TERMS OF YOUR SERIES OF SECURITIES AND ANY OTHER INFORMATION
CONTAINED HEREIN VARY BETWEEN THIS PROSPECTUS AND THE ACCOMPANYING PROSPECTUS
SUPPLEMENT, YOU SHOULD RELY ON THE INFORMATION IN THE ACCOMPANYING PROSPECTUS
SUPPLEMENT.
We have not authorized anyone to provide you with information that is
different from that contained in this prospectus and the accompanying prospectus
supplement.
You can find a listing of the pages on which capitalized terms used in this
prospectus are defined under "Index of Defined Terms" beginning on page 83 of
this prospectus.
3
SUMMARY OF PROSPECTUS
- - This summary highlights material information from this prospectus and does not
contain all of the information that you need to consider in making your
investment decision. To understand all of the terms of the offering of the
securities, carefully read this entire prospectus and the accompanying
prospectus supplement.
- - This summary provides an overview of the structural elements, calculations,
cash flows and other information to aid your understanding and is qualified by
the full description of these calculations, cash flows and other information
in this prospectus and the accompanying prospectus supplement.
- - There are material risks associated with an investment in the securities. You
should read the section entitled "Risk Factors" beginning on page 7 of this
prospectus and in the accompanying prospectus supplement, and consider the
risk factors described in those sections, before making a decision to invest
in the securities.
TRUST
The issuer for a particular series of securities will be a trust formed by
the depositor.
DEPOSITOR
For any series of securities, either Sequoia Mortgage Funding Corporation,
a Delaware corporation, or Sequoia Residential Funding, Inc., a Delaware
corporation, as identified in the prospectus supplement. Each depositor's
principal offices are located at 591 Redwood Highway, Mill Valley, California
94941 and the telephone number is (415) 381-1765.
SERVICER
For any series of securities, the servicer named in the related prospectus
supplement. While we refer to a single servicer in this prospectus, for a
particular series of securities there may be more than one servicer, as set
forth in the prospectus supplement, as well as a master servicer to supervise
the performance of each servicer under the related servicing agreement.
If specified in the related prospectus supplement, the depositor may
appoint a special servicer for the series of securities.
TRUSTEE
For any series of securities, the trustee named in the prospectus
supplement.
In addition, if the trust issues bonds pursuant to a separate indenture,
the trust and the indenture will be administered by separate independent
trustees. In that case, the trust will be administered by an owner trustee and
the indenture will be administered by an indenture trustee, in each case as
named in the prospectus supplement.
THE SECURITIES
Each class or series of securities will be either:
- certificates representing interests in the assets of the trust related to
a certain series; or
- bonds which are secured by the pledge of the trust assets related to a
certain series.
Each class or series of securities may have a different interest rate,
which may be a fixed or floating interest rate. The prospectus supplement will
specify the interest rate for each class or series of securities, or the initial
interest rate and the method for determining subsequent changes to the interest
rate.
A series may include one or more classes which:
- are stripped of regular interest payments and entitled only to principal
distributions, with disproportionate, nominal or no interest
distributions;
- are stripped of regular principal payments and entitled only to interest
distributions, with disproportionate, nominal or no principal
distributions;
- have different terms including different interest rates and different
timing, sequential order or priority of payments, amount of principal or
interest or both;
- will not distribute accrued interest but rather will add the accrued
interest to the note principal balance, or nominal balance, in the
4
manner described in the related prospectus supplement;
- are senior or subordinate to one or more other classes of securities in
respect of distributions of principal and interest and allocations of
losses on receivables; or
- have a feature entitling the class to a portion of or no principal
distributions for an initial period and then all or a different portion
of the principal distributions during subsequent periods.
A series of securities may provide that distributions of principal or
interest or both on any class may be made:
- upon the occurrence of specified events;
- in accordance with a schedule or formula; or
- on the basis of collections from designated portions of the related trust
assets.
TRUST ASSETS
As specified in the prospectus supplement, the trust assets may consist of:
- fixed rate mortgage loans secured by senior and junior liens on one- to
four-family residential properties;
- adjustable rate mortgage loans secured by senior and junior liens on one-
to four-family residential properties;
- mortgage pass-through securities issued or guaranteed by Ginnie Mae,
Fannie Mae or Freddie Mac;
- private mortgage-backed securities; and
- other assets as described in detail elsewhere in the prospectus
supplement.
If the prospectus supplement specifies, the trustee may acquire additional
trust assets during a specified pre-funding period from monies in a pre-funding
account.
PAYMENT DATE
As described in the prospectus supplement, the securities will pay
principal and/or interest on specified dates. Payment dates will occur monthly,
quarterly, or semi-annually.
RECORD DATE
The prospectus supplement will describe a date preceding the payment date,
as of which the trustee or its paying agent will fix the identity of
securityholders. Securityholders whose identities are fixed on this date will
receive payments on the next succeeding payment date.
COLLECTION PERIOD
A period preceding each payment date -- for example, in the case of
monthly-pay securities, the calendar month preceding the month in which a
payment date occurs. As the prospectus supplement will more fully describe, the
servicer will remit collections received in respect of a collection period to
the related trustee prior to the related payment date.
CREDIT ENHANCEMENT
As described in the prospectus supplement, credit enhancement for the trust
assets or any class of securities may include any one or more of the following:
- the subordination of one or more classes of the securities of such
series;
- a limited financial guaranty policy issued by an entity named in the
prospectus supplement;
- the establishment of one or more reserve accounts;
- the use of a cross-collateralization feature;
- use of a mortgage pool insurance policy;
- excess spread,
- over-collateralization;
- letter of credit;
- guaranteed investment contract;
- primary mortgage insurance,
- other pledged assets,
- corporate guarantees,
- surety bond;
- special hazard insurance policy;
- bankruptcy bond;
5
- FHA insurance or VA guarantee;
- any other method of credit enhancement contemplated in this prospectus
and described in the prospectus supplement; and
- any combination of the foregoing.
REGISTRATION OF SECURITIES
The trust may issue the securities as global securities registered in the
name of Cede & Co. as nominee of the Depository Trust Company, or another
nominee. In this case, securityholders will not receive definitive securities
representing their interests except in limited circumstances described in the
prospectus supplement.
OPTIONAL TERMINATION
As described in this prospectus and the prospectus supplement, the
servicer, the depositor, or if the prospectus supplement specifies, other
entities, may, at their respective options, cause the early retirement or
redemption of some or all of a series of securities.
MANDATORY TERMINATION
As described in this prospectus and the related prospectus supplement, the
trustee, the servicer, or if the related prospectus supplement specifies, other
entities, may be required to retire early all or any portion of a series of
securities. An indenture may require these parties to solicit competitive bids
for the purchase of the trust property or otherwise.
FEDERAL INCOME TAX CONSEQUENCES
The securities of each series generally will be structured, for federal
income tax purposes, as one of the following:
- regular interests or residual interests in a trust treated as a real
estate mortgage investment conduit or REMIC under Sections 860A through
860G of the Internal Revenue Code, or
- indebtedness issued by a real estate investment trust or its taxable
subsidiary.
You should consult your own tax advisor concerning your investment.
ERISA CONSIDERATIONS
A fiduciary of a pension, profit sharing or other employee benefit plan may
wish to review with its legal advisors whether the purchase, holding or
disposition of securities could give rise to a prohibited transaction under
ERISA, or the Internal Revenue Code, and whether an exemption from the
prohibited transaction rules is available.
RATINGS
Each class of securities offered by a prospectus supplement will initially
be rated in one of the four highest rating categories of at least one nationally
recognized statistical rating agency. The ratings are not a recommendation to
purchase, hold or sell the securities and do not address the market price or
suitability of the securities for a particular investor. The ratings generally
address the likelihood of timely payment of interest and the ultimate payment of
principal on the securities by the stated maturity date. The ratings do not
generally address the rate of prepayments that may be experienced on the trust
assets or the effect on the rate of prepayments on the return of principal to
securityholders.
LEGAL INVESTMENT
So long as any class of securities is rated in one of the two highest
ratings categories by at least one nationally recognized statistical rating
agency, such class of securities will generally constitute "mortgage related
securities" under the Secondary Mortgage Market Enhancement Act of 1984. There
are other restrictions on the ability of certain types of investors to purchase
the securities that prospective investors should consider.
6
RISK FACTORS
INVESTORS SHOULD CONSIDER THE FOLLOWING FACTORS IN CONNECTION WITH THE
PURCHASE OF SECURITIES. YOU SHOULD ALSO CONSIDER THE RISK FACTORS DESCRIBED IN
THE PROSPECTUS SUPPLEMENT.
ABILITY TO RESELL SECURITIES MAY BE LIMITED
No market for any of the securities will exist before they are issued. We
cannot assure you that a secondary market will develop, or if it does develop,
that it will continue. Consequently, you may not be able to sell your securities
readily or at prices that will enable you to realize your desired yield. The
market values of the securities are likely to fluctuate; these fluctuations may
be significant and could result in significant losses to you.
The secondary market for asset-backed securities has experienced periods of
illiquidity and can be expected to do so in the future. Illiquidity can have a
severely adverse effect on the prices of securities that are especially
sensitive to prepayment, credit, or interest rate risk, or that have been
structured to meet the investment requirements of limited categories of
investors.
LIMITED SOURCE OF PAYMENTS -- NO RECOURSE TO DEPOSITOR, SELLERS, SERVICER OR
TRUSTEE
The assets of the trust are the sole source of distributions for the
securities. The securities do not represent an interest in or obligation of the
depositor, any seller, the servicer, the trustee or any of their affiliates,
except for the limited obligations of each seller with respect to certain
breaches of its representations and warranties and of the servicer with respect
to its servicing obligations. Neither the securities nor the trust assets will
be guaranteed by or insured by any governmental agency or instrumentality, the
depositor, any seller, the servicer, the trustee or any of their affiliates,
unless so specified in the supplement. Consequently, if payments on the trust
assets are insufficient to make all payments required on the certificates you
may incur a loss on your investment.
CREDIT ENHANCEMENT MAY NOT BE SUFFICIENT TO PROTECT YOU FROM LOSSES
Credit enhancement is intended to reduce the effect of delinquent payments
or loan losses on those classes of securities that have the benefit of the
credit enhancement. However, the amount of any credit enhancement may decline or
be depleted before the securities are paid in full. As a result, securityholders
may suffer losses. In addition, credit enhancement may not cover all potential
sources of loss, such as a loss resulting from fraud or negligence by a loan
originator or other party.
PREPAYMENTS ARE UNPREDICTABLE AND AFFECT YIELD
The rate of principal distributions and yield to maturity on the securities
will be directly related to the rate of principal payments on the trust assets.
For example, the rate of principal payments on the loans will be affected by the
following:
- the amortization schedules of the loans;
- the rate of principal prepayments (including partial prepayments and
prepayments resulting from refinancing) by borrowers;
- liquidations or repurchases of defaulted loans by the servicer;
- repurchases of loans by the seller as a result of defective documentation
or breaches of representations and warranties; and
- the mandatory or optional purchase by the servicer or other entity with
such rights of all of the loans or some or all of the securities in
connection with an optional redemption of securities or termination of
the trust.
The rate of principal payments on loans is influenced by a variety of
economic, geographic, social and other factors. For example, if interest rates
for similar loans fall below the interest rates on the loans, the rate
7
of prepayment would generally be expected to increase. Conversely, if interest
rates on similar loans rise above the interest rates on the loans, the rate of
prepayment would generally be expected to decrease.
We cannot predict the rate at which borrowers will repay their loans.
Please consider the following:
- If you are purchasing a security at a discount, in particular, a
principal-only security, your yield may be lower than expected if
principal payments on the loans occur at a slower rate than you expected;
- If you are purchasing a security at a premium, in particular, an
interest-only security, your yield may be lower than expected if
principal payments on the loans occur at a faster rate than you expected
and you could lose your initial investment; and
- The earlier a payment of principal occurs, the greater the impact on your
yield. For example, if you purchase a security at a premium, although the
average rate of principal payments is consistent with your expectations,
if the rate of principal payments occurs initially at a rate higher than
expected, which would adversely impact your yield, a subsequent reduction
in the rate of principal payments will not offset any adverse yield
effect.
DECLINE IN PROPERTY VALUES MAY INCREASE LOAN LOSSES
Because your securities represent an interest in loans or are secured by
loans, your investment may be affected by a decline in property values. If the
outstanding balance of a loan and any secondary financing on the underlying
property is greater than the value of the property, there is an increased risk
of delinquency, default, foreclosure and loss. A decline in property values
could extinguish the value of a junior lien holder's interest in a property.
Losses on such loans that are not otherwise covered by the credit enhancement
described in the prospectus supplement will be borne by the holder of one or
more classes of securities.
DELAYS IN LIQUIDATION MAY ADVERSELY AFFECT YOU
Substantial delays may occur before defaulted loans are liquidated and the
proceeds forwarded to investors. Property foreclosure actions are regulated by
state statutes and rules and are subject to many of the delays and expenses that
characterize lawsuits if defenses or counterclaims are raised. As a result,
foreclosure actions can sometimes take several years to complete and the
liquidation proceeds may not cover the defaulted loan amount. In particular,
because the costs of liquidation do not vary based on the loan amount, the risk
of insufficient liquidation proceeds is greater with small loans. Some states
prohibit a mortgage lender from obtaining a judgment against the borrower for
amounts not covered by property proceeds if the property is sold outside of a
judicial proceeding.
In addition, federal and state statutory provisions, including the federal
bankruptcy laws and state laws affording relief to debtors, may interfere with
or affect the ability of the servicer to liquidate the property, which could
result in a delay in payments to you.
JUNIOR LIEN PRIORITY COULD RESULT IN PAYMENT DELAYS AND LOSSES
Loans may be secured by mortgages and deeds of trust that are junior in
priority. Junior liens receive proceeds from a sale of the related property only
after the senior liens have been paid. If the proceeds remaining after the
senior liens have been paid are insufficient to satisfy the loans, then:
- there may be a delay in payments to you while a deficiency judgment
against the borrower is sought; and
- you may incur a loss if a deficiency judgment cannot be obtained or is
not realized upon.
LOANS UNDERWRITTEN TO STANDARDS BELOW "A" QUALITY MAY RESULT IN UNEXPECTED
LOSSES
Loans supporting a series of securities may be comprised of mortgage loans
underwritten according to standards below "A" quality (e.g., Alt-A, A minus or
subprime). Such loans may be illiquid and present greater credit and other risks
than conforming mortgage loans. In addition, such mortgage loans may lack
8
standardized terms and may be secured by properties which are unique and more
difficult to value than typical residential properties. Loans may have been
underwritten primarily on the basis of loan-to-value ratios or favorable credit
factors rather than on the borrower's credit standing or income ratios.
Accordingly, the potential loss experience on non "A" quality mortgage loans
supporting a series of securities may be more difficult to evaluate compared to
the experience for "A" quality or other more standardized types of residential
and mixed-use properties. Actual losses incurred on such lower quality mortgage
loans may exceed levels of credit enhancement thought to be sufficient to
protect securityholders from risk of loss.
STATE AND FEDERAL LAWS MAY LIMIT ABILITY TO COLLECT ON LOANS
Applicable federal and state laws regulate interest rates and other charges
and require certain disclosures. In addition, other laws, public policy and
general principles of equity relating to the protection of consumers, unfair and
deceptive practices and debt collection practices may apply to the origination,
servicing and collection of the mortgage loans. Depending on the provisions of
the applicable law and the specific facts involved, violations may limit the
ability to collect all or part of the principal of or interest on the mortgage
loans. In some cases, the borrower may be entitled to a refund of amounts
previously paid and could subject the trust to damages and administrative
enforcement.
COSTS FOR CLEANING CONTAMINATED PROPERTY MAY RESULT IN LOSSES
Under certain state and federal laws, a contaminated property may give rise
to a lien on the property to assure the costs of cleanup. In addition these laws
may impose liability for cleanup costs on the lender if the lender was involved
in the operations of the borrower, even if the environmental damage was caused
by a prior owner. Any lien or costs attached to a contaminated property could
result in a loss to securityholders.
RATING OF THE SECURITIES DOES NOT ASSURE PAYMENT
It will be a condition to the issuance of the securities offered hereby
that they be rated in one of the four highest rating categories by each rating
agency identified in the prospectus supplement. The ratings of the securities
will be based on, among other things, the adequacy of the value of the trust
assets and any credit enhancement. The rating should not be deemed a
recommendation to purchase, hold or sell the securities, particularly since the
ratings do not address market price or suitability for an investor. There is no
assurance that the rating assigned to a security will remain in effect over the
life of that security, as the rating may be lowered or withdrawn.
CONSEQUENCES OF OWNING BOOK-ENTRY SECURITIES
LIMIT ON LIQUIDITY OF SECURITIES. Issuance of the securities in book-entry
form may reduce their liquidity in the secondary trading market because
investors may be unwilling to purchase securities for which they cannot obtain
physical certificates.
LIMIT ON ABILITY TO TRANSFER OR PLEDGE. Since transactions in the
book-entry securities can be effected only through the Depository Trust Company
("DTC"), participating organizations, indirect participants and certain banks,
your ability to transfer or pledge a book-entry security to persons or entities
that do not participate in the DTC system or otherwise to take actions in
respect of such securities, may be limited due to lack of a physical
certificate.
DELAYS IN DISTRIBUTIONS. You may experience some delay in the receipt of
distributions on book-entry securities because the distributions will be
forwarded by the trustee to DTC for DTC to credit the accounts of its
participants which will thereafter credit them to your account either directly
or indirectly through indirect participants, as applicable.
PAYMENTS TO AND RIGHTS OF INVESTORS ADVERSELY AFFECTED BY INSOLVENCY OF SELLERS
OR SERVICER
Each seller and the depositor will treat the transfer of the loans from the
seller to the depositor as a sale for accounting purposes. The depositor and the
trust will treat the transfer of the loans from the depositor to
9
the trust as a sale for accounting purposes. If these characterizations are
correct, then if the seller were to become bankrupt, the loans would not be part
of the seller's bankruptcy estate and would not be available to the seller's
creditors. On the other hand, if the seller becomes bankrupt, its bankruptcy
trustee or one of its creditors may argue that the transfer of the loans is a
pledge of the loans as security for a borrowing rather than a sale. Such an
attempt, even if unsuccessful, could result in delays in payments to you.
In the event of a bankruptcy of the servicer, the bankruptcy trustee or
receiver may have the power to prevent the trustee or the securityholders from
appointing a successor servicer, which could result in a delay in payments to
you.
TRUST ASSETS MAY NOT BE SUFFICIENT TO PAY SECURITIES
There is no assurance that the market value of the trust assets at any time
will equal the principal amount of the securities. In addition, under any
situation in which the trust assets are required to be sold, the proceeds
generally will be paid to cover administrative costs before being paid to you.
The net proceeds may be insufficient to pay the principal and interest on the
securities.
CONCENTRATION OF LOANS COULD ADVERSELY AFFECT YOUR INVESTMENT
Loans may be secured by properties that are concentrated in particular
geographic areas, as specified in the prospectus supplement. Consequently,
losses and prepayments on the loans and the resultant payments on the securities
may be affected significantly by changes in the housing markets and the regional
economies in these areas and by the occurrence of natural disasters, such as
earthquakes, hurricanes, tornadoes, tidal waves, mud slides, fires and floods,
in these areas.
PRE-FUNDING ACCOUNTS MAY RESULT IN RE-INVESTMENT RISK TO INVESTORS
Amounts remaining in any pre-funded account at the end of the related
funding period will be distributed as prepayment of principal to investors on
the distribution date immediately following the end of the funding period in the
manner specified in the related prospectus supplement. Investors will bear any
reinvestment risk resulting from such prepayment.
THE ADDITION OF SUBSEQUENT MORTGAGE COLLATERAL TO PRE-FUNDING ACCOUNTS DURING
THE FUNDING PERIOD MAY ADVERSELY AFFECT THE PERFORMANCE OF THE SECURITIES
Although subsequent mortgage collateral must satisfy the characteristics
described in the related prospectus supplement, subsequent mortgage collateral
may have different characteristics, including, without limitation, a more recent
origination date than the initial mortgage collateral. As a result, the addition
of subsequent mortgage collateral to the pre-funding account may adversely
affect the performance of the related securities.
OWNERS OF ORIGINAL ISSUE DISCOUNT SECURITIES SHOULD CONSIDER FEDERAL INCOME TAX
CONSEQUENCES
An investor owning a security issued with original issue discount will be
required to include original issue discount in ordinary gross income for federal
income tax purposes as it accrues, in advance of receipt of the cash
attributable to such income. Accrued but unpaid interest on accrual securities
will be treated as original issue discount for this federal income tax purpose.
THE DEPOSITOR
The prospectus supplement will identify whether the depositor is Sequoia
Mortgage Funding Corporation or Sequoia Residential Funding, Inc. Sequoia
Mortgage Funding Corporation is a Delaware corporation organized on January 31,
1997 and Sequoia Residential Funding, Inc., is a Delaware corporation organized
on September 1, 1999, in each case for the limited purpose of acquiring, owning
and transferring trust assets and selling interests therein or bonds secured
thereby. Sequoia Residential Funding, Inc. is a subsidiary of RWT Holdings, Inc.
Sequoia Mortgage Funding Corporation is a qualifying REIT subsidiary of, and RWT
10
Holdings, Inc. is a taxable subsidiary of, Redwood Trust, Inc. Redwood Trust,
Inc. is a publicly owned real estate investment trust and is listed on the New
York Stock Exchange under the symbol "RWT". Each depositor maintains its
principal office at 591 Redwood Highway, Mill Valley, California 94941. The
telephone number is (415) 381-1765.
Neither the depositor nor any of the depositor's affiliates will insure or
guarantee distributions on the securities of any series.
THE TRUST
GENERAL
Either Sequoia Mortgage Funding Corporation or Sequoia Residential Funding,
Inc., the depositor, will establish a trust for each series of mortgage-backed
securities and convey to the related trustee certain assets, consisting of one
or more pools of loans as specified in the prospectus supplement. Each trust
will be created as of the first day of the month in which the securities are
issued or another date which will be specified in the prospectus supplement (the
"Cut-Off-Date"). All references in this prospectus to "pool," "certificates,"
"bonds," "securities," or "securityholders," should be deemed to apply to one
specific series, trust and prospectus supplement, unless otherwise noted.
The certificates of a series will represent interests in the assets of the
trust related to that series and the notes of a series will be secured by the
pledge of the trust assets related to that series. The trust assets for each
series will be held by the trustee for the benefit of the related
securityholders. The securities will be entitled to payment from the assets of
the trust or other assets pledged for the benefit of the securityholders, as
specified in the prospectus supplement, and will not be entitled to payments in
respect of the assets of any other trust established by the depositor.
The trust assets will be acquired by the depositor, either directly or
through affiliates, from one or more sellers which may be affiliates of the
depositor, and conveyed without recourse by the depositor to the trust. Each
seller will have originated or acquired the loans as described in the prospectus
supplement. Loans acquired by the depositor will have been originated in
accordance with the underwriting criteria described under "Loan
Program -- Underwriting Standards" or as otherwise described in the prospectus
supplement. See "Loan Program -- Underwriting Standards."
The depositor will cause the trust assets to be assigned or pledged to the
trustee named in the prospectus supplement for the benefit of the holders of the
securities. For a fee, the servicer named in the prospectus supplement will
service the trust assets, either directly or through other servicing
institutions, or subservicers, pursuant to a pooling and servicing agreement
among the depositor, the servicer, the trustee and other entities named in the
prospectus supplement in the case of a series consisting of certificates, or
pursuant to a servicing agreement among the depositor, the servicer, the trust,
the trustee and other entities named in the prospectus supplement in the case of
a series consisting of bonds. With respect to loans serviced by the servicer
through a subservicer, the servicer will remain liable for its servicing
obligations under the related agreement as if the servicer were servicing such
loans.
As used in this prospectus, "Agreement" means, with respect to a series
consisting of certificates, the pooling and servicing agreement, and with
respect to a series consisting of bonds, the trust agreement, the indenture and
the servicing agreement, or, in either case such other agreements containing
comparable provisions as set forth in the prospectus supplement, as the context
requires.
With respect to each trust, prior to the initial offering of the
securities, the trust will have no assets or liabilities. No trust is expected
to engage in any activities other than acquiring, managing and holding the trust
assets and other assets specified in the prospectus supplement and the proceeds
thereof, issuing securities and making payments and distributions thereon and
certain related activities. No trust is expected to have any source of capital
other than its assets and any related credit enhancement.
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Generally, the only obligations of the depositor will be to obtain certain
representations and warranties from the sellers and to assign them to the
trustee. See "The Agreements -- Assignment of the Trust Assets." The obligations
of the servicer with respect to the loans will consist principally of its
contractual servicing obligations under the related Agreement (including its
obligation to enforce the obligations of the subservicers or sellers, or both,
as more fully described in this prospectus under "Loan Program --
Representations by Sellers; Repurchases" and "The Agreements -- Subservicing by
Sellers" and "-- Assignment of the Trust Assets") and its obligation, if any, to
make certain cash advances in the event of delinquencies in payments on or with
respect to the loans in the amounts described in this prospectus under
"Description of the Securities -- Advances." The obligations of the servicer to
make advances may be subject to limitations, to the extent provided in this
prospectus and in the prospectus supplement.
The following is a brief description of the assets expected to be included
in the trust. If specific information respecting the trust assets is not known
at the time the securities are offered, more general information of the nature
described below will be provided in the prospectus supplement, and specific
information will be set forth in a report on Form 8-K to be filed with the SEC
within fifteen days after the initial issuance of the securities. A copy of the
Agreements with respect to each series of securities will be available for
inspection at the corporate trust office of the trustee. A schedule of the loans
relating to each series will be attached to the Agreement delivered to the
trustee.
THE LOANS
The loans included in a trust will be mortgage loans secured by
one-to-four-family residential properties. The loans may be either first or
junior lien loans. As described in the prospectus supplement, the loans may be
underwritten to "A" quality standards or to standards below "A" quality (e.g.,
Alt-A, A minus or subprime).
The loans will have monthly payments due on the first day of each month or
on such other day of the month specified in the prospectus supplement. The
payment terms of the loans to be included in a trust will be described in the
prospectus supplement and may include any of the following features (or
combination thereof):
- Interest may be payable at a fixed rate, a rate adjustable from time to
time in relation to an index, a rate that is fixed for a period of time
or under certain circumstances and is followed by an adjustable rate, a
rate that otherwise varies from time to time, a rate that is convertible
from an adjustable rate to a fixed rate, or a rate that is convertible
from one index to another, in each case as specified in the prospectus
supplement. Changes to an adjustable rate may be subject to periodic
limitations, maximum rates, minimum rates or a combination of such
limitations. Accrued interest may be deferred and added to the principal
of a loan for such periods and under such circumstances as may be
specified in the prospectus supplement.
- Principal may be payable on a level debt service basis to fully amortize
the loan over its term, may be calculated on the basis of an assumed
amortization schedule that is significantly longer than the original term
to maturity or on an interest rate that is different from the loan rate
or may not be amortized during all or a portion of the original term.
Certain loans may provide for monthly payments of interest but no
payments of principal for either the first five or ten years or any other
period specified after origination. Certain loans may require payment of
all or a substantial portion of the principal upon maturity, commonly
referred to as a "balloon payment". Principal may include interest that
has been deferred and added to the principal balance of the loan.
- Monthly payments of principal and interest may be fixed for the life of
the loan, may increase over a specified period of time or may change from
period to period. Loans may include limits on periodic increases or
decreases in the amount of monthly payments and may include maximum or
minimum amounts of monthly payments.
- Prepayments of principal may be subject to a prepayment fee, which may be
fixed for the life of the loan or may change over time. Certain loans may
permit prepayments after expiration of certain periods, commonly referred
to as "lockout periods". Other loans may permit prepayments without
12
payment of a fee unless the prepayment occurs during specified time
periods. The loans may include "due on sale" clauses which permit the
mortgagee to demand payment of the entire loan in connection with the
sale or certain transfers of the related property. Other loans may be
assumable by persons meeting the then applicable standards set forth in
the Agreement.
A trust may contain buydown loans. A buydown loan includes provisions
whereby a third party partially subsidizes the monthly payments of the borrower
on the related loan during the early years of repayment under the loan, the
partial subsidy being made from a buydown fund contributed by the third party at
the time of origination of the loan. A buydown fund will be in an amount equal
either to the discounted value or full aggregate amount of future payment
subsidies. The underlying assumption of a buydown plan is that the income of the
borrower will increase during the buydown period as a result of normal increases
in compensation and inflation, so that the borrower will be able personally to
make the full loan payments at the end of the buydown period without the
continued assistance of the partial subsidy. To the extent that this assumption
as to increased income is not fulfilled, the possibility of default on a buydown
loan is increased. The prospectus supplement will contain information with
respect to any buydown loan concerning limitations on the interest rate paid by
the borrower initially, on annual increases in the interest rate and on the
length of the buydown period.
The real property that secures repayment of the loans is referred to in
this prospectus as the mortgaged properties. Loans will be secured by mortgages
or deeds of trust or other similar security instruments creating a lien on a
mortgaged property. Some liens will be subordinated to one or more senior liens
on the related mortgaged properties as described in the prospectus supplement.
The properties relating to loans will consist of detached or semi-detached one-
to four-family dwelling units, townhouses, rowhouses, individual condominium
units, manufactured homes, individual units in planned unit developments, and
certain other dwelling units. Such properties may include vacation and second
homes, investment properties and dwellings situated on leasehold estates. The
loans may include cooperative apartment loans secured by security interests in
shares issued by private, nonprofit, cooperative housing corporations and in the
related proprietary lease or occupancy agreements granting exclusive rights to
occupy specific dwelling units in the cooperatives' building. In the case of
leasehold interests, the term of the leasehold will exceed the scheduled
maturity of the loan by at least five years, unless otherwise specified in the
prospectus supplement. The properties may be located in any one of the fifty
states, the District of Columbia, Guam, Puerto Rico or any other territory of
the United States.
Loans with certain loan-to-value ratios and/or certain principal balances
may be covered wholly or partially by primary mortgage guaranty insurance
policies. The existence, extent and duration of any such coverage will be
described in the prospectus supplement.
Certain loans, in addition to being secured by real property, may be
secured by a security interest in a limited amount of additional collateral
owned by the borrower or a third-party guarantor. Such additional collateral may
no longer be required when the principal balance of such additional collateral
mortgage loan is reduced to a predetermined amount set forth in the related
pledge agreement or guaranty agreement, as applicable, or when the loan-to-value
ratio for such additional collateral mortgage loan is reduced to the applicable
loan-to-value ratio for such additional collateral mortgage loan by virtue of an
increase in the appraised value of the mortgaged property as determined by the
related servicer.
Each prospectus supplement will contain information to the extent then
specifically known to the depositor, with respect to the loans contained in the
pool, generally including:
- the aggregate outstanding principal balance and the average outstanding
principal balance of the loans as of the applicable Cut-Off-Date;
- the type of property securing the loan (e.g., single family residences,
individual units in condominium apartment buildings, two- to four-family
dwelling units, other real property or home improvements);
- the original terms to maturity of the loans;
- the largest principal balance of any of the loans;
- the smallest principal balance of any of the loans;
13
- the earliest origination date and latest maturity date of any of the
loans;
- the loan-to-value ratios or combined loan-to-value ratios, as applicable,
of the loans;
- the loan rates or annual percentage rates or range of loan rates or
annual percentage rates borne by the loans;
- the maximum and minimum per annum loan rates; and
- the geographical location of real property related to the loans.
If specific information regarding the loans is not known to the depositor
at the time the related securities are initially offered, more general
information of the nature described above will be provided in the prospectus
supplement, and specific information will be set forth in a report filed on Form
8-K to be filed with the SEC within 15 days of initial issuance of the
securities.
The loan-to-value ratio of a loan at any given time is the fraction,
expressed as a percentage, the numerator of which is the principal balance of
the loan and the denominator of which is the collateral value of the property.
The combined loan-to-value ratio of a loan at any given time is the ratio,
expressed as a percentage, of (i) the sum of (a) the principal balance of the
loan and (b) the outstanding principal balance of any senior mortgage loan(s) to
(ii) the collateral value of the property. The effective loan-to-value ratio of
a loan at any given time is the fraction, expressed as a percentage, the
numerator of which is the principal balance of the loan, less the amount secured
by additional collateral, if any, and the denominator of which is the collateral
value of the property.
The "collateral value" of a property, other than with respect to certain
loans the proceeds of which were used to refinance an existing mortgage loan
(each, a "refinance loan"), is the lesser of (a) the appraised value determined
in an appraisal obtained at origination of such loan and (b) the sales price for
the property if the proceeds of the loan are used to purchase the related
property. In the case of a refinance loan, the collateral value of the related
property is the appraised value of the property as determined by an appraisal
obtained at the time of refinancing.
No assurance can be given that collateral values of the properties have
remained or will remain at the levels at which they are originally calculated.
If the residential real estate market should experience an overall decline in
property values such that the sum of the outstanding principal balances of the
loans and any primary or secondary financing on the properties, as applicable,
in a particular pool become equal to or greater than the value of the
properties, the actual rates of delinquencies, foreclosures and losses
experienced with respect to that pool could be higher than those now generally
experienced in the mortgage lending industry. In addition, adverse economic
conditions and other factors (which may or may not affect real property values)
may affect the timely payment by borrowers of scheduled payments of principal
and interest on the loans and, accordingly, the actual rates of delinquencies,
foreclosures and losses with respect to any pool. To the extent that such losses
are not covered by subordination provisions or alternative arrangements, such
losses will be borne by the securityholders of the affected series to the extent
that the credit enhancement provisions relating to the series do not protect the
securityholders from such losses.
AGENCY SECURITIES
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION OR GINNIE MAE. The Government
National Mortgage Association (Ginnie Mae) is a wholly-owned corporate
instrumentality of the United States within the Department of Housing and Urban
Development. Section 306(g) of Title II of the National Housing Act of 1934, as
amended, authorizes Ginnie Mae to guarantee the timely payment of the principal
of and interest on certificates which represent an interest in a pool of FHA
loans, which are mortgage loans insured by the FHA under the National Housing
Act or under Title V of the Housing Act of 1949, or VA loans, which are mortgage
loans partially guaranteed by the VA under the Servicemen's Readjustment Act of
1944, as amended, or Chapter 37 of Title 38 of the United States Code.
Section 306(g) of the National Housing Act provides that "the full faith
and credit of the United States is pledged to the payment of all amounts which
may be required to be paid under any guaranty under this
14
subsection." In order to meet its obligations under any such guarantee, Ginnie
Mae may, under Section 306(d) of the National Housing Act, borrow from the
United States Treasury in an unlimited amount which is at any time sufficient to
enable Ginnie Mae to perform its obligations under its guarantee.
GINNIE MAE CERTIFICATES. Each Ginnie Mae certificate held in a trust fund
will be a "fully modified pass-through" mortgage-backed certificate issued and
serviced by a Ginnie Mae issuer that is a mortgage banking company or other
financial concern approved by Ginnie Mae or approved by Fannie Mae as a
seller-servicer of FHA loans and/or VA loans. The Ginnie Mae certificates may be
either Ginnie Mae I certificates issued under the Ginnie Mae I program or Ginnie
Mae II certificates issued under the Ginnie Mae II program. The mortgage loans
underlying the Ginnie Mae certificates will consist of FHA loans and/or VA
loans. Each such mortgage is secured by a one- to four-family or multifamily
residential property. Ginnie Mae will approve the issuance of each Ginnie Mae
certificate in accordance with a guaranty agreement between Ginnie Mae and the
Ginnie Mae issuer. Pursuant to its guaranty agreement, a Ginnie Mae issuer will
be required to advance its own funds in order to make timely payments of all
amounts due on each Ginnie Mae certificate, even if the payments received by the
Ginnie Mae issuer on the underlying FHA loans or VA loans are less than the
amounts due on the related Ginnie Mae certificate.
The full and timely payment of principal of and interest on each Ginnie Mae
certificate will be guaranteed by Ginnie Mae, which obligation is backed by the
full faith and credit of the United States. Each Ginnie Mae certificate will
have an original maturity of not more than 30 years, but may have original
maturities of substantially less than 30 years. Each Ginnie Mae certificate will
be based on and backed by a pool of FHA loans or VA loans secured by one- to
four-family residential properties and will provide for the payment by or on
behalf of the Ginnie Mae issuer to the registered holder of the Ginnie Mae
certificate scheduled monthly payments of principal and interest equal to the
registered holder's proportionate interest in the aggregate amount of the
monthly principal and interest payment on each FHA Loan or VA Loan underlying
the Ginnie Mae certificate, less the applicable servicing and guarantee fee
which together equal the difference between the interest on the FHA loan or VA
loan and the pass-through rate on the Ginnie Mae certificate. In addition, each
payment will include proportionate pass-through payments of any prepayments of
principal on the FHA loans or VA loans underlying the Ginnie Mae certificate and
liquidation proceeds in the event of a foreclosure or other disposition of any
such FHA loans or VA loans.
If a Ginnie Mae issuer is unable to make the payments on a Ginnie Mae
certificate as they become due, it must promptly notify Ginnie Mae and request
Ginnie Mae to make the payments. Upon notification and request, Ginnie Mae will
make payments directly to the registered holder of the Ginnie Mae certificate.
In the event no payment is made by a Ginnie Mae issuer and the Ginnie Mae issuer
fails to notify and request Ginnie Mae to make the payment, the holder of the
Ginnie Mae certificate will have recourse only against Ginnie Mae to obtain
payment. The trustee or its nominee, as registered holder of the Ginnie Mae
certificates held in a trust fund, will have the right to proceed directly
against Ginnie Mae under the terms of the guaranty agreements relating to those
Ginnie Mae certificates for any amounts that are not paid when due.
All mortgage loans underlying a particular Ginnie Mae I certificate must
have the same interest rate (except for pools of mortgage loans secured by
manufactured homes) over the term of the loan. The interest rate on a Ginnie Mae
I certificate will equal the interest rate on the mortgage loans included in the
pool of mortgage loans underlying the Ginnie Mae I certificate, less one-half
percentage point per annum of the unpaid principal balance of the mortgage
loans.
Mortgage loans underlying a particular Ginnie Mae II certificate may have
per annum interest rates that vary from one another by up to one percentage
point. The interest rate on each Ginnie Mae II certificate will be between
one-half percentage point and one and one-half percentage points lower than the
highest interest rate on the mortgage loans included in the pool of mortgage
loans underlying the Ginnie Mae II certificate (except for pools of mortgage
loans secured by manufactured homes).
Regular monthly installment payments on each Ginnie Mae certificate held in
a trust fund will be comprised of interest due as specified on the Ginnie Mae
certificate plus the scheduled principal payments on the FHA loans or VA loans
underlying the Ginnie Mae certificate due on the first day of the month in which
the scheduled monthly installments on the Ginnie Mae certificate are due.
Regular monthly installments on
15
each Ginnie Mae certificate are required to be paid to the trustee as registered
holder by the 15th day of each month in the case of a Ginnie Mae I certificate,
and are required to be mailed to the trustee by the 20th day of each month in
the case of a Ginnie Mae II certificate. Any principal prepayments on any FHA
loans or VA loans underlying a Ginnie Mae certificate held in a trust fund or
any other early recovery of principal on such loan will be passed through to the
trustee as the registered holder of the Ginnie Mae certificate.
Ginnie Mae certificates may be backed by graduated payment mortgage loans
or by "buydown" mortgage loans for which funds will have been provided (and
deposited into escrow accounts) for application to the payment of a portion of
the borrowers' monthly payments during the early years of such mortgage loans.
Payments due the registered holders of Ginnie Mae certificates backed by pools
containing "buydown" mortgage loans will be computed in the same manner as
payments derived from other Ginnie Mae certificates and will include amounts to
be collected from both the borrower and the regulated escrow account. The
graduated payment mortgage loans will provide for graduated interest payments
that, during the early years of such mortgage loans, will be less than the
amount of stated interest on such mortgage loans. The interest not so paid will
be added to the principal of the graduated payment mortgage loans and, together
with interest thereon, will be paid in subsequent years. The obligations of
Ginnie Mae and of a Ginnie Mae issuer will be the same irrespective of whether
the Ginnie Mae certificates are backed by graduated payment mortgage loans or
"buydown" mortgage loans. No statistics comparable to the FHA's prepayment
experience on level payment, non-"buydown" mortgage loans are available in
respect of graduated payment or "buydown" mortgages. Ginnie Mae certificates
related to a series of certificates may be held in book-entry form.
If specified in a prospectus supplement, Ginnie Mae certificates may be
backed by multifamily mortgage loans having the characteristics specified in the
prospectus supplement.
FEDERAL HOME LOAN MORTGAGE CORPORATION OR FREDDIE MAC. The Federal Home
Loan Mortgage Corporation (Freddie Mac) is a shareholder-owned, government
sponsored enterprise created pursuant to Title III of the Emergency Home Finance
Act of 1970, as amended. Freddie Mac was established primarily for the purpose
of increasing the availability of mortgage credit for the financing of urgently
needed housing. It seeks to provide an enhanced degree of liquidity for
residential mortgage investments primarily by assisting in the development of
secondary markets for conventional mortgages. The principal activity of Freddie
Mac currently consists of the purchase of first lien conventional mortgage
loans, or participation interests in the mortgage loans, and the sale of the
mortgage loans or participations so purchased in the form of mortgage
securities, primarily Freddie Mac certificates. Freddie Mac is confined to
purchasing, so far as practicable, mortgage loans that it deems to be of such
quality, type and class as to meet generally the purchase standards imposed by
private institutional mortgage investors.
FREDDIE MAC CERTIFICATES. Each Freddie Mac certificate represents an
undivided interest in a pool of mortgage loans that may consist of first lien
conventional loans, FHA loans or VA loans. Freddie Mac certificates are sold
under the terms of a mortgage participation certificate agreement. A Freddie Mac
certificate may be issued under either Freddie Mac's Cash Program or its
Guarantor Program.
Mortgage loans underlying the Freddie Mac certificates held by a trust fund
will consist of mortgage loans with original terms to maturity of from ten to 40
years. Each such mortgage loan must meet the applicable standards set forth in
the legislation that established Freddie Mac. The pool of loans backing a
Freddie Mac certificate may include whole loans, participation interests in
whole loans and undivided interests in whole loans and/or participations
comprising another Freddie Mac pool. Under the Guarantor Program, however, the
pool of loans backing a Freddie Mac certificate may include only whole loans or
participation interests in whole loans.
Freddie Mac guarantees to each registered holder of a Freddie Mac
certificate the timely payment of interest on the underlying mortgage loans to
the extent of the applicable certificate rate on the registered holder's pro
rata share of the unpaid principal balance outstanding on the underlying
mortgage loans represented by that Freddie Mac certificate, whether or not
received. Freddie Mac also guarantees to each registered holder of a Freddie Mac
certificate that the holder will collect all principal on the underlying
mortgage loans, without any offset or deduction, to the extent of such holder's
pro rata share thereof, but does not, except if and to the extent specified in
the related prospectus supplement for a series of certificates,
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guarantee the timely payment of scheduled principal. Under Freddie Mac's Gold PC
Program, Freddie Mac guarantees the timely payment of principal based on the
difference between the pool factor, published in the month preceding the month
of distribution, and the pool factor published in such month of distribution.
Pursuant to its guarantees, Freddie Mac indemnifies holders of Freddie Mac
certificates against any diminution in principal by reason of charges for
property repairs, maintenance and foreclosure. Freddie Mac may remit the amount
due on account of its guaranty of collection of principal at any time after
default on an underlying mortgage loan, but not later than (i) 30 days following
foreclosure sale, (ii) 30 days following payment of the claim by any mortgage
insurer or (iii) 30 days following the expiration of any right of redemption,
whichever occurs later, but in any event no later than one year after demand has
been made upon the mortgagor for accelerated payment of principal. In taking
actions regarding the collection of principal after default on the mortgage
loans underlying Freddie Mac certificates, including the timing of demand for
acceleration, Freddie Mac reserves the right to exercise its judgment with
respect to the mortgage loans in the same manner as for mortgage loans which it
has purchased but not sold. The length of time necessary for Freddie Mac to
determine that a mortgage loan should be accelerated varies with the particular
circumstances of each mortgagor, and Freddie Mac has not adopted standards which
require that the demand be made within any specified period.
Freddie Mac certificates are not guaranteed by the United States or by any
Federal Home Loan Bank and do not constitute debts or obligations of the United
States or any Federal Home Loan Bank. The obligations of Freddie Mac under its
guarantee are obligations solely of Freddie Mac and are not backed by, or
entitled to, the full faith and credit of the United States. If Freddie Mac were
unable to satisfy such obligations, distributions to holders of Freddie Mac
certificates would consist solely of payments and other recoveries on the
underlying mortgage loans and, accordingly, monthly distributions to holders of
Freddie Mac certificates would be affected by delinquent payments and defaults
on such mortgage loans.
Registered holders of Freddie Mac certificates are entitled to receive
their monthly pro rata share of all principal payments on the underlying
mortgage loans received by Freddie Mac, including any scheduled principal
payments, full and partial repayments of principal and principal received by
Freddie Mac by virtue of condemnation, insurance, liquidation or foreclosure,
and repurchases of the mortgage loans by Freddie Mac or the seller thereof.
Freddie Mac is required to remit each registered Freddie Mac Certificateholder's
pro rata share of principal payments on the underlying mortgage loans, interest
at the Freddie Mac pass-through rate and any other sums such as prepayment fees,
within 60 days of the date on which those payments are deemed to have been
received by Freddie Mac.
Under Freddie Mac's Cash Program, there is no limitation on the amount by
which interest rates on the mortgage loans underlying a Freddie Mac certificate
may exceed the pass-through rate on the Freddie Mac certificate. Under this
program, Freddie Mac purchases groups of whole mortgage loans from sellers at
specified percentages of their unpaid principal balances, adjusted for accrued
or prepaid interest, which, when applied to the interest rate of the mortgage
loans and participations purchased, results in the yield (expressed as a
percentage) required by Freddie Mac. The required yield, which includes a
minimum servicing fee retained by the servicer, is calculated using the
outstanding principal balance. The range of interest rates on the mortgage loans
and participations in a particular Freddie Mac pool under the Cash Program will
vary since mortgage loans and participations are purchased and assigned to a
Freddie Mac pool based upon their yield to Freddie Mac rather than on the
interest rate on the underlying mortgage loans. Under Freddie Mac's Guarantor
Program, the pass-through rate on a Freddie Mac certificate is established based
upon the lowest interest rate on the underlying mortgage loans, minus a minimum
servicing fee and the amount of Freddie Mac's management and guaranty income as
agreed upon between the related seller and Freddie Mac.
Freddie Mac certificates duly presented for registration of ownership on or
before the last business day of a month are registered effective as of the first
day of the month. The first remittance to a registered holder of a Freddie Mac
certificate will be distributed so as to be received normally by the 15th day of
the second month following the month in which the purchaser becomes a registered
holder of Freddie Mac certificates. Thereafter, such remittance will be
distributed monthly to the registered holder so as to be received normally by
the 15th day of each month. The Federal Reserve Bank of New York maintains
book-entry accounts with
17
respect to Freddie Mac certificates sold by Freddie Mac, and makes payments of
principal and interest each month to the registered Freddie Mac
certificateholders in accordance with the holders' instructions.
FEDERAL NATIONAL MORTGAGE ASSOCIATION OR FANNIE MAE. The Federal National
Mortgage Association (Fannie Mae) is a federally chartered and privately owned
corporation organized and existing under the Federal National Mortgage
Association Charter Act, as amended. Fannie Mae was originally established in
1938 as a United States government agency to provide supplemental liquidity to
the mortgage market and was transformed into a stockholder-owned and
privately-managed corporation by legislation enacted in 1968.
Fannie Mae provides funds to the mortgage market primarily by purchasing
mortgage loans from lenders, thereby replenishing their funds for additional
lending. Fannie Mae acquires funds to purchase mortgage loans from many capital
market investors that may not ordinarily invest in mortgages, thereby expanding
the total amount of funds available for housing. Operating nationwide Fannie Mae
helps to redistribute mortgage funds from capital-surplus to capital-short
areas.
FANNIE MAE CERTIFICATES. Fannie Mae certificates are Guaranteed Mortgage
Pass-Through Certificates representing fractional undivided interests in a pool
of mortgage loans formed by Fannie Mae. Each mortgage loan must meet the
applicable standards of the Fannie Mae purchase program. Mortgage loans
comprising a pool are either provided by Fannie Mae from its own portfolio or
purchased pursuant to the criteria of the Fannie Mae purchase program.
Mortgage loans underlying Fannie Mae certificates held by a trust fund will
consist of conventional mortgage loans, FHA loans or VA loans. Original
maturities of substantially all of the conventional, level payment mortgage
loans underlying a Fannie Mae certificate are expected to be from eight to 15
years or from 20 to 40 years. The original maturities of substantially all of
the fixed rate level payment FHA loans or VA loans are expected to be 30 years.
Mortgage loans underlying a Fannie Mae certificate may have annual interest
rates that vary by as much as two percentage points from one another. The rate
of interest payable on a Fannie Mae certificate is equal to the lowest interest
rate of any mortgage loan in the related pool, less a specified minimum annual
percentage representing servicing compensation and Fannie Mae's guaranty fee.
Under a regular servicing option pursuant to which the mortgagee or each other
servicer assumes the entire risk of foreclosure losses, the annual interest
rates on the mortgage loans underlying a Fannie Mae certificate will be between
25 basis points and 250 basis points greater than is its annual pass-through
rate. Under a special servicing option pursuant to which Fannie Mae assumes the
entire risk for foreclosure losses, the annual interest rates on the mortgage
loans underlying a Fannie Mae certificate will generally be between 30 basis
points and 255 basis points greater than the annual Fannie Mae certificate
pass-through rate. If specified in the related prospectus supplement, Fannie Mae
certificates may be backed by adjustable rate mortgages.
Fannie Mae guarantees to each registered holder of a Fannie Mae certificate
that it will distribute amounts representing the holder's proportionate share of
scheduled principal and interest payments at the applicable pass-through rate
provided for by the Fannie Mae certificate on the underlying mortgage loans,
whether or not received, and the holder's proportionate share of the full
principal amount of any foreclosed or other finally liquidated mortgage loan,
whether or not such principal amount is actually recovered. The obligations of
Fannie Mae under its guarantees are obligations solely of Fannie Mae and are not
backed by, or entitled to, the full faith and credit of the United States.
Although the Secretary of the Treasury of the United States has discretionary
authority to lend Fannie Mae up to $2.25 billion outstanding at any time,
neither the United States nor any of its agencies or instrumentalities is
obligated to finance Fannie Mae's operations or to assist Fannie Mae in any
other manner. If Fannie Mae were unable to satisfy its obligations,
distributions to holders of Fannie Mae certificates would consist solely of
payments and other recoveries on the underlying mortgage loans and, accordingly,
monthly distributions to holders of Fannie Mae certificates would be affected by
delinquent payments and defaults on such mortgage loans.
Fannie Mae certificates evidencing interests in pools of mortgage loans
formed on or after May 1, 1985 (other than Fannie Mae certificates backed by
pools containing graduated payment mortgage loans or mortgage loans secured by
multifamily projects) are available in book-entry form only. Distributions of
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principal and interest on each Fannie Mae certificate will be made by Fannie Mae
on the 25th day of each month to the persons in whose name the Fannie Mae
certificate is entered in the books of the Federal Reserve Banks (or registered
on the Fannie Mae certificate register in the case of fully registered Fannie
Mae certificates) as of the close of business on the last day of the preceding
month. With respect to Fannie Mae certificates issued in book-entry form,
distributions will be made by wire and, with respect to fully registered Fannie
Mae certificates, distributions will be made by check.
STRIPPED MORTGAGE-BACKED SECURITIES. Agency securities may consist of one
or more stripped mortgage-backed securities as described in this prospectus and
in the related prospectus supplement. Each agency security of this type will
represent an undivided interest in all or part of the principal
distributions -- but not the interest distributions, or the interest
distributions -- but not the principal distributions, or in some specified
portion of the principal and interest distributions on certain Freddie Mac,
Fannie Mae or Ginnie Mae certificates. The underlying securities will be held
under a trust agreement by Freddie Mac, Fannie Mae or Ginnie Mae, each as
trustee, or by another trustee named in the related prospectus supplement.
Freddie Mac, Fannie Mae or Ginnie Mae will guaranty each stripped agency
security to the same extent as such entity guarantees the underlying securities
backing the stripped agency security, unless otherwise specified in the related
prospectus supplement.
OTHER AGENCY SECURITIES. If specified in the related prospectus
supplement, a trust fund may include other mortgage pass-through certificates
issued or guaranteed by Freddie Mac, Fannie Mae or Ginnie Mae. The
characteristics of any such mortgage pass-through certificates will be described
in the related prospectus supplement. If specified in the related prospectus
supplement, a combination of different types of agency securities may be held in
a trust fund.
PRIVATE MORTGAGE-BACKED SECURITIES
GENERAL. Private mortgage-backed securities may consist of
- pass-through certificates or participation certificates evidencing an
undivided interest in a pool of single family loans, home equity loans,
multifamily loans, manufactured housing contracts or home improvement
contracts,
- collateralized mortgage obligations secured by single family loans, home
equity loans, multifamily loans, manufactured housing contracts or home
improvement contracts, or
- other private mortgage-backed securities.
Private mortgage-backed securities may include stripped mortgage-backed
securities representing an undivided interest in all or a part of the principal
distributions -- but not the interest distributions, or the interest
distributions -- but not the principal distributions, or in some specified
portion of the principal and interest distributions on certain mortgage loans.
The private mortgage-backed securities will have been issued pursuant to a
pooling and servicing agreement, an indenture or similar agreement. Unless
otherwise specified in the related prospectus supplement, the seller/servicer of
the underlying loans will have entered into a private mortgage-backed securities
Agreement with a trustee under that agreement. The trustee or its agent, or a
custodian, will possess the mortgage loans underlying the private
mortgage-backed securities. The loans underlying the private mortgage-backed
securities will be serviced by a servicer directly or by one or more
subservicers which may be subject to the supervision of the servicer. Unless
otherwise specified in the related prospectus supplement, the private
mortgage-backed securities servicer will be a Fannie Mae- or Freddie
Mac-approved servicer and, if FHA loans underlie the private mortgage-backed
securities, approved by HUD as an FHA mortgagee.
The private mortgage-backed securities issuer will be a financial
institution or other entity engaged generally in the business of mortgage
lending, a public agency or instrumentality of a state, local or federal
government, or a limited purpose corporation organized for the purpose of, among
other things, establishing trusts and acquiring and selling housing loans to
trusts and selling beneficial interests in trusts. If specified in the related
prospectus supplement, the issuer may be an affiliate of the depositor. The
obligations of the PLS issuer will generally be limited to certain
representations and warranties with respect to the assets it conveys to
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the related trust. Unless otherwise specified in the related prospectus
supplement, the PLS issuer will not have guaranteed any of the assets conveyed
to the related trust or any of the private mortgage-backed securities issued
under the PLS agreement. Additionally, although the loans underlying the private
mortgage-backed securities may be guaranteed by an agency or instrumentality of
the United States, the private mortgage-backed securities themselves will not be
so guaranteed, unless the related prospectus supplement specifies otherwise.
Distributions of principal and interest will be made on the private
mortgage-backed securities on the dates specified in the related prospectus
supplement. The private mortgage-backed securities may be entitled to receive
nominal or no principal distributions or nominal or no interest distributions.
Principal and interest distributions will be made on the private mortgage-backed
securities by the trustee or the servicer. The issuer or the servicer may have
the right to repurchase assets underlying the private mortgage-backed securities
after a particular date or under other circumstances specified in the related
prospectus supplement.
UNDERLYING LOANS. The loans underlying the private mortgage-backed
securities may consist of fixed rate, level payment, fully amortizing loans or
graduated payment mortgage loans, buydown loans, adjustable rate mortgage loans,
or loans having balloon or other special payment features. The loans may be
secured by one- to four-family residential property, small mixed-use property,
five- to eight-family residential property, multifamily property, manufactured
homes or by an assignment of the proprietary lease or occupancy agreement
relating to a specific dwelling within a cooperative and the related shares
issued by the cooperative.
CREDIT SUPPORT RELATING TO PRIVATE MORTGAGE-BACKED SECURITIES. Credit
support in the form of reserve funds, subordination of other private
mortgage-backed securities issued under the private mortgage-backed securities
agreement, letters of credit, surety bonds, insurance policies or other types of
credit support may be provided with respect to the loans underlying the private
mortgage-backed securities or with respect to the private mortgage-backed
securities themselves.
ADDITIONAL INFORMATION. If the trust fund for a series of securities
includes private mortgage-backed securities, the related prospectus supplement
will generally specify
- the aggregate approximate principal amount and type of private
mortgage-backed securities to be included in the trust fund,
- the maximum original term-to-stated maturity of the private
mortgage-backed securities,
- the weighted average term-to-stated maturity of the private
mortgage-backed securities,
- the pass-through or certificate rate of the private mortgage-backed
securities,
- the weighted average pass-through of interest rate of the private
mortgage-backed securities,
- the issuer, the servicer (if other than the issuer) and the trustee,
- certain characteristics of any credit support such as reserve funds,
insurance policies, surety bonds, letters of credit or guaranties
relating to the loans underlying the private mortgage-backed securities
themselves,
- the terms on which the loans underlying the private mortgage-backed
securities may, or are required to, be purchased prior to their stated
maturity or the stated maturity of the private mortgage-backed
securities, and
- the terms on which mortgage loans may be substituted for those originally
underlying the private mortgage-backed securities.
In addition, the related prospectus supplement will provide information
about the loans which comprise the underlying assets of the private
mortgage-backed securities, generally including
- the payment features of the mortgage loans,
- the approximate aggregate principal balance, if known, of underlying
loans insured or guaranteed by a governmental entity,
20
- the servicing fee or range of servicing fees with respect to the loans,
and
- the minimum and maximum stated maturities of the underlying loans at
origination.
SUBSTITUTION OF TRUST ASSETS
Substitution of trust assets may be permitted in the event of breaches of
representations and warranties with respect to certain trust assets or in the
event the documentation with respect to any trust asset is determined by the
trustee to be incomplete or as further specified in the prospectus supplement.
The period during which such substitution will be permitted generally will be
indicated in the prospectus supplement.
USE OF PROCEEDS
The net proceeds to be received from the sale of the securities will be
applied by the depositor to the purchase of trust assets or will be used by the
depositor for general corporate purposes. The depositor expects to sell
securities in series from time to time, but the timing and amount of offerings
of securities will depend on a number of factors, including the volume of trust
assets acquired by the depositor, prevailing interest rates, availability of
funds and general market conditions.
LOAN PROGRAM
The loans will have been purchased by the depositor, either directly or
through affiliates, from sellers. Unless otherwise specified in the prospectus
supplement, the loans acquired by the depositor will have been originated in
accordance with the underwriting criteria described below.
UNDERWRITING STANDARDS
Each seller will represent and warrant that all loans originated and/or
sold by it to the depositor will have been underwritten in accordance with
standards described in the prospectus supplement.
Underwriting standards are applied by or on behalf of a lender to evaluate
the borrower's credit standing and repayment ability, and the value and adequacy
of the related property as collateral. In general, a prospective borrower
applying for a mortgage loan is required to fill out a detailed application
designed to provide to the underwriting officer pertinent credit information. As
part of the description of the borrower's financial condition, the borrower
generally is required to provide a current list of assets and liabilities and a
statement of income and expenses, as well as an authorization to apply for a
credit report which summarizes the borrower's credit history with local
merchants and lenders and any record of bankruptcy or other significant public
records. In most cases, an employment verification is obtained from an
independent source (typically the borrower's employer), which verification
reports the length of employment with that organization, the borrower's current
salary and whether it is expected that the borrower will continue such
employment in the future. If a prospective borrower is self-employed, the
borrower may be required to submit copies of signed tax returns. The borrower
may also be required to authorize verification of deposits at financial
institutions where the borrower has demand or savings accounts.
In determining the adequacy of the property as collateral, an appraisal
will generally be made of each property considered for financing. The appraiser
is required to inspect the property and verify that it is in good repair and
that construction, if new, has been completed. The appraisal is based on the
market value of comparable homes, the estimated rental income (if considered
applicable by the appraiser) and the cost of replacing the home.
Once all applicable employment, credit and property information is
received, a determination generally is made as to whether the prospective
borrower has sufficient monthly income available:
- to meet the borrower's monthly obligations on the proposed mortgage loan
(generally determined on the basis of the monthly payments due in the
year of origination) and other expenses related to the property (such as
property taxes and hazard insurance), and
- to meet monthly housing expenses and other financial obligations and
monthly living expenses.
21
The underwriting standards applied by a seller, particularly with respect to the
level of loan documentation and the borrower's income and credit history, may be
varied in appropriate cases where factors such as low combined loan-to-value
ratios or other favorable credit aspects exist.
If specified in the prospectus supplement, a portion of the loans in the
pool may have been originated under a limited documentation program. Under a
limited documentation program, more emphasis is placed on the value and adequacy
of the property as collateral and other assets of the borrower than on credit
underwriting. Under a limited documentation program, certain credit underwriting
documentation concerning income or income verification and/or employment
verification is waived. The prospectus supplement will indicate the types of
limited documentation programs pursuant to which the loans were originated and
the underwriting standards applicable to such limited documentation programs.
In the case of a loan secured by a leasehold interest in real property, the
title to which is held by a third party lessor, the seller will represent and
warrant, among other things, that the remaining term of the lease and any
sublease is at least five years longer than the remaining term on the related
mortgage note.
Certain of the types of loans that may be included in a trust may involve
additional uncertainties not present in traditional types of loans. For example,
certain of such loans may provide for escalating or variable payments by the
borrower. These types of loans are underwritten on the basis of a judgment that
the borrowers have the ability to make the monthly payments required initially.
In some instances, however, a borrower's income may not be sufficient to permit
continued loan payments as such payments increase. These types of loans may also
be underwritten primarily upon the basis of combined loan-to-value ratios or
other favorable credit factors.
QUALIFICATIONS OF SELLERS
Each seller must be an institution experienced in originating and servicing
loans of the type contained in the pool in accordance with accepted practices
and prudent guidelines, and must maintain satisfactory facilities to originate
and service those loans. Each seller must be a seller/servicer approved by
either Fannie Mae or Freddie Mac. Each seller must be a mortgagee approved by
the FHA or an institution the deposit accounts of which are insured by the
Federal Deposit Insurance Corporation.
QUALITY CONTROL
A quality control program has been developed to monitor the quality of loan
underwriting at the time of acquisition and on an ongoing basis. All loans
purchased will be subject to this quality control program. A legal document
review of each loan acquired will be conducted to verify the accuracy and
completeness of the information contained in the mortgage notes, security
instruments and other pertinent documents in the file. A sample of loans to be
acquired, selected by focusing on those loans with higher risk characteristics,
will normally be submitted to a third party nationally recognized underwriting
review firm for a compliance check of underwriting and review of income, asset
and appraisal information.
REPRESENTATIONS BY SELLERS; REPURCHASES
Each seller will have made representations and warranties in respect of the
loans sold by such seller and evidenced by all, or a part, of a series of
securities. Such representations and warranties may include, among other things:
- that title insurance (or in the case of properties located in areas where
such policies are generally not available, an attorney's certificate of
title) and any required hazard insurance policy were effective at
origination of each loan and that each policy (or certificate of title as
applicable) remained in effect on the date of purchase of the loan from
the seller by or on behalf of the depositor;
- that the seller had good title to each such loan and such loan was
subject to no offsets, defenses, counterclaims or rights of rescission
except to the extent that any buydown agreement may forgive certain
indebtedness of a borrower;
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- that each loan constituted a valid lien on, or a perfected security
interest with respect to, the property (subject only to permissible liens
disclosed, if applicable, title insurance exceptions, if applicable, and
certain other exceptions described in the Agreement) and that the
property was free from damage and was in acceptable condition;
- that there were no delinquent tax or assessment liens against the
property;
- that no required payment on a loan was delinquent more than the number of
days specified in the prospectus supplement; and
- that each loan was made in compliance with, and is enforceable under, all
applicable state and federal laws and regulations in all material
respects.
The servicer or the trustee will promptly notify the relevant seller of any
breach of any representation or warranty made by it in respect of a loan which
materially and adversely affects the interests of the securityholders in such
loan. Unless otherwise specified in the prospectus supplement, if such seller
cannot cure such breach within the time period specified in the prospectus
supplement following notice from the servicer or the trustee, as the case may
be, then such seller will be obligated to repurchase such loan from the trust at
a purchase price equal to 100% of the unpaid principal balance thereof as of the
date of the repurchase plus accrued interest thereon to the first day of the
month following the month of repurchase at the loan rate (less any advances or
amount payable as related servicing compensation if the seller is the servicer)
and may elect to substitute for such loan a replacement loan that satisfies the
criteria specified in the prospectus supplement.
If a REMIC election is being made with respect to a trust, the servicer,
the trustee or a holder of the related residual certificate generally will be
obligated to pay any prohibited transaction tax which may arise in connection
with any such repurchase or substitution and the trustee must have received a
satisfactory opinion of counsel that any such substitution will not cause the
trust to lose its status as a REMIC or otherwise subject the trust to a
prohibited transaction tax. This repurchase or substitution obligation will
constitute the sole remedy available to holders of securities or the trustee for
a breach of representation by a seller.
Neither the depositor nor the servicer will be obligated to purchase or
substitute a loan if a seller defaults on its obligation to do so, and no
assurance can be given that sellers will carry out their respective repurchase
or substitution obligations with respect to loans.
DESCRIPTION OF THE SECURITIES
Each series of securities issued in the form of certificates will be issued
pursuant to either a pooling and servicing agreement or a trust agreement among
the depositor, the servicer and the trustee or pursuant to agreements containing
comparable provisions, as described in the prospectus supplement. A form of
pooling and servicing agreement and trust agreement have been filed as an
exhibit to the registration statement of which this prospectus forms a part.
Each series of securities issued in the form of bonds will be issued pursuant to
an indenture between the related trust and the entity named in the prospectus
supplement as trustee or pursuant to agreements containing comparable
provisions, as described in the prospectus supplement, and the related loans
will be serviced by the servicer pursuant to a servicing agreement. A form of
indenture and servicing agreement has been filed as an exhibit to the
registration statement of which this prospectus forms a part.
A series of securities may consist of both bonds and certificates. The
provisions of each Agreement will vary depending upon the nature of the
securities to be issued thereunder and the nature of the trust. The following
are descriptions of the material provisions which may appear in each Agreement.
The descriptions are subject to, and are qualified in their entirety by
reference to, all of the provisions of the specific Agreement applicable to
series of securities. The depositor will provide a copy of the Agreement
(without exhibits) relating to any series without charge upon written request of
a holder of record of a security of such series addressed to the depositor, 591
Redwood Highway, Mill Valley, California 94941, Attention: Secretary.
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GENERAL
Unless otherwise described in the prospectus supplement, the securities of
each series:
- will be issued in book-entry or fully registered form, in the authorized
denominations specified in the prospectus supplement;
- will, in the case of certificates, evidence specified beneficial
ownership interests in the assets of the trust;
- will, in the case of bonds, be secured by the assets of the trust; and
- will not be entitled to payments in respect of the assets included in any
other trust established by the depositor.
Unless otherwise specified in the prospectus supplement, the securities
will not represent obligations of the depositor or any affiliate of the
depositor. Certain of the loans may be guaranteed or insured as set forth in the
prospectus supplement. Each trust will consist of, to the extent provided in the
related Agreement:
- the trust assets subject to the related Agreement, including all payments
of interest and principal received with respect to the loans after the
Cut-Off Date;
- such assets as from time to time are required to be deposited in the
related Collection Account;
- property which secured a loan and which is acquired on behalf of the
securityholders by foreclosure or deed in lieu of foreclosure; and
- any insurance policies or other forms of credit enhancement required to
be maintained pursuant to the related Agreement.
If so specified in the prospectus supplement, a trust may also include one
or more of the following: reinvestment income on payments received on the trust
assets, a reserve account, a mortgage pool insurance policy, a special hazard
insurance policy, a bankruptcy bond, one or more letters of credit, a surety
bond, guaranties, a demand note or similar instruments.
Each series of securities will be issued in one or more classes. Each class
of certificates of a series will evidence beneficial ownership of a specified
percentage (which may be 0%) or portion of future interest payments and a
specified percentage (which may be 0%) or portion of future principal payments
on, and each class of notes of a series will be secured by, the related trust
assets. A series of securities may include one or more classes that are senior
in right to payment to one or more other classes of securities of such series.
Certain series or classes of securities may be covered by insurance policies,
surety bonds or other forms of credit enhancement, in each case as described in
the prospectus supplement. One or more classes of securities of a series may be
entitled to receive distributions of principal, interest or any combination
thereof. Distributions on one or more classes of a series of securities may be
made prior to one or more other classes, after the occurrence of specified
events, in accordance with a schedule or formula or on the basis of collections
from designated portions of the related trust assets, in each case as specified
in the prospectus supplement. The timing and amounts of such distributions may
vary among classes or over time as specified in the prospectus supplement.
Distributions of principal and interest (or, where applicable, of principal
only or interest only) on the related securities will be made by the trustee or
the payment agent on each payment date in proportion to the percentages
described in the prospectus supplement. Payment dates will occur either monthly,
quarterly, semi-annually or at other specified intervals and will occur on the
dates as are described in the prospectus supplement. Distributions will be made
to the persons in whose names the securities are registered at the close of
business on the record date relating to payment date. Distributions will be made
in the manner described in the prospectus supplement to the persons entitled
thereto at the address appearing in the register maintained for securityholders;
provided, however, that, unless otherwise provided in the prospectus supplement,
the final distribution in retirement of the securities will be made only upon
presentation and surrender of the securities
24
at the office or agency of the trustee or other person specified in the notice
to securityholders of such final distribution.
The securities will be freely transferable and exchangeable at the
corporate trust office of the trustee specified in the prospectus supplement. No
service charge will be made for any registration of exchange or transfer of
securities of any series, but the trustee may require payment of a sum
sufficient to cover any related tax or other governmental charge.
The sale or transfer of certain classes of securities to employee benefit
plans and retirement arrangements that are subject to the provisions of Title I
of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), or
Section 4975 of the Internal Revenue Code of 1986, as amended (the "Code"), may
be restricted. The prospectus supplement for each series of securities will
describe any such restrictions.
As to each series, an election may be made to treat the related trust or
designated portions thereof as one or more REMICs as defined in the Code. The
prospectus supplement will specify whether a REMIC election is to be made.
Alternatively, the Agreement for a series of securities may provide that a REMIC
election may be made at the discretion of the depositor or the servicer and may
only be made if certain conditions are satisfied. As to any such series, the
terms and provisions applicable to the making of a REMIC election will be set
forth in the prospectus supplement. If such an election is made with respect to
a series of securities, one of the classes will be designated as evidencing the
sole class of residual interests in the REMIC. All other classes of securities
in such a series will constitute regular interests in the REMIC. As to each
series of securities with respect to which a REMIC election is to be made; the
servicer, the trustee and/or a holder of the residual certificate will be
obligated to take all actions required in order to comply with applicable laws
and regulations.
DISTRIBUTIONS ON SECURITIES
GENERAL.
In general, the method of determining the amount of distributions on a
particular series of securities will depend on the type of credit support, if
any, that is used with respect to such series. Set forth below are descriptions
of various methods that may be used to determine the amount of distributions on
the securities of a particular series. The prospectus supplement for each series
of securities will describe the method to be used in determining the amount of
distributions on the securities of that series.
Distributions allocable to principal and interest on the securities will be
made by the trustee out of, and only to the extent of, funds in the related
Collection Account, including any funds transferred from any reserve account. As
between securities of different classes and as between distributions of
principal (and, if applicable, between distributions of principal prepayments
and scheduled payments of principal) and interest, distributions made on any
payment date will be applied as specified in the prospectus supplement. The
prospectus supplement will also describe the method for allocating distributions
among securities of a particular class.
AVAILABLE FUNDS.
All distributions on the securities of each series on each payment date
will be made from the available funds described below, in accordance with the
terms described in the prospectus supplement and specified in the Agreement.
Available funds for each payment date will generally equal the amount on deposit
in the related Collection Account on such payment date (net of related fees and
expenses payable by the related trust) other than amounts to be held therein for
distribution on future payment dates.
DISTRIBUTIONS OF INTEREST.
Interest will accrue on the aggregate principal balance of the securities
(or, in the case of securities entitled only to distributions allocable to
interest, the aggregate notional amount) of each class of securities (the "Class
Security Balance") entitled to interest from the date, at the pass-through rate
or interest rate, as applicable, and for the periods specified in the related
prospectus supplement. The pass-through rate or interest rate applicable to each
class of securities will be specified in the related prospectus supplement as
either a fixed rate or adjustable rate. Other than with respect to a class of
securities that provides for interest
25
that accrues but is not currently payable ("accrual securities"), to the extent
funds are available for the payment of interest on a class of securities,
interest accrued during each specified period on that class of securities
entitled to interest will be distributable on the payment dates specified in the
prospectus supplement until the aggregate Class Security Balance of those
securities has been distributed in full or, in the case of securities entitled
only to distributions allocable to interest, until the aggregate notional amount
of those securities is reduced to zero or for the period of time designated in
the prospectus supplement. Except in the case of the accrual securities, the
original Class Security Balance of each security will equal the aggregate
distributions allocable to principal to which such security is entitled.
Distributions allocable to interest on each security that is not entitled to
distributions allocable to principal will be calculated based on the notional
amount of such security. The notional amount of a security will not evidence an
interest in or entitlement to distributions allocable to principal but will be
used solely for convenience in expressing the calculation of interest and for
certain other purposes.
Interest payable on the securities of a series on a payment date will
include all interest accrued during the period specified in the prospectus
supplement. In the event interest accrues over a period ending two or more days
prior to a payment date, the effective yield to securityholders will be reduced
from the yield that would otherwise be obtainable if interest payable on the
security were to accrue through the day immediately preceding such payment date,
and the effective yield (at par) to securityholders will be less than the
indicated coupon rate.
With respect to any class of accrual securities, as specified in the
prospectus supplement, any interest that has accrued but is not paid on a given
payment date may be added to the aggregate Class Security Balance of such class
of securities on that payment date and thereafter may itself accrue interest as
part of the aggregate Class Security Balance. Distributions of interest on any
class of accrual securities will commence only after the occurrence of the
events specified in such prospectus supplement. Prior to the occurrence of those
specified events, the beneficial ownership interest in the trust or the
principal balance, as applicable, of such class of accrual securities, as
reflected in the aggregate Class Security Balance of such class of accrual
securities, will increase on each payment date by the amount of interest that
accrued on that class of accrual securities during the preceding interest
accrual period.
DISTRIBUTIONS OF PRINCIPAL.
The prospectus supplement will specify the method by which the amount of
principal to be distributed on the securities on each payment date will be
calculated and the manner in which such amount will be allocated among the
classes of securities entitled to distributions of principal. The aggregate
Class Security Balance of any class of securities entitled to distributions of
principal generally will equal the aggregate original Class Security Balance
specified in the related prospectus supplement for that class, reduced by all
distributions allocable to principal previously made to the holders of that
class of securities and by any allocations of realized losses to that class,
and, in the case of accrual securities, increased by all interest accrued but
not then distributable on such accrual securities, as specified in the
prospectus supplement. The aggregate Class Security Balance for adjustable rate
securities may also be subject to the effects of negative amortization.
If so provided in the prospectus supplement, one or more classes of
securities will be entitled to receive all or a disproportionate percentage of
the principal prepayments made with respect to a payment date in the percentages
and under the circumstances or for the periods specified in that prospectus
supplement. This allocation of principal prepayments to that class or those
classes of securities will have the effect of accelerating the amortization of
those securities while increasing the interests evidenced by one or more other
classes of securities issued by the related trust. Increasing the interests of
the other classes of securities relative to that of certain securities is
intended to preserve the availability of the subordination provided by those
other classes of securities.
UNSCHEDULED DISTRIBUTIONS.
If specified in the prospectus supplement, the securities will be subject
to receipt of distributions before the next scheduled payment date under the
circumstances and in the manner described below and in such
26
prospectus supplement. If applicable, the trustee will be required to make these
unscheduled distributions on the day and in the amount specified in the
prospectus supplement if, due to substantial payments of principal (including
principal prepayments, redemptions of securities or termination of the trust) on
the trust assets, the trustee or the servicer determines that the funds
available or anticipated to be available from the Collection Account and, if
applicable, any reserve account, on the next scheduled payment date may be
insufficient to make required distributions on the securities on that payment
date. Unless otherwise specified in the prospectus supplement, the amount of any
such unscheduled distribution that is allocable to principal will not exceed the
amount that would otherwise have been required to be distributed as principal on
the securities on the next payment date. Unless otherwise specified in the
prospectus supplement, the unscheduled distributions will include interest at
the applicable pass-through rate, if any, or interest rate, if any, on the
portion of the unscheduled distribution that is allocable to principal for the
period and to the date specified in the prospectus supplement.
ADVANCES
To the extent provided in the prospectus supplement, the servicer will be
required to advance on or before each payment date (from its own funds, funds
advanced by subservicers or funds held in the Collection Account for future
distributions to the holders of securities of the related series), an amount
equal to the aggregate of payments of interest and/or principal that were
delinquent on the related determination date (as specified in the prospectus
supplement) and were not advanced by any subservicer, subject to the servicer's
determination that such advances may be recoverable out of late payments by
borrowers, liquidation proceeds, insurance proceeds or otherwise.
In making advances, the servicer will endeavor to maintain a regular flow
of scheduled interest and principal payments to securityholders, rather than to
guarantee or insure against losses. If advances are made by the servicer from
cash being held for future distribution to securityholders, the servicer will
replace the funds advanced on or before any future payment date to the extent
that funds in the applicable Collection Account on that payment date would be
less than the amount required to be available for distributions to
securityholders on that date. Any funds advanced with respect to a given loan
will be reimbursable to the servicer out of recoveries on that loan (which
recoveries will include late payments made by the related borrower, any related
insurance proceeds, liquidation proceeds or proceeds of any loan purchased by
the depositor, a subservicer or a seller pursuant to the related Agreement).
Advances by the servicer (and any advances by a subservicer) also will be
reimbursable to the servicer (or subservicer) from cash otherwise distributable
to securityholders (including the holders of senior securities) to the extent
that the servicer determines that any advances previously made are not
ultimately recoverable from recoveries on the related loans.
To the extent provided in the prospectus supplement, the servicer also will
be obligated to make advances in respect of certain taxes and insurance premiums
not paid by borrowers on a timely basis, but only to the extent those advances
would be recoverable out of insurance proceeds, liquidation proceeds or
otherwise. These advances are reimbursable to the servicer to the extent
permitted by the related Agreement. The obligations of the servicer to make
advances may be supported by a cash advance reserve account, a surety bond or
other arrangement of the type described in this prospectus under "Credit
Enhancement," and in each case as described in the prospectus supplement.
If specified in the prospectus supplement, in the event the servicer or a
subservicer fails to make a required advance, the trustee, in its capacity as
successor servicer, will be obligated to make the advance. If the trustee makes
this type of advance, it will be entitled to reimbursement to the same extent
and in the same manner that the servicer or a subservicer would have been
entitled to reimbursement if it had made the advance.
COMPENSATING INTEREST
Payments may be received on loans in the trust which represent either a
principal prepayment in full or a principal payment which is in excess of the
scheduled monthly payment and which is not intended to cure a
27
delinquency. If specified in the prospectus supplement, the servicer will be
required to remit to the trustee with respect to each of these types of payments
during any due period an amount equal to either (1) the excess, if any, of (a)
30 days' interest on the principal balance of the related loan at the loan rate
net of the per annum rate at which the servicer's servicing fee accrues, over
(b) the amount of interest actually received on the loan during the related due
period, net of the servicer's servicing fee or (2) such other amount as
described in the prospectus supplement. This amount remitted to the trustee by
the servicer will be limited to amounts otherwise payable to the servicer as
servicing compensation.
REPORTS TO SECURITYHOLDERS
Prior to or concurrently with each distribution on a payment date, the
servicer or the trustee will furnish to each securityholder of record of the
related series a statement setting forth, to the extent applicable to such
series of securities, among other things:
- the amount of the distribution made on that payment date that is
allocable to principal, separately identifying the aggregate amount of
any principal prepayments and, if specified in the prospectus supplement,
any applicable prepayment penalties included therein;
- the amount of the distribution made on that payment date that is
allocable to interest;
- the amount of any advance made during the related due period;
- the aggregate amount (a) otherwise allocable to the subordinated
securityholders on that payment date, and (b) withdrawn from the reserve
account, if any, that is included in the amounts distributed to the
senior securityholders;
- the outstanding principal balance or notional amount, as applicable, of
each class of the related series after giving effect to all distributions
of principal on that payment date;
- the percentage or amount of principal payments on the loans (excluding
prepayments), if any, which each class will be entitled to receive on the
related payment date;
- the percentage or amount of principal prepayments on the loans, if any,
which each such class will be entitled to receive on the related payment
date;
- the amount of the servicing compensation retained or withdrawn from the
Collection Account by the servicer, and the amount of additional
servicing compensation received by the servicer attributable to
penalties, fees, excess liquidation proceeds and other similar charges
and items;
- the number and aggregate principal balances of loans which are:
- not in foreclosure but are delinquent (A) 31 to 60 days, (B) 61 to 90
days and (C) 91 or more days, as of the close of business on the last
day of the calendar month preceding that payment date; and
- in foreclosure and are delinquent (A) 31 to 60 days, (B) 61 to 90 days
and (C) 91 or more days, as of the close of business on the last day
of the calendar month preceding that payment date;
- the remaining principal balance of any loan secured by real estate
acquired through foreclosure or grant of a deed in lieu of foreclosure
and held as of the last day of the calendar month preceding that payment
date;
- the pass-through rate or interest rate, as applicable, if adjusted from
the date of the last statement, of any such class expected to be
applicable to the next distribution to such class;
- if applicable, the amount remaining in any reserve account at the close
of business on that payment date;
- the pass-through rate or interest rate, as applicable, as of the day
prior to the immediately preceding payment date; and
28
- any amounts remaining under letters of credit, pool insurance policies or
other forms of credit enhancement after distributions made on that
payment date.
The report to securityholders for any series of securities may include
additional or other information of a similar nature to that specified above.
In addition, within a reasonable period of time after the end of each
calendar year, the servicer or the trustee will mail to each securityholder of
record at any time during that calendar year a report of information as may be
deemed necessary or desirable for securityholders to prepare their tax returns.
CATEGORIES OF CLASSES OF SECURITIES
The securities of any series may be comprised of one or more classes. These
classes generally fall into different categories. The following chart identifies
and generally defines certain of the more typical categories of security
classes. The prospectus supplement for a series of securities may identify the
classes which comprise that series by reference to the following categories.
<Table>
<Caption>
CATEGORIES OF CLASSES DEFINITION
PRINCIPAL TYPES
Accretion Directed........................ A class that receives principal payments that are funded
from collections that would have otherwise funded
interest payments on the accreted interest from
specified accrual classes. An accretion directed class
also may receive principal payments from principal paid
on the trust assets.
Component Securities...................... A class consisting of "components." The components of a
class of component securities may have different
principal and/or interest payment characteristics but
together constitute a single class. Each component of a
class of component securities may be identified as
falling into one or more of the categories in this
chart.
Notional Amount Securities................ A class having no principal balance and bearing interest
on the related notional amount. The notional amount is
used for purposes of the determination of interest
distributions.
Planned Principal Class or PACs........... A class that is designed to receive principal payments
using a predetermined principal balance schedule derived
by assuming two constant prepayment rates for the trust
assets. These two rates are the endpoints for the
"structuring range" for the planned principal class. The
planned principal classes in any series of securities
may be subdivided into different categories (e.g.,
primary planned principal classes, secondary planned
principal classes and so forth) having different
effective structuring ranges and different principal
payment priorities. The structuring range for the
secondary planned principal class of a series of
securities will be narrower than that for the primary
planned principal class of such series.
Scheduled Principal Class................. A class that is designated to receive principal payments
using a predetermined principal balance schedule but is
not designated as a planned principal class or targeted
principal class. In many cases, the schedule is derived
by assuming two constant prepayment rates for the trust
assets. Theses two rates are the endpoints for the
"structuring range" for the scheduled principal class.
</Table>
29
<Table>
<Caption>
CATEGORIES OF CLASSES DEFINITION
Sequential Pay............................ Classes that receive principal payments in a prescribed
sequence, that do not have predetermined principal
balance schedules and that receive payments of
principal, when amounts are available to make payments
of principal, continuously from the first payment date
on which they receive principal until they are retired.
A single class that receives principal payments before
or after all other classes in the same series of
securities may be identified as a sequential pay class.
Strip..................................... A class that receives a constant proportion, or "strip,"
of the principal payments on the trust assets. The
constant proportion of such principal payments may or
may not vary for each trust asset included in the trust
and will be calculated in the manner described in the
prospectus supplement. These classes may also receive
payments of interest.
Support Class (or companion class)........ A class that receives principal payments on any payment
date only if scheduled payments have been made on
specified planned principal classes, targeted principal
classes and/or scheduled principal classes.
Targeted Principal Class.................. A class that is designated to receive principal payments
using a predetermined principal balance schedule derived
by assuming a single constant prepayment rate for the
trust assets.
INTEREST TYPES
Accrual................................... A class that adds accrued interest otherwise
distributable on the class to the principal balance of
the class on each applicable payment date. The accretion
may continue until some specified event has occurred or
until the class is retired.
Fixed Rate................................ A class with a pass-through rate or interest rate that
is fixed throughout the life of the class.
Floating Rate............................. A class with an interest rate that resets periodically
based upon a designated index and that varies directly
with changes in that index.
Inverse Floating Rate..................... A class with an interest rate that resets periodically
based upon a designated index and that varies inversely
with changes in such index.
Interest Only or IO....................... A class that receives some or all of the interest
payments made on the trust assets and little or no
principal. Interest only certificates have either a
nominal principal balance or a notional amount. A
nominal principal balance represents actual principal
that will be paid on the class. It is referred to as
nominal since it is extremely small compared to other
classes. A notional amount is an amount used as a
reference to calculate the amount of interest due on an
interest only security but is never actually paid out as
principal on the class.
</Table>
30
<Table>
<Caption>
CATEGORIES OF CLASSES DEFINITION
Partial Accrual........................... A class that adds a portion of the amount of accrued
interest thereon to the principal balance of the class
on each applicable payment date, with the remainder of
the accrued interest to be distributed currently as
interest on the class on each applicable payment date.
The accretion of designated amounts of the interest may
continue until a specified event has occurred or until
the class is retired.
Principal Only or PO...................... A class that does not bear interest and is entitled to
receive only distributions in respect of principal.
Variable Rate............................. A class with a pass-through rate of interest rate that
resets periodically and is calculated by reference to
the rate or rates of interest applicable to specified
assets or instruments (e.g., the loan rates borne by the
loans in the trust).
</Table>
BOOK-ENTRY REGISTRATION OF SECURITIES
As described in the prospectus supplement, if not issued in fully
registered form, each class of securities will be registered as book-entry
securities. Persons acquiring beneficial ownership interests in the securities,
or "beneficial owners," will hold their securities through DTC in the United
States, or Clearstream Banking, societe anonyme (formerly Cedelbank), commonly
known as Clearstream, Luxembourg, or the Euroclear system, in Europe.
Clearstream, Luxembourg and Euroclear will hold omnibus positions for
Clearstream, Luxembourg participants and Euroclear participants, respectively,
through customers' securities accounts in Clearstream, Luxembourg's and
Euroclear's names on the books of their respective depositaries. The
depositaries will hold these positions in customers' Collection Accounts in the
depositaries names on DTC's books. The prospectus supplement will state if the
securities will be in physical rather than book-entry form.
DTC is a limited purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a clearing
corporation within the meaning of the Uniform Commercial Code and a clearing
agency registered under Section 17A of the Securities Exchange Act. DTC was
created to hold securities for its participants and facilitate the clearance and
settlement of securities transactions between its participants through
electronic book-entry changes in their accounts, eliminating the need for
physical movement of certificates. DTC's participants include securities brokers
and dealers, banks, trust companies and clearing corporations and may include
other organizations. Indirect access to the DTC system also is available to
indirect participants such as brokers, dealers, banks and trust companies that
clear through or maintain a custodial relationship with a DTC participant,
either directly or indirectly.
Transfers between DTC participants will occur according to DTC rules.
Transfers between Clearstream, Luxembourg participants and Euroclear
participants will occur according to their applicable rules and operating
procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Clearstream,
Luxembourg participants or Euroclear participants, on the other, will be
effected in DTC according to DTC rules on behalf of the relevant European
international clearing system by its depositary; however, those cross-market
transactions will require the counterparty to deliver instructions to the
relevant European international clearing system according to the counterparty
rules and procedures and within its established deadlines (European time). The
relevant European international clearing system will, if the transaction meets
its settlement requirements, deliver instructions to its depositary to take
action to effect final settlement on its behalf by delivering or receiving
securities in DTC, and making or receiving payment according to normal
procedures for same-day funds settlement applicable to DTC. Clearstream,
Luxembourg participants and Euroclear participants may not deliver instructions
directly to the depositaries.
31
Because of time-zone differences, credits of securities in Clearstream,
Luxembourg or Euroclear resulting from a transaction with a DTC participant will
be made during the subsequent securities settlement processing, dated the
business day following the DTC settlement date, and the credits or any
transactions in the securities settled during the processing will be reported to
the relevant Clearstream, Luxembourg participant or Euroclear participant on
that business day. Cash received in Clearstream, Luxembourg or Euroclear
resulting from sales or securities by or through a Clearstream, Luxembourg
participant or a Euroclear participant to a DTC participant will be received
with value on the DTC settlement date but will be available in the relevant
Clearstream, Luxembourg or Euroclear cash account only as of the business day
following settlement in DTC.
Clearstream, Luxembourg was incorporated in 1970 as Cedel S.A., a company
with limited liability under Luxembourg law (a societe anonyme). Cedel S.A.
subsequently changed its name to Cedelbank. On January 10, 2000, Cedelbank's
parent company, Cedel International, societe anonyme, merged its clearing,
settlement and custody business with that of Deutsche Borse Clearing AG.
Clearstream, Luxembourg holds securities for its customers and facilitates
the clearance and settlement of securities transactions between Clearstream,
Luxembourg customers through electronic book-entry changes in accounts of
Clearstream, Luxembourg customers, thereby eliminating the need for physical
movement of certificates. Transactions may be settled by Clearstream, Luxembourg
in any of 36 currencies, including U.S. Dollars. Clearstream, Luxembourg
provides, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. Clearstream, Luxembourg also deals with domestic
securities markets in over 30 countries through established depository and
custodial relationships. Clearstream, Luxembourg is registered as a bank in
Luxembourg, and as such is subject to regulation by the Commission de
Surveillance du Secteur Financier which supervises Luxembourg banks.
Clearstream, Luxembourg's customers are world-wide financial institutions
including underwriters, securities brokers and dealers, banks, trust companies
and clearing corporations. Clearstream, Luxembourg's U.S. customers are limited
to securities brokers and dealers, and banks. Currently, Clearstream, Luxembourg
has approximately 2,000 customers located in over 80 countries, including all
major European countries, Canada, and the United States. Indirect access to
Clearstream, Luxembourg is available to other institutions that clear through or
maintain a custodial relationship with an account holder of Clearstream,
Luxembourg. Clearstream, Luxembourg has established an electronic bridge with
Morgan Guaranty Trust Company of New York as the operator of the Euroclear
System in Brussels to facilitate settlement of trades between Clearstream,
Luxembourg and Euroclear."
Euroclear was created in 1968 to hold securities for participants of
Euroclear and to clear and settle transactions between Euroclear participants
through simultaneous electronic book-entry delivery against payment, thereby
eliminating both the need for physical movement of securities and any risk from
lack of simultaneous transfers of securities and cash. Transactions may now be
settled in any of 37 currencies, including United States dollars. Euroclear
includes various other services, including securities lending and borrowing and
interfaces with domestic markets in several countries generally similar to the
arrangements for cross-market transfers with DTC described above. Euroclear is
operated by the Brussels, Belgium office of Morgan Guaranty Trust Company of New
York, under contract with Euroclear Clearance Systems S.C., a Belgian
cooperative corporation. All operations are conducted by the Euroclear operator,
and all Euroclear securities clearance accounts and Euroclear cash accounts are
accounts with the Euroclear operator, not Euroclear Clearance. Euroclear
Clearance establishes policy for Euroclear on behalf of Euroclear participants.
Euroclear participants include banks (including central banks), securities
brokers and dealers, and other professional financial intermediaries. Indirect
access to Euroclear is also available to other firms that clear through or
maintain a custodial relationship with a Euroclear participant, either directly
or indirectly.
The Euroclear operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it is
regulated and 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.
32
Securities clearance accounts and cash accounts with the Euroclear operator
are governed by the Terms and Conditions Governing Use of Euroclear and the
related operating procedures of the Euroclear system and applicable Belgian law.
The Terms and Conditions govern transfers of securities and cash within
Euroclear, withdrawals of securities and cash from Euroclear, and receipts of
payments with respect to securities in Euroclear. All securities in Euroclear
are held on a fungible basis without attribution of specific securities to
specific securities clearance accounts. The Euroclear operator acts under the
Terms and Conditions only on behalf of Euroclear participants, and has no record
of or relationship with persons holding through Euroclear participants.
Under a book-entry format, securityholders that are not DTC participants or
indirect participants but desire to purchase, sell or otherwise transfer
ownership of securities registered in the name of Cede, as nominee of DTC, may
do so only through participants and indirect participants. In addition, these
securityholders will receive all distributions of principal of and interest on
the securities from the trustee through DTC and its participants.
Securityholders may receive payments after the payment date because DTC will
forward these payments to its participants, which thereafter will be required to
forward these payments to indirect participants or securityholders. Unless and
until physical securities are issued, it is anticipated that the only
securityholder will be Cede, as nominee of DTC, and that the beneficial holders
of securities will not be recognized by the trustee as securityholders under the
Agreements. Securityholders which are not DTC participants will only be
permitted to exercise their rights under the Agreements through DTC or through
its participants.
Under the rules, regulations and procedures creating and affecting DTC and
its operations, DTC is required to make book-entry transfers among its
participants and is required to receive and transmit payments of principal of
and interest on the securities. DTC's participants and indirect participants are
required to make book-entry transfers and receive and transmit payments on
behalf of their respective securityholders. Accordingly, although
securityholders will not possess physical securities, the rules provide a
mechanism by which securityholders will receive distributions and will be able
to transfer their interests.
Unless and until physical securities are issued, securityholders who are
not DTC participants may transfer ownership of securities only through DTC
participants by instructing those participants to transfer securities, through
DTC for the account of the purchasers of the securities, which account is
maintained with their respective participants. Under DTC's rules and in
accordance with DTC's normal procedures, transfers of ownership of securities
will be executed through DTC and the accounts of the respective participants at
DTC will be debited and credited. Similarly, the respective participants will
make debits or credits, as the case may be, on their records on behalf of the
selling and purchasing securityholders.
Because DTC can only act on behalf of its participants, who in turn act on
behalf of indirect participants and some banks, the ability of a securityholder
to pledge securities to persons or entities that do not participate in the DTC
system, or otherwise take actions in respect of the securities may be limited
due to the lack of a physical certificate for the securities.
DTC advises that it will take any action permitted to be taken by a
securityholder under the Agreements only at the direction of one or more of its
participants to whose account the securities are credited. Additionally, DTC
advises that it will take actions only at the direction of and on behalf of its
participants whose holdings include current principal amounts of outstanding
securities that satisfy the minimum percentage established in the Agreements.
DTC may take conflicting actions if directed by its participants.
Any securities initially registered in the name of Cede, as nominee of DTC,
will be issued in fully registered, certificated form to securityholders or
their nominees, rather than to DTC or its nominee only under the events
specified in the Agreements and described in the prospectus supplement. Upon the
occurrence of any of the events specified in this prospectus or in the
Agreements and the prospectus supplement, DTC will be required to notify its
participants of the availability through DTC of physical certificates. Upon
surrender by DTC of the securities and receipt of instruction for
re-registration, the trustee will issue the securities in the form of physical
certificates, and thereafter the trustee will recognize the holders of the
physical certificates as securityholders. Thereafter, payments of principal of
and interest on the securities will be made by the trustee directly to
securityholders in accordance with the procedures set forth in
33
the Agreements. The final distribution of any security whether physical
certificates or securities registered in the name of Cede, however, will be made
only upon presentation and surrender of the securities on the final payment date
at the office or agency specified in the notice of final payment to
securityholders.
None of the depositor, the servicer, any finance subsidiary, or the trustee
will have any liability for any actions taken by DTC or its nominee or Cedel or
Euroclear, including, without limitation, actions for any aspect of the records
relating to or payments made on account of the securities held by Cede, as
nominee for DTC, or for maintaining, supervising or reviewing any records
relating to the securities.
CREDIT ENHANCEMENT
GENERAL
Credit enhancement may be provided with respect to one or more classes of a
series of securities or with respect to the related trust assets. Credit
enhancement may be in the form of:
- the subordination of one or more classes of the securities of such
series;
- a limited financial guaranty policy issued by an entity named in the
prospectus supplement;
- the establishment of one or more reserve accounts;
- the use of a cross-collateralization feature;
- use of a mortgage pool insurance policy;
- excess spread,
- over-collateralization;
- letter of credit;
- guaranteed investment contract;
- primary mortgage insurance,
- other pledged assets,
- corporate guarantees,
- surety bond;
- special hazard insurance policy;
- bankruptcy bond;
- FHA insurance or VA guarantee;
- another method of credit enhancement contemplated in this prospectus and
described in the prospectus supplement; and
- any combination of the foregoing.
Unless otherwise specified in the prospectus supplement, credit enhancement
will not provide protection against all risks of loss and will not guarantee
repayment of the entire principal balance of the securities and interest on the
securities. If losses occur which exceed the amount covered by credit
enhancement or which are not covered by the credit enhancement, securityholders
will bear their allocable share of any deficiencies.
If specified in the prospectus supplement, the coverage provided by one or
more of the forms of credit enhancement described in this prospectus may apply
concurrently to two or more separate trusts. If applicable, the prospectus
supplement will identify the trusts to which such credit enhancement relates and
the manner of determining the amount of coverage provided to those trusts by the
credit enhancement and of the application of that coverage to the related
trusts.
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SUBORDINATION
If specified in the prospectus supplement, protection afforded to holders
of one or more classes of securities of a series may be made by means of a
subordination feature. This protection may be accomplished by providing a
preferential right to holders of senior securities in a series to receive
distributions in respect of scheduled principal, principal prepayments, interest
or any combination thereof that otherwise would have been payable to holders of
subordinate securities in that series, under the circumstances and to the extent
specified in the prospectus supplement. Subordination protection may also be
afforded to the holders of senior securities by reducing the ownership interest
(if applicable) of the related subordinate securities, which protection may or
may not be in conjunction with the protection described in the immediately
preceding sentence. Finally, protection may be afforded to the holders of senior
securities by application of a subordination feature in another manner as
described in the prospectus supplement.
If a subordination feature is present with respect to a given series,
delays in receipt of scheduled payments on the loans and losses on defaulted
loans may be borne first by the various classes of subordinate securities and
only thereafter by the various classes of senior securities, in each case under
the circumstances and subject to the limitations specified in the prospectus
supplement. The aggregate distributions in respect of delinquent payments on the
loans over the lives of the securities or at any time, the aggregate losses in
respect of defaulted loans which must be borne by the subordinate securities by
virtue of subordination and the amount of the distributions otherwise
distributable to the subordinate securityholders that will be distributable to
senior securityholders on any payment date all may be limited as specified in
the prospectus supplement. If aggregate distributions in respect of delinquent
payments on the loans or aggregate losses in respect of the related loans were
to exceed the amount specified in the prospectus supplement, then holders of
senior securities would experience losses.
As specified in the prospectus supplement, all or any portion of
distributions otherwise payable to holders of subordinate securities on any
payment date may instead be deposited into one or more reserve accounts
established with the trustee or distributed to holders of senior securities. The
prospectus supplement will describe whether deposits are made into a reserve
account on each payment date, only during specified periods, only until the
balance in the related reserve account has reached a specified amount, only to
replenish amounts in the related reserve account following payments from the
reserve account to holders of senior securities or otherwise. Amounts on deposit
in a reserve account may be released to the holders of certain classes of
securities at the times and under the circumstances specified in the prospectus
supplement.
If specified in the prospectus supplement, various classes of senior
securities and subordinate securities may themselves be subordinate in their
right to receive certain distributions to other classes of senior and
subordinate securities, respectively, through a cross-collateralization
mechanism or otherwise. As between classes of senior securities and as between
classes of subordinate securities, distributions may be allocated among the
classes:
- in the order of their scheduled final payment dates;
- in accordance with a schedule or formula;
- in relation to the occurrence of events; or
- otherwise, as specified in the prospectus supplement.
As between classes of subordinate securities, payments to holders of senior
securities on account of delinquencies or losses and payments to any reserve
account will be allocated as specified in the prospectus supplement.
INSURANCE POLICIES, SURETY BONDS AND GUARANTIES
If provided in the prospectus supplement, deficiencies in amounts otherwise
payable on the securities or certain classes of securities will be covered by
insurance policies and/or surety bonds provided by one or more insurance
companies or sureties. These instruments may cover, with respect to one or more
classes of securities, timely distributions of interest and/or full
distributions of principal on the basis of a schedule of
35
principal distributions set forth in or determined in the manner specified in
the prospectus supplement. In addition, if specified in the prospectus
supplement, a trust may also include a bankruptcy bond, a special hazard
insurance policy, a demand note or other insurance or guaranties for the purpose
of:
- maintaining timely payments or providing additional protection against
losses on the assets included in such trust;
- paying administrative expenses; or
- establishing a minimum reinvestment rate on the payments made in respect
of those assets or principal payment rate on those assets.
These arrangements may include agreements under which securityholders are
entitled to receive amounts deposited in various accounts held by the trustee
upon the terms specified in the prospectus supplement. A copy of any of these
types of instruments for a series will be filed with the SEC as an exhibit to a
Current Report on Form 8-K to be filed with the Commission within 15 days of
issuance of the securities.
CROSS SUPPORT
If specified in the prospectus supplement, separate groups of assets
included in a trust may be evidenced by or secure only specified classes of the
related series of securities. If this is the case, credit support may be
provided by a cross support feature. This cross support feature would require
that cashflow received with respect to a particular group of assets first be
distributed as payments on the class of securities specifically related to those
assets, but after the necessary payments with respect to that class were made,
remaining cashflow from those assets would be available to make payments on one
or more other classes issued by the same trust. The prospectus supplement for a
series of securities which includes a cross support feature will describe the
manner and conditions for applying this cross support feature.
RESERVE ACCOUNTS
If specified in the prospectus supplement, credit support with respect to a
series of securities will be provided by the establishment and maintenance with
the related trustee, in trust, of one or more reserve accounts for the series.
The prospectus supplement will specify whether or not any reserve accounts so
established will be included in the trust for such series.
Amounts deposited in the reserve account for a series will be specified in
the prospectus supplement and may include:
- cash, United States Treasury securities, instruments evidencing ownership
of principal or interest payments thereon, letters of credit, demand
notes, certificates of deposit or a combination of the foregoing in an
aggregate amount specified in the prospectus supplement; or
- amounts generated by the trust assets deposited from time to time to
which the subordinate securityholders, if any, would otherwise be
entitled.
Any amounts on deposit in the reserve account and the proceeds of any other
instrument deposited therein upon maturity will be held in cash or will be
invested in investments consisting of United States government securities and
other high-quality investments ("Permitted Investments"). Any instrument
deposited in a reserve account will name the trustee, in its capacity as trustee
for securityholders, or such other entity as is specified in the prospectus
supplement, as beneficiary and will be issued by an entity acceptable to each
rating agency that rates the securities. Additional information with respect to
instruments deposited in the reserve accounts will be set forth in the
prospectus supplement.
Any amounts on deposit in the reserve accounts and payments on instruments
deposited therein will be available for withdrawal from the reserve account for
distribution to the holders of securities of the related series for the
purposes, in the manner and at the times specified in the prospectus supplement.
36
POOL INSURANCE POLICIES
If specified in the prospectus supplement, a separate pool insurance policy
will be obtained for the pool and issued by the credit enhancer named in the
prospectus supplement. Each pool insurance policy will, subject to the
limitations described below, cover loss by reason of default in payment on loans
in the pool in an amount equal to a percentage specified in the prospectus
supplement of the aggregate principal balance of those loans on the Cut-Off
Date. As more fully described below, the servicer will present claims under the
pool insurance policy to the credit enhancer on behalf of itself, the trustee
and the holders of the securities of the related series. The pool insurance
policies, however, are not blanket policies against loss, since claims
thereunder may only be made respecting particular defaulted loans and only upon
satisfaction of certain conditions precedent described below. The pool insurance
policies generally will not cover losses due to a failure to pay or denial of a
claim under a primary mortgage insurance policy.
The pool insurance policies generally will provide that no claims may be
validly presented unless:
- any required primary mortgage insurance policy is in effect for the
defaulted loan and a claim thereunder has been submitted and settled;
- hazard insurance on the related property has been kept in force and real
estate taxes and other protection and preservation expenses have been
paid;
- if there has been physical loss or damage to the property, it has been
restored to its physical condition (reasonable wear and tear excepted) at
the time of issuance of the policy; and
- the insured has acquired good-and merchantable title to the property free
and clear of liens except certain permitted encumbrances.
Upon satisfaction of these conditions, the credit enhancer will have the
option either:
- to purchase the property securing the defaulted loan at a price equal to
the principal balance thereof plus accrued and unpaid interest at the
loan rate to the date of such purchase and certain expenses incurred by
the servicer on behalf of the trustee and securityholders, net of certain
amounts paid or assumed to have been paid under the related primary
mortgage insurance policy; or
- to pay the amount by which the sum of the principal balance of the
defaulted loan plus accrued and unpaid interest at the loan rate to the
date of payment of the claim and the aforementioned expenses exceeds the
proceeds received from an approved sale of the property, net of certain
amounts paid or assumed to have been paid under the related primary
mortgage insurance policy.
If any property securing a defaulted loan is damaged and proceeds, if any,
from the related hazard insurance policy or the applicable special hazard
insurance policy are insufficient to restore the damaged property to a condition
sufficient to permit recovery under the pool insurance policy, the servicer will
not be required to expend its own funds to restore the damaged property unless
it determines that (a) such a restoration will increase the proceeds to
securityholders on liquidation of the loan after reimbursement of the servicer
for its expenses and (b) those expenses it incurs will be recoverable by it
through proceeds of the sale of the property or proceeds of the related pool
insurance policy or any related primary mortgage insurance policy.
Like many primary insurance policies, the pool insurance policies may not
insure against loss sustained by reason of default arising from, among other
things:
- fraud or negligence in the origination or servicing of a loan, including
misrepresentation by the borrower, the originator or persons involved in
the origination of the loan;
- failure to construct a property in accordance with plans and
specifications or
- losses arising from special hazards, such as earthquakes, floods,
mudslides or vandalism.
A failure of coverage attributable to one of these events might result in a
breach of the related seller's representations regarding the loan and might give
rise to an obligation on the part of the seller to repurchase
37
the defaulted loan if it is unable to cure the breach. Many primary mortgage
policies do not cover, and no pool insurance policy will cover, a claim in
respect of a defaulted loan if the servicer of the loan was not approved by the
applicable insurer either at the time of default or thereafter.
The amount of coverage available under each pool insurance policy generally
will be reduced over the life of the related securities by the positive
difference, if any, between the aggregate dollar amount of claims paid under the
pool insurance policy minus the aggregate of the net amounts realized by the
credit enhancer upon disposition of the related foreclosed properties. The
amount of claims paid will include certain expenses incurred by the servicer as
well as accrued interest on delinquent loans to the date of payment of the claim
or another date set forth in the prospectus supplement. Accordingly, if
aggregate net claims paid under any pool insurance policy reach the original
policy limit, coverage under that pool insurance policy will be exhausted and
any further losses will be borne by the related securityholders.
OVER-COLLATERALIZATION
Over-collateralization exists when the principal balance of the loans
supporting a class or classes of securities exceeds the principal balance of the
class or classes of securities themselves. If provided for in the prospectus
supplement, a portion of the interest payment received on the loans during a due
period may be paid to the securityholders on the related payment date as an
additional distribution of principal on a certain class or classes of
securities. This payment of interest as principal would accelerate the rate of
payment of principal on the class or classes of securities relative to the
principal balance of the loans in the related trust and thereby create
over-collateralization.
LETTER OF CREDIT
The letter of credit, if any, with respect to a series of securities will
be issued by the bank or financial institution specified in the prospectus
supplement. Under the letter of credit, the issuing bank will be obligated to
honor drawings thereunder in an aggregate fixed dollar amount, net of
unreimbursed payments thereunder, equal to the percentage specified in the
prospectus supplement of the aggregate principal balance of the loans on the
related Cut-Off Date or of one or more classes of securities. If specified in
the prospectus supplement, the letter of credit may permit drawings in the event
of losses not covered by insurance policies or other credit support, such as
losses arising from damage not covered by standard hazard insurance policies,
losses resulting from the bankruptcy of a borrower and the application of
certain provisions of the federal Bankruptcy Code, or losses resulting from
denial of insurance coverage due to misrepresentations in connection with the
origination of a loan. The amount available under the letter of credit will, in
all cases, be reduced to the extent of the unreimbursed payments thereunder. The
obligations of the issuing Bank under the letter of credit for each series of
securities will expire at the earlier of the date specified in the prospectus
supplement or the termination of the trust. A copy of the letter of credit for a
series, if any, will be filed with the SEC as an exhibit to a Current Report on
Form 8-K to be filed within 15 days of issuance of the securities of the related
series.
OTHER INSURANCE, GUARANTIES, LETTERS OF CREDIT AND SIMILAR INSTRUMENTS OR
AGREEMENTS
If specified in the prospectus supplement, a trust may also include
insurance, guaranties, letters of credit or similar arrangements for the purpose
of:
- maintaining timely payments or providing additional protection against
losses on the assets included in the trust;
- paying administrative expenses; or
- establishing a minimum reinvestment rate on the payments made in respect
of those assets or principal payment rate on those assets.
These arrangements may include agreements under which securityholders are
entitled to receive amounts deposited in various accounts held by the trustee
upon the terms specified in the prospectus supplement.
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YIELD AND PREPAYMENT CONSIDERATIONS
The yields to maturity and weighted average lives of the securities will be
affected primarily by the amount and timing of principal payments received on or
in respect of the trust assets. The original terms to maturity of the loans in a
given pool will vary depending upon the type of loans included therein. Each
prospectus supplement will contain information with respect to the type and
maturities of the loans in the related pool. The prospectus supplement will
specify the circumstances, if any, under which the related loans will be subject
to prepayment penalties. The prepayment experience on the loans in a pool will
affect the weighted average life of the securities.
The rate of prepayments with respect to conventional mortgage loans has
fluctuated significantly in recent years. In general, if prevailing rates fall
significantly below the loan rates borne by the loans, such loans are more
likely to be subject to higher prepayment rates than if prevailing interest
rates remain at or above such loan rates. Conversely, if prevailing interest
rates rise appreciably above the loan rates borne by the loans, such loans are
more likely to experience a lower prepayment rate than if prevailing rates
remain at or below such loan rates. However, there can be no assurance that such
will be the case.
The rate of prepayment on the loans cannot be predicted. The prepayment
experience of the trust may be affected by a wide variety of factors, including:
- general economic conditions;
- prevailing interest rate levels;
- availability of alternative financing;
- homeowner mobility;
- the amounts of, and interest rates on, the underlying senior mortgage
loans, if any; and
- the use of first mortgage loans as long-term financing for home purchase
and subordinate mortgage loans as shorter-term financing for a variety of
purposes, including home improvement, education expenses and purchases of
consumer durables such as automobiles.
The yield to an investor who purchases securities in the secondary market
at a price other than par will vary from the anticipated yield if the rate of
prepayment on the loans is actually different than the rate anticipated by the
investor at the time the securities were purchased.
When a full prepayment is made on a loan, the borrower is charged interest
on the principal amount of the prepaid loan not for the entire month in which
the prepayment is made, but only for the number of days in the month actually
elapsed up to the date of the prepayment. The effect of prepayments in full will
be to reduce the amount of interest passed through or paid in the following
month to securityholders because interest on the principal amount of any prepaid
loan will generally be paid only to the date of prepayment. Partial prepayments
in a given month may be applied to the outstanding principal balances of the
prepaid loans on the first day of the month of receipt or the month following
receipt. In the latter case, partial prepayments will not reduce the amount of
interest passed through or paid in the month in which the partial prepayment was
made. Generally, neither full nor partial prepayments will be passed through or
paid to securityholders until the month following receipt.
Even assuming that the properties provide adequate security for the loans,
substantial delays could be encountered in connection with the liquidation of
defaulted loans, which would give rise to corresponding delays in the receipt by
securityholders of the proceeds of a liquidation. An action to foreclose on a
property securing a loan is regulated by state statutes and rules and is subject
to many of the delays and expenses of other lawsuits if defenses or
counterclaims are interposed, sometimes requiring several years to complete.
Furthermore, in some states an action to obtain a deficiency judgment is not
permitted following a nonjudicial sale of a property. In the event of a default
by a borrower, these restrictions among other things, may impede the ability of
the servicer to foreclose on or sell the property or to obtain liquidation
proceeds sufficient to repay all amounts due on the related loan. In addition,
the servicer will be entitled to deduct from related liquidation proceeds all
expenses reasonably incurred in attempting to recover amounts due and not yet
repaid
39
on defaulted loans, including payments to senior lienholders, legal fees and
costs of legal action, real estate taxes and maintenance and preservation
expenses.
Liquidation expenses with respect to defaulted mortgage loans generally do
not vary directly with the outstanding principal balance of the mortgage loan
being liquidated. Therefore, assuming that a servicer took the same steps in
realizing upon a defaulted mortgage loan having a small outstanding principal
balance as it would in the case of a defaulted mortgage loan having a large
outstanding principal balance, the amount realized after expenses of liquidation
would be smaller as a percentage of the outstanding principal balance for the
former mortgage loan as opposed to the latter.
If the rate at which interest is passed through or paid to the holders of
securities of a series is calculated on a loan-by-loan basis, disproportionate
principal prepayments among loans with different loan rates will affect the
yield on such securities. In most cases, the effective yield to securityholders
will be lower than the yield otherwise produced by the applicable pass-through
rate or interest rate and purchase price, because while interest will accrue on
each loan from the first day of the month (unless otherwise specified in the
prospectus supplement), the distribution of such interest will not be made
earlier than the month following the month of accrual.
Under certain circumstances, the servicer, the depositor, the holders of
the residual interests in a REMIC or any person specified in the prospectus
supplement may be obligated to or may have the option to purchase either the
assets of a trust or some or all of the securities and thereby effect earlier
retirement or redemption of the related series of securities.
The relative contribution of the various factors affecting prepayment may
vary from time to time. There can be no assurance as to the rate of payment of
principal of the trust assets at any time or over the lives of the securities.
The prospectus supplement will discuss in greater detail the effect of the
rate and timing of principal payments (including prepayments), delinquencies and
losses on the yield, weighted average lives and maturities of the securities.
THE AGREEMENTS
Set forth below is a description of the material provisions of the
Agreements which are not described elsewhere in this prospectus. The description
is subject to, and qualified in its entirety by reference to, the provisions of
each Agreement. Where particular provisions or terms used in the Agreements are
referred to, such provisions or terms are as specified in the Agreements. As
specified in the related prospectus supplement, certain of the rights of
securityholders described below may be exercised by the credit enhancer for the
related series of securities without the consent of the securityholders and
certain rights of securityholders may not be exercised without the written
consent of the credit enhancer.
ASSIGNMENT OF THE TRUST ASSETS
ASSIGNMENT OF THE LOANS. At the time of issuance of the securities, the
depositor will cause the loans to be assigned or pledged to the trustee for the
benefit of the securityholders, without recourse, together with all principal
and interest received by or on behalf of the depositor on or with respect to
such loans after the Cut-Off Date, other than principal and interest due on or
before the Cut-Off Date and other than any amounts specified in the prospectus
supplement. Concurrently with this sale, the trustee will deliver the securities
to the depositor in exchange for the loans. Each loan will be identified in a
schedule appearing as an exhibit to the related Agreement. Such schedule will
include information as to the outstanding principal balance of each loan after
application of payments due on or before the Cut-Off Date, as well as
information regarding the loan rate or annual percentage rate, the maturity of
the loan, the loan-to-value ratios, combined loan-to-value ratios or effective
loan-to-value ratios, as applicable, at origination and certain other
information.
Unless otherwise specified in the prospectus supplement, the related
Agreement will require that, within the time period specified therein, the
depositor will also deliver or cause to be delivered to the trustee or, if so
40
indicated in the prospectus supplement, a separate custodian appointed by the
trustee pursuant to a custodial agreement, as to each mortgage loan or home
equity loan, among other things:
- the mortgage note or contract endorsed without recourse in blank or to
the order of the trustee;
- the mortgage, deed of trust or similar instrument with evidence of
recording indicated thereon, except that in the case of any mortgage not
returned form the public recording office, the depositor will deliver or
cause to be delivered a copy of such mortgage together with a certificate
that the original of the mortgage was delivered to such recording office;
- an assignment of the mortgage to the trustee, which assignment will be in
recordable form in the case of a mortgage assignment; and
- all other security documents, including those relating to any senior
interests in the property, that are specified in the prospectus
supplement or the related Agreement.
If specified in the prospectus supplement, the depositor will promptly
cause the assignments of the loans to be recorded in the appropriate public
office for real property records. If specified in the prospectus supplement,
some or all of the loan documents may not be delivered to the trustee until
after the occurrence of certain events specified in the prospectus supplement.
In lieu of delivering the mortgage or deed of trust and an assignment of
the mortgage to the trustee, for any loans registered on the MERS(R) System the
depositor will cause the trustee to be recorded as the beneficial owner of the
loans pursuant to the MERS rules for electronically tracking changes in
ownership rights.
The trustee or the appointed custodian will review the loan documents
within the time period specified in the prospectus supplement after receipt
thereof to ascertain that all required documents have been properly executed and
received, and the trustee will hold the loan documents in trust for the benefit
of the related securityholders. Unless otherwise specified in the prospectus
supplement, if any loan document is found to be missing or defective in any
material respect, the trustee or the custodian, as appropriate, will notify the
servicer and the depositor, and the servicer will notify the related seller. If
the related seller cannot cure the omission or defect within the time period
specified in the prospectus supplement after receipt of notice from the
servicer, the seller will be obligated to either purchase the related loan from
the trust at the purchase price or, if so specified in the prospectus
supplement, remove such loan from the trust and substitute in its place one or
more other loans that meets certain requirements as set forth in the prospectus
supplement. There can be no assurance that a seller will fulfill this purchase
or substitution obligation. Unless otherwise specified in the prospectus
supplement, this obligation to cure, purchase or substitute constitutes the sole
remedy available to the securityholders or the trustee for omission of, or a
material defect in, a loan document.
Notwithstanding the foregoing provisions, with respect to a trust for which
a REMIC election is to be made, no purchase or substitution of a loan will be
made if the purchase or substitution would result in a prohibited transaction
tax under the Code.
NO RECOURSE TO SELLERS; DEPOSITOR OR SERVICER. As described above under
"-- Assignment of the Loans," the depositor will cause the loans comprising the
trust to be assigned or pledged to the trustee, without recourse. However, each
seller will be obligated to repurchase or substitute for any loan as to which
certain representations and warranties are breached or for failure to deliver
certain documents relating to the loans as described in this prospectus under
"Assignment of the Loans" and "Loan Program -- Representations by Sellers;
Repurchases." These obligations to purchase or substitute constitute the sole
remedy available to the securityholders or the trustee for a breach of any such
representation or warranty or failure to deliver a constituent document.
PAYMENTS ON LOANS; DEPOSITS TO COLLECTION ACCOUNT
The servicer will establish and maintain or cause to be established and
maintained with respect to the each trust a separate account or accounts for the
collection of payments on the trust assets in the trust (the
41
"Collection Account"). The prospectus supplement may provide for other
requirements for the Collection Account, but if it does not, then the Collection
Account must be either:
- maintained with a depository institution the short-term debt obligations
of which (or, in the case of a depository institution that is the
principal subsidiary of a holding company, the short-term debt
obligations of such holding company) are rated in one of the two highest
short-term rating categories by the rating agency that rated one or more
classes of the related series of securities;
- an account or accounts the deposits in which are fully insured by the
FDIC;
- an account or accounts the deposits in which are insured by the FDIC to
the limits established by the FDIC and the uninsured deposits in which
are otherwise secured such that, as evidenced by an opinion of counsel,
securityholders have a claim with respect to the funds in such account or
accounts, or a perfected first-priority security interest against any
collateral securing those funds, that is superior to the claims of any
other depositors or general creditors of the depository institution with
which such account or accounts are maintained; or
- an account or accounts otherwise acceptable to such rating agency.
The collateral eligible to secure amounts in the Collection Account is
limited to Permitted Investments. A Collection Account may be maintained as an
interest bearing account or the funds held therein may be invested pending each
succeeding payment date in Permitted Investments. The servicer, the trustee or
any other entity described in the prospectus supplement may be entitled to
receive interest or other income earned on funds in the Collection Account as
additional compensation and will be obligated to deposit in the Collection
Account the amount of any loss when realized. The Collection Account may be
maintained with the servicer or with a depository institution that is an
affiliate of the servicer, provided it meets the standards set forth above.
The servicer or trustee will deposit or cause to be deposited in the
Collection Account for each trust, to the extent applicable and unless otherwise
specified in the prospectus supplement and provided in the related Agreement,
the following payments and collections received or advances made by or on behalf
of it subsequent to the Cut-Off Date (other than certain payments due on or
before the Cut-Off Date and any excluded amounts):
- all payments on account of principal and interest (which may be net of
the applicable servicing compensation), including principal prepayments
and, if specified in the prospectus supplement, any applicable prepayment
penalties, on the loans;
- all net insurance proceeds, less any incurred and unreimbursed advances
made by the servicer, of the hazard insurance policies and any primary
mortgage insurance policies, to the extent such proceeds are not applied
to the restoration of the property or released to the mortgagor in
accordance with the servicer's normal servicing procedures;
- all proceeds received in connection with the liquidation of defaulted
loans, less any expenses of liquidation and any unreimbursed advances
made by the servicer with respect to the liquidated loans;
- any net proceeds received on a monthly basis with respect to any
properties acquired on behalf of the securityholders by foreclosure or
deed in lieu of foreclosure;
- all advances as described in this prospectus under "Description of the
Securities -- Advances";
- all proceeds of any loan or property in respect thereof repurchased by
any seller as described under "Loan Program -- Representations by
Sellers; Repurchases" or "-- Assignment of Trust Assets" above and all
proceeds of any loan repurchased as described under "-- Termination;
Optional Termination" below;
- all payments required to be deposited in the Collection Account with
respect to any deductible clause in any blanket insurance policy
described under "-- Hazard Insurance" below;
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- any amount required to be deposited by the servicer in connection with
losses realized on investments for the benefit of the servicer of funds
held in the Collection Account and, to the extent specified in the
prospectus supplement, any payments required to be made by the servicer
in connection with prepayment interest shortfalls; and
- all other amounts required to be deposited in the Collection Account
pursuant to the related agreement.
The servicer or the depositor, as applicable, may from time to time direct
the institution that maintains the Collection Account to withdraw funds from the
Collection Account for the following purposes:
- to transfer funds for the trustee for distribution of payments due on the
securities and other purposes set forth in the prospectus supplement;
- to pay to the servicer the servicing fees described in the prospectus
supplement and, as additional servicing compensation, earnings on or
investment income with respect to funds in the Collection Account
credited thereto;
- to reimburse the servicer for advances made with respect to a loan, but
only from amounts received that represent late payments of principal on,
late payments of interest on, insurance proceeds received with respect to
or liquidation proceeds received with respect to the same loan;
- to reimburse the servicer for any advances previously made which the
servicer has determined to be nonrecoverable;
- to reimburse the servicer from insurance proceeds for expenses incurred
by the servicer and covered by insurance policies;
- to reimburse the servicer for unpaid servicing fees and unreimbursed
out-of-pocket costs and expenses incurred by the servicer in the
performance of its servicing obligations, such right of reimbursement
being limited to amounts received representing late recoveries of the
payments for which the original advances were made;
- to pay to the servicer, with respect to each loan or property acquired in
respect thereof that has been purchased by the servicer pursuant to the
Agreement, all amounts received thereon and not taken into account in
determining the principal balance of that repurchased loan,
- to reimburse the servicer or the depositor for expenses incurred and
reimbursable pursuant to the Agreement;
- to pay or reimburse the trustee or any other party as provided in the
prospectus supplement;
- to withdraw any amount deposited in the Collection Account that was not
required to be deposited therein; and
- to clear and terminate the Collection Account upon termination of the
Agreement.
In addition, unless otherwise specified in the prospectus supplement, on or
prior to the business day immediately preceding each payment date, the servicer
shall withdraw from the Collection Account the amount of available funds, to the
extent on deposit, for deposit in an account maintained by the trustee.
The applicable Agreement may require the servicer to establish and maintain
one or more escrow accounts into which mortgagors deposit amounts sufficient to
pay taxes, assessments, hazard insurance premiums or comparable items.
Withdrawals from the escrow accounts maintained for mortgagors may be made to
effect timely payment of taxes, assessments and hazard insurance premiums or
comparable items, to reimburse the servicer out of related assessments for
maintaining hazard insurance, to refund to mortgagors amounts determined to be
overages, to remit to mortgagors, if required, interest earned, if any, on
balances in any of the escrow accounts, to repair or otherwise protect the
property and to clear and terminate any of the escrow accounts. The servicer
will be solely responsible for administration of the escrow accounts and will be
expected to make advances to such account when a deficiency exists therein.
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PRE-FUNDING ACCOUNT
If provided in the prospectus supplement, the servicer will establish and
maintain, in the name of the trustee on behalf of the securityholders, a
pre-funding account into which the depositor will deposit cash or other assets
on the Closing Date. The pre-funding account will be maintained with the
trustee. The deposit will not exceed 50% of the initial aggregate principal
amount of the securities.
The cash on deposit in the pre-funding account will be used by the trustee
to purchase additional loans for the trust from the depositor from time to time
during the funding period. Monies on deposit in the prefunding account will not
be available to cover losses on or in respect of the loans. The funding period
for a trust will begin on the Closing Date and will end on the date specified in
the prospectus supplement, which will not be later than one year after the
Closing Date. Monies on deposit in the pre-funding account may be invested in
Permitted Investments as specified in the related Agreement. Earnings on
investment of funds in the pre-funding account will be applied as specified in
the prospectus supplement and losses will be charged against the funds on
deposit in the pre-funding account. Any amounts remaining the pre-funding
account at the end of the funding period will be distributed to securityholders
as a prepayment of principal, in the manner and priority specified in the
prospectus supplement.
In addition, if provided in the prospectus supplement, on the related
Closing Date the depositor will make a deposit to a capitalized interest
account, which will be maintained by the trustee. The funds on deposit in the
capitalized interest account will be used solely to cover shortfalls in interest
that may arise as a result of utilization of the pre-funding account. Monies on
deposit in the capitalized interest account will not be available to cover
losses on or in respect of the loans. To the extent that the entire amount on
deposit in the capitalized interest account has not been used to cover
shortfalls in interest by the end of the funding period, any remaining amounts
will be paid to the depositor.
SUBSERVICING BY SELLERS
The servicer may enter into subservicing agreements with any servicing
entity which will act as the subservicer for the loans, which subservicing
agreements will not contain any terms inconsistent with the related Agreement.
While each subservicing agreement will be a contract solely between the servicer
and the subservicer, the Agreement pursuant to which a series of securities is
issued will provide that, if for any reason the servicer for that series of
securities is no longer the servicer of the loans, the trustee or any successor
servicer must recognize the subservicer's rights and obligations under the
related subservicing agreement. Notwithstanding any subservicing arrangement,
unless otherwise provided in the prospectus supplement, the servicer will remain
liable for its servicing duties and obligations under the servicing agreement as
if the servicer alone were servicing the loans.
COLLECTION PROCEDURES
The servicer, directly or through one or more subservicers, will make
reasonable efforts to collect all payments called for under the loans and will,
consistent with each Agreement and any pool insurance policy, primary mortgage
insurance policy, FHA insurance, VA guaranty, bankruptcy bond or alternative
arrangements, follow those collection procedures that are customary with respect
to loans that are comparable to the loans. Consistent with the above, the
servicer may, in its discretion:
- waive any prepayment charge, assumption fee, late payment or other charge
in connection with a loan; and
- to the extent not inconsistent with the rules applicable to REMIC, and
with the coverage of an individual loan by a pool insurance policy,
primary mortgage insurance policy, FHA insurance, VA guaranty, bankruptcy
bond or alternative arrangements, if applicable, suspend or reduce
regular monthly payment on the loan for a period of up to six months, or
arrange with the related borrower a schedule for the liquidation of
delinquencies.
The servicer's obligation, if any, to make or cause to be made advances on a
loan will remain during any period of this type of arrangement.
Under the Agreement, the servicer will be required to enforce due-on-sale
clauses with respect to any loans to the extent contemplated by the terms of
those loans and permitted by applicable law. Where an
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assumption of, or substitution of liability with respect to, a loan is required
by law, upon receipt of assurance that the primary mortgage insurance policy
covering such loan will not be affected, the servicer may permit the assumption
of a loan, pursuant to which the borrower would remain liable on the related
loan note, or a substitution of liability with respect to the loan, pursuant to
which the new borrower would be substituted for the original borrower as being
liable on the loan note. Any fees collected for entering into an assumption or
substitution of liability agreement may be retained by the servicer as
additional servicing compensation. In connection with any assumption or
substitution, generally neither the loan rate borne by the related loan note nor
its payment terms may be changed.
HAZARD INSURANCE
Except as otherwise specified in the prospectus supplement, the servicer
will require the mortgagor or obligor on each loan to maintain a hazard
insurance policy providing coverage against loss by fire and other hazards which
are covered under the standard extended coverage endorsement customary for the
type of property in the state in which such property is located. This hazard
insurance coverage will be in an amount that is at least equal to the lesser of:
- the maximum insurable value of the improvements securing the loan from
time to time; and
- either the combined principal balance owing on the loan and any mortgage
loan senior to such loan or an amount such that the proceeds of the
policy shall be sufficient to prevent the mortgagor or obligor and/or the
lender from becoming a co-insurer, whichever is greater.
All amounts collected by the servicer under any hazard policy (except for
amounts to be applied to the restoration or repair of the property or released
to the mortgagor or obligor in accordance with the servicer's normal servicing
procedures) will be deposited in the related Collection Account. In the event
that the servicer maintains a blanket policy insuring against hazard losses on
all the loans comprising part of a trust, it will conclusively be deemed to have
satisfied its obligation relating to the maintenance of hazard insurance. If the
blanket policy relating to a trust contains a deductible clause, the servicer
will be required to deposit from its own funds into the Collection Account an
amount equal to the amount which would have been deposited therein but for the
deductible clause.
In general, the standard form of fire and extended coverage policy covers
physical damage to or destruction of the improvements securing a loan by fire,
lightning, explosion, smoke, windstorm and hail, riot, strike and civil
commotion, subject to the conditions and exclusions listed in each policy.
Although the policies relating to the loans may have been underwritten by
different insurers under different state laws in accordance with different
applicable forms and therefore may not contain identical terms and conditions,
the basic terms of these types of policies are dictated by respective state
laws, and most hazard policies typically do not cover (among other things) any
physical damage resulting from the following:
- war;
- revolution;
- governmental actions;
- floods and other water-related causes;
- earth movement, including earthquakes, landslides and mud flows;
- nuclear reactions;
- wet or dry rot;
- vermin, rodents, insects or domestic animals; or
- theft and, in certain cases, vandalism.
The foregoing list is merely indicative of certain kinds of uninsured risks and
is not intended to be all inclusive.
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If, however, any mortgaged property at the time of origination of the
related loan is located in an area identified by the Flood Emergency Management
Agency as having special flood hazards and flood insurance has been made
available, the servicer will cause to be maintained with a generally acceptable
insurance carrier a flood insurance policy in accordance with mortgage servicing
industry practice. Any flood insurance policy so maintained will provide
coverage in an amount at least equal to the lesser of the principal balance of
the loan and the minimum amount required under the terms of coverage to
compensate for any damage or loss on a replacement cost basis. The amount of
coverage provided will not be greater than the maximum amount of flood insurance
available for the related mortgaged property under either the regular or
emergency programs of the National Flood Insurance Program.
The hazard insurance policies covering properties securing the loans
typically contain a clause which in effect requires the insured at all times to
carry insurance of a specified percentage (generally 80% to 90%) of the full
replacement value of the insured property in order to recover the full amount of
any partial loss. If the insured's coverage falls below this specified
percentage, then the insurer's liability in the event of partial loss will not
exceed the larger of (a) the replacement costs of the improvements less physical
depreciation and (b) such proportion of the loss as the amount of insurance
carried bears to the specified percentage of the full replacement cost of the
improvements. Since the amount of hazard insurance the servicer may cause to be
maintained on the improvements securing a loan declines as the principal
balances owing on the loan itself decrease, and since improved real estate
generally has appreciated in value over time in the past, the effect of this
requirement in the event of partial loss may be that hazard insurance proceeds
will be insufficient to restore fully the damaged property.
PRIMARY MORTGAGE INSURANCE
The servicer will maintain or cause to be maintained, as the case may be
and as permitted by law, in full force and effect, to the extent specified in
the prospectus supplement, a primary mortgage insurance policy with regard to
each loan for which that coverage is required. Unless required by law, the
servicer will not cancel or refuse to renew any primary mortgage insurance
policy in effect at the time of the initial issuance of a series of securities
that is required to be kept in force under the applicable Agreement unless the
replacement primary mortgage insurance policy for the cancelled or nonrenewed
policy is maintained with an insurer whose claims-paying ability is sufficient
to maintain the current rating of the classes of securities of that series that
have been rated.
Although the terms and conditions of primary mortgage insurance vary, the
amount of a claim for benefits under a primary mortgage insurance policy
covering a mortgage loan will consist of the insured percentage of the unpaid
principal amount of the covered loan and accrued and unpaid interest on the loan
and reimbursement of certain expenses, less:
- all rents or other payments collected or received by the insured (other
than the proceeds of hazard insurance) that are derived from or in any
way related to the property;
- hazard insurance proceeds in excess of the amount required to restore the
property and which have not been applied to the payment of the loan;
- amounts expended but not approved by the insurer of the related primary
mortgage insurance policy;
- claim payments previously made by the insurer; and
- unpaid premiums.
Primary mortgage insurance policies reimburse certain losses sustained by
reason of default in payments by borrowers. Primary mortgage insurance policies
will not insure against, and exclude from coverage, losses sustained by reason
of a default arising from or involving certain matters, including:
- fraud or negligence in origination or servicing of the loans, including
misrepresentation by the originator, mortgagor (or obligor) or other
persons involved in the origination of the loan;
- failure to construct the property subject to the loan in accordance with
specified plans;
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- physical damage to the property; and
- the related subservicer not being approved as a servicer by the insurer.
Evidence of each primary mortgage insurance policy will be provided to the
trustee simultaneously with the transfer to the trustee of the loan. The
servicer, on behalf of itself, the trustee and the securityholders, is required
to present claims to the insurer under any primary mortgage insurance policy and
to take reasonable steps that are necessary to permit recovery thereunder with
respect to defaulted loans. Amounts collected by the servicer on behalf of the
servicer, the trustee and the securityholders shall be deposited in the related
Collection Account for distribution as set forth above.
CLAIMS UNDER INSURANCE POLICIES AND OTHER REALIZATION UPON DEFAULTED LOANS
The servicer or subservicers, on behalf of the trustee and securityholders,
will present claims to the insurer under any applicable insurance policies. If
the property securing a defaulted loan is damaged and proceeds, if any, from the
related hazard insurance policy are insufficient to restore the damaged
property, the servicer is not required to expend its own funds to restore the
damaged property unless it determines (a) that such restoration will increase
the proceeds to securityholders on liquidation of the loan after reimbursement
of the servicer for its expenses and (b) that the expenditure will be
recoverable by it from related insurance proceeds or liquidation proceeds.
If recovery on a defaulted loan under any insurance policy is not
available, or if the defaulted loan is not covered by an insurance policy, the
servicer will be obligated to follow or cause to be followed those normal
practices and procedures that it deems necessary or advisable to realize upon
the defaulted loan. If the net proceeds after reimbursable expenses of any
liquidation of the property securing the defaulted loan are less than the
principal balance of the loan plus interest accrued thereon that is payable to
securityholders, the trust will realize a loss in the amount of that difference
plus the aggregate of expenses incurred by the servicer in connection with the
liquidation proceedings and which are reimbursable under the Agreement.
The proceeds from any liquidation of a loan will be applied in the
following order of priority:
- first, to reimburse the servicer for any unreimbursed expenses incurred
by it to restore the related property and any unreimbursed servicing
compensation payable to the servicer with respect to the loan;
- second, to reimburse the servicer for any unreimbursed advances with
respect to the loan;
- third, to accrued and unpaid interest (to the extent no advance has been
made for that amount) on the loan; and
- fourth, as a recovery of principal of the loan.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The servicer's primary compensation for its activities as servicer will
come from the payment to it, with respect to each interest payment on a loan, of
the amount specified in the prospectus supplement. As principal payments are
made on the loans, the portion of each monthly payment which represents interest
will decline, and thus servicing compensation to the servicer will decrease as
the loans amortize. Prepayments and liquidations of loans prior to maturity will
also cause servicing compensation to the servicer to decrease. Subservicers, if
any, will be entitled to a monthly servicing fee as described in the prospectus
supplement in compensation for their servicing duties. In addition, the servicer
or subservicer will retain all prepayment charges, assumption fees and late
payment charges, to the extent collected from borrowers, and any benefit that
may accrue as a result of the investment of funds in the applicable Collection
Account (unless otherwise specified in the prospectus supplement).
The servicer will pay or cause to be paid certain ongoing expenses
associated with each trust and incurred by it in connection with its
responsibilities under the related Agreement, including, without limitation, and
only if specified in the prospectus supplement, payment of any fee or other
amount payable in respect of any credit enhancement arrangements, the trustee,
any custodian appointed by the trustee, the certificate registrar
47
and any paying agent, and payment of expenses incurred in enforcing the
obligations of subservicers and sellers. The servicer will be entitled to
reimbursement of expenses incurred in enforcing the obligations of subservicers
and sellers under certain limited circumstances.
EVIDENCE AS TO COMPLIANCE
Each Agreement will provide that the servicer at its expense shall cause a
firm of independent public accountants to furnish a report annually to the
trustee. Each annual report will state that the firm has performed certain
procedures specified in the related Agreement and that the review has disclosed
no items of noncompliance with the provisions of the Agreement which, in the
opinion of the firm, are material, except for any items of noncompliance that
are forth in such report.
Each Agreement will also provide for delivery to the trustee, on or before
a specified date in each year, of an annual statement signed by an officer of
the servicer to the effect that the servicer has fulfilled its obligations under
the Agreement throughout the preceding year.
CERTAIN MATTERS REGARDING THE SERVICER AND THE DEPOSITOR
The servicer under each pooling and servicing agreement or servicing
agreement, as applicable, will be named in the prospectus supplement. The entity
serving as servicer may have normal business relationships with the depositor or
the depositor's affiliates.
Each Agreement will provide that the servicer may not resign from its
obligations and duties under the Agreement except upon (a) appointment of a
successor servicer and receipt by the trustee of a letter from the applicable
rating agency or rating agencies that the servicer's resignation and the
successor servicer's appointment will not result in a downgrade of the
securities or (b) a determination that its performance of its duties thereunder
is no longer permissible under applicable law. The servicer may, however, be
removed from its obligations and duties as set forth in the Agreement. No
resignation by the servicer will become effective until the trustee or a
successor servicer has assumed the servicer's obligations and duties under the
Agreement.
Each Agreement generally will further provide that neither the servicer,
the depositor nor any director, officer, employee, or agent of the servicer or
the depositor (collectively, the "Indemnified Parties") will be under any
liability to the related trust or securityholders for taking any action or for
refraining from taking any action in good faith pursuant to the Agreement, or
for errors in judgment; provided, however, that neither the servicer, the
depositor nor any such person will be protected against any liability which
would otherwise be imposed by reason of willful misfeasance, bad faith or gross
negligence in the performance of duties thereunder or by reason of reckless
disregard of obligations and duties thereunder. Each Agreement generally will
further provide that each Indemnified Party will be entitled to indemnification
by the related trust and will be held harmless against any loss, liability or
expense incurred in connection with any legal action relating to the Agreement
or the securities for the related series, other than any loss, liability or
expense related to any specific loan or loans (except any loss, liability or
expense otherwise reimbursable pursuant to the Agreement) and any loss,
liability or expense incurred by reason of willful misfeasance, bad faith or
gross negligence in the performance of that Indemnified Party's duties
thereunder or by reason of reckless disregard by that Indemnified Party of
obligations and duties thereunder. In addition, each Agreement generally will
provide that neither the servicer nor the depositor will be under any obligation
to appear in, prosecute or defend any legal action which is not incidental to
its respective responsibilities under the Agreement and which in its opinion may
involve it in any expense or liability. The servicer or the depositor may,
however, in its discretion undertake any action which it may deem necessary or
desirable with respect to the Agreement and the rights and duties of the parties
thereto and the interests of the securityholders thereunder. In that event, the
legal expenses and costs of the action and any liability resulting therefrom
will be expenses, costs and liabilities of the trust, and the servicer or the
depositor, as the case may be, will be entitled to be reimbursed for those costs
and liabilities out of funds which would otherwise be distributed to
securityholders.
Except as otherwise specified in the prospectus supplement, any person into
which the servicer may be merged or consolidated, or any person resulting from
any merger or consolidation to which the servicer is a party, or any person
succeeding to the business of the servicer, will be the successor of the
servicer under each
48
Agreement, provided that that person is qualified to sell mortgage loans to, and
service mortgage loans on behalf of, Fannie Mae or Freddie Mac. Furthermore, the
merger, consolidation or succession may not adversely affect the then current
rating or ratings of the class or classes of securities of the related series
that have been rated.
EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT
POOLING AND SERVICING AGREEMENT; SERVICING AGREEMENT. Events of default
under each Agreement will be specified in the prospectus supplement and may
include:
- any failure by the servicer to make an Advance which continues unremedied
for one business day;
- any failure by the servicer to make or cause to be made any other
required payment pursuant to the Agreement which continues unremedied for
one business day after written notice of such failure to the servicer in
the manner specified in the Agreement;
- any failure by the servicer duly to observe or perform in any material
respect any of its other covenants or agreements in the Agreement which
continues unremedied for sixty days after written notice of the failure
to the servicer in the manner specified in the Agreement; and
- certain events of insolvency, readjustment of debt, marshalling of assets
and liabilities or similar proceedings and certain actions by or on
behalf of the servicer indicating its insolvency, reorganization or
inability to pay its obligations.
Unless otherwise provided in the prospectus supplement, so long as an event
of default under an Agreement remains unremedied, the trustee may, and at the
direction of holders of securities evidencing not less than 25% of the aggregate
voting rights of such series and under such other circumstances as may be
specified in such Agreement, the trustee shall terminate all of the rights and
obligations of the servicer under the Agreement relating to such trust and in
and to the related trust assets, whereupon the trustee will succeed to all of
the responsibilities, duties and liabilities of the servicer under the
Agreement, including, if specified in the prospectus supplement, the obligation
to make advances, and will be entitled to similar compensation arrangements. In
the event that the trustee is unwilling or unable to act as successor to the
servicer, it may appoint, or petition a court of competent jurisdiction for the
appointment of, a housing and home finance institution which is a Fannie Mae or
Freddie Mac approved servicer with a net worth of a least $15,000,000 to act as
successor to the servicer under the Agreement. Pending the appointment of a
successor servicer, the trustee is obligated to act in such capacity. The
trustee and any such successor may agree upon the servicing compensation to be
paid, which in no event may be greater than the compensation payable to the
servicer under the Agreement.
Unless otherwise provided in the prospectus supplement, no securityholder,
solely by virtue of the securityholder's status as a securityholder, will have
any right under any Agreement to institute any proceeding with respect to that
Agreement, unless the securityholder previously has given to the trustee written
notice of default and unless the holders of securities evidencing not less than
25% of the aggregate voting rights for the related series have made written
request upon the trustee to institute such proceeding in its own name as trustee
thereunder and have offered to the trustee reasonable indemnity, the trustee for
60 days has neglected or refused to institute any such proceeding, and all other
conditions precedent for the initiation of suit as described in the Agreement
have been met. However, the trustee is under no obligation to exercise any of
the trusts or powers vested in it by the Agreement for any series or to make any
investigation of matters arising thereunder or to institute, conduct or defend
any litigation thereunder or in relation thereto at the request, order or
direction of any securityholders, unless those securityholders have offered and
provided to the trustee reasonable security or indemnity against the costs,
expenses and liabilities which may be incurred therein or thereby.
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INDENTURE. Except as otherwise specified in the prospectus supplement,
events of default or rapid amortization events under the indenture for each
series of notes include:
- a default in the payment of any principal of or interest on any bond as
specified in the prospectus supplement;
- failure to perform in any material respect any other covenant of the
depositor or the trust in the indenture which continues for a period of
thirty (30) days after notice thereof is given in accordance with the
procedures described in the prospectus supplement;
- certain events of bankruptcy, insolvency, receivership or liquidation of
the depositor or the trust; or
- any other event of default provided with respect to bonds of that series
including, but not limited to, certain defaults on the part of the trust,
if any, of a credit enhancement instrument supporting such notes.
If an event of default with respect to the notes of any series at the time
outstanding occurs and is continuing, either the trustee or the holders of a
majority of the then aggregate outstanding amount of the bonds of that series or
the credit enhancer of that series, if any, may declare the principal amount
(or, if the bonds have an interest rate of 0%, that portion of the principal
amount as may be specified in the terms of that series, as provided in the
prospectus supplement) of all the bonds of that series to be due and payable
immediately. This declaration may, under certain circumstances, be rescinded and
annulled by the holders of more than 50% of the aggregate voting rights of the
bonds of the related series. Rapid amortization events will trigger an
accelerated rate of payment of principal on the bonds, as described in the
related prospectus supplement.
If, following an event of default with respect to any series of bonds, the
bonds of that series have been declared to be due and payable and the prospectus
supplement and applicable Agreement so provide, the trustee may, in its
discretion, notwithstanding the acceleration of the bonds, elect to maintain
possession of the collateral securing the bonds of that series and to continue
to apply distributions on the collateral as if there had been no declaration of
acceleration if the collateral continues to provide sufficient funds for the
payment of principal of and interest on the bonds of that series as they would
have become due if there had not been such a declaration. In addition, unless
otherwise specified in the prospectus supplement, the trustee may not sell or
otherwise liquidate the collateral securing the bonds of a series following an
event of default or a rapid amortization event, unless:
- the holders of 100% of the aggregate voting rights of the bonds of such
series consent to the sale;
- the proceeds of the sale or liquidation are sufficient to pay in full the
principal of and accrued interest, due and unpaid, on the outstanding
bonds of the series at the date of the sale; or
- the trustee determines that the collateral would not be sufficient on an
ongoing basis to make all payments on the bonds as those payments would
have become due if the bonds had not been declared due and payable, and
the trustee obtains the consent of the holders of 66 2/3% of the
aggregate voting rights of the bonds of that series.
In the event that the trustee liquidates the collateral in connection with
an event of default or a rapid amortization event, the indenture provides that
the trustee will have a prior lien on the proceeds of that liquidation for
unpaid fees and expenses. As a result, upon the occurrence of an event of
default or rapid amortization event, the amount available for distribution to
the bondholders could be less than would otherwise be the case. However, the
trustee may not institute a proceeding for the enforcement of its lien except in
connection with a proceeding for the enforcement of the lien of the indenture
for the benefit of the bondholders after the occurrence of an event of default
or rapid amortization event.
Except as otherwise specified in the prospectus supplement, in the event
the principal of the bonds of a series is declared due and payable, as described
above, the holders of any of the bonds issued at a discount from par may be
entitled to receive no more than an amount equal to the unpaid principal amount
thereof less the amount of the discount which is unamortized.
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Subject to the provisions of the indenture relating to the duties of the
trustee, in case an event of default or a rapid amortization event shall occur
and be continuing with respect to a series of bonds, the trustee shall be under
no obligation to exercise any of the rights or powers under the indenture at the
request or direction of any of the holders of bonds of the series, unless those
holders offer to the trustee security or indemnity satisfactory to it against
the costs, expenses and liabilities which might be incurred by it in complying
with their request or direction. Subject to these provisions for indemnification
and certain limitations contained in the indenture, the holders of a majority of
the then aggregate outstanding amount of the bonds of a series shall have the
right to direct the time, method and place of conducting any proceeding for any
remedy available to the trustee or exercising any trust or power conferred on
the trustee with respect to the bonds of the series, and the holders of a
majority of the then aggregate outstanding amount of the notes of the series
may, in certain cases, waive any default with respect thereto, except a default
in the payment of principal or interest or a default in respect of a covenant or
provision of the indenture that cannot be modified without the waiver or consent
of all the holders of the outstanding bonds of the series affected thereby.
AMENDMENT
Except as otherwise specified in the prospectus supplement, each Agreement
may be amended by the depositor, the servicer, the trustee and, if applicable,
the credit enhancer, without the consent of any of the securityholders:
- to cure any ambiguity;
- to correct a defective provision or correct or supplement any provision
therein which may be inconsistent with any other provision therein;
- to make any other revisions with respect to matters or questions arising
under the Agreement which are not inconsistent with the provisions
thereof; or
- to comply with any requirements imposed by the Code or any regulation
thereunder; provided, however, that no such amendments (except those
pursuant to this clause) will adversely affect in any material respect
the interests of any securityholder.
An amendment will be deemed not to adversely affect in any material respect
the interests of the securityholders if the trustee receives a letter from each
rating agency requested to rate the class or classes of securities of such
series stating that the proposed amendment will not result in the downgrading or
withdrawal of the respective ratings then assigned to the related securities.
Each Agreement may also be amended by the depositor, the servicer, the trustee
and, if applicable, the credit enhancer with consent of holders of securities of
such series evidencing not less than 66 2/3% of the aggregate voting rights of
each class affected thereby for the purpose of adding any provisions to or
changing in any manner or eliminating any of the provisions of the Agreement or
of modifying in any manner the rights of the holders of the related securities;
provided, however, that no such amendment may (a) reduce in any manner the
amount of, or delay the timing of, payments received on loans which are required
to be distributed on any security without the consent of the holder of such
security, or (b) with respect to any series of securities, reduce the aforesaid
percentage of securities of any class the holders of which are required to
consent to any such amendment without the consent of the holders of all
securities of such class covered by such Agreement then outstanding. If a REMIC
election is made with respect to a trust, the trustee will not be entitled to
consent to an amendment to the related Agreement without having first received
an opinion of counsel to the effect that the proposed amendment will not cause
such trust to fail to qualify as a REMIC.
TERMINATION; OPTIONAL TERMINATION
POOLING AND SERVICING AGREEMENT; TRUST AGREEMENT. Unless otherwise
specified in the related Agreement, the obligations created by each pooling and
servicing agreement and trust agreement for each series of
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securities will terminate upon the payment to the related securityholders of all
amounts held in the Collection Account or by the servicer and required to be
paid to them pursuant to the Agreement following the later of:
(a) the final payment of or other liquidation of the last of the trust
assets subject thereto or the disposition of all property acquired upon
foreclosure of any such trust assets remaining in the trust; and
(b) the purchase by the servicer or, if REMIC treatment has been elected
and if specified in the prospectus supplement, by the holder of the
residual interest or any other party specified to have such rights (see
"Federal Income Tax Consequences" below), from the related trust of all
of the remaining trust assets and all property acquired in respect of
the related trust assets.
Unless otherwise specified by the prospectus supplement, any purchase of
trust assets and property acquired in respect of trust assets evidenced by a
series of securities will be made at the option of the servicer, such other
person or, if applicable, the holder of the REMIC residual interest, at a price
specified in the prospectus supplement. The exercise of this right will effect
early retirement of the securities of that series, but the right of the
servicer, such other person or, if applicable, the holder of the REMIC residual
interest, to so purchase is subject to the principal balance of the related
trust assets being less than the percentage specified in the prospectus
supplement of the aggregate principal balance of the trust assets at the Cut-Off
Date for the series. The foregoing is subject to the provision that if a REMIC
election is made with respect to a trust, any repurchase pursuant to clause (b)
above will be made only in connection with a "qualified liquidation" of the
REMIC within the meaning of Section 860F(g)(4) of the Code.
INDENTURE. The indenture will be discharged with respect to a series of
bonds, except with respect to certain continuing rights specified in the
indenture, upon the delivery to the trustee for cancellation of all the bonds of
the related series or, with certain limitations, upon deposit with the trustee
of funds sufficient for the payment in full of all of the bonds of that series.
In addition to this type of discharge with certain limitations, the
indenture will provide that, if so specified with respect to the bonds of any
series, the related trust will be discharged from any and all obligations in
respect of the bonds of the related series (except for certain obligations
relating to temporary bonds and exchange of bonds, to register the transfer of
or exchange bonds of such series, to replace stolen, lost or mutilated bonds of
such series, to maintain paying agencies and to hold monies for payment in
trust) upon the deposit with the trustee, in trust, of money and/or direct
obligations of or obligations guaranteed by the United States of America which
through the payment of interest and principal in respect thereof in accordance
with their terms will provide money in an amount sufficient to pay the principal
of and each installment of interest on the bonds of the series on the last
scheduled payment date for the notes and any installment of interest on the
bonds in accordance with the terms of the indenture and the bonds of that
series. In the event of any defeasance and discharge of bonds of the series,
holders of bonds of the series would be able to look only to that money and/or
those direct obligations for payment of principal and interest, if any, on their
bonds until maturity.
THE TRUSTEE
The trustee under each Agreement will be named in the prospectus
supplement. The commercial bank, savings and loan association or trust company
serving as trustee may have normal banking relationships with the depositor, the
servicer and any of their respective affiliates.
CERTAIN LEGAL ASPECTS OF THE LOANS
The following discussion contains summaries, which are general in nature,
of certain legal matters relating to the loans. Because these legal aspects are
governed primarily by applicable state law and because the applicable state laws
may differ substantially from state to state, the descriptions do not, except as
expressly provided below, reflect the laws of any particular state, nor do they
encompass the laws of all states in which the security for the loans is
situated. The descriptions are qualified in their entirety by reference to the
applicable federal laws and the appropriate laws of the states in which loans
may be originated.
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GENERAL
DEEDS OF TRUST AND MORTGAGES. The loans for a series may be secured by
deeds of trust, mortgages, security deeds or deeds to secure debt, depending
upon the prevailing practice in the state in which the property subject to the
loan is located. Deeds of trust are used almost exclusively in California
instead of mortgages. A mortgage creates a lien upon the real property
encumbered by the mortgage, which lien is generally not prior to the lien for
real estate taxes and assessments. Priority between mortgages depends on their
terms and generally on the order of recording with a state or county office.
There are two parties to a mortgage, the mortgagor, who is the borrower and
owner of the mortgaged property, and the mortgagee, who is the lender. Under the
mortgage instrument, the mortgagor delivers to the mortgagee a note or bond and
the mortgage. Although a deed of trust is similar to a mortgage, a deed of trust
formally has three parties, the borrower-property owner called the trustor
(similar to a mortgagor), a lender (similar to a mortgagee) called the
beneficiary, and a third-party grantee called the trustee. Under a deed of
trust, the borrower grants the property, irrevocably until the debt is paid, in
trust, generally with a power of sale, to the trustee to secure payment of the
obligation. A security deed and a deed to secure debt are special types of deeds
which indicate on their face that they are granted to secure an underlying debt.
By executing a security deed or deed to secure debt, the grantor conveys title
to, as opposed to merely creating a lien upon, the subject property to the
grantee until such time as the underlying debt is repaid. The trustee's
authority under a deed of trust, the mortgagee's authority under a mortgage and
the grantee's authority under a security deed or deed to secure debt are
governed by law and, with respect to some deeds of trust, the directions of the
beneficiary.
COOPERATIVE LOANS. Some of the loans may be cooperative loans. A
cooperative is owned by tenant-stockholders, who, through ownership of stock,
shares or membership certificates in the corporation, receive proprietary leases
or occupancy agreements which confer exclusive rights to occupy specific units.
The cooperative owns the real property and the specific units and is responsible
for management of the property. An ownership interest in a cooperative and the
accompanying rights are financed through a cooperative share loan evidenced by a
promissory note and secured by a security interest in the occupancy agreement or
proprietary lease and in the related cooperative shares.
FORECLOSURE/REPOSSESSION
DEED OF TRUST. Foreclosure of a deed of trust is generally accomplished by
a non-judicial sale under a specific provision in the deed of trust which
authorizes the trustee to sell the property at public auction upon any default
by the borrower under the terms of the note or deed of trust. In certain states,
these foreclosures also may be accomplished by judicial action in the manner
provided for foreclosure of mortgages. In addition to any notice requirements
contained in a deed of trust, in some states, including California, the trustee
must record a notice of default and send a copy to the borrower-trustor, to any
person who has recorded a request for a copy of any notice of default and notice
of sale, to any successor in interest to the borrower-trustor, to the
beneficiary of any junior deed of trust and to certain other persons. In some
states, including California, the borrower-trustor has the right to reinstate
the loan at any time following default until shortly before the trustee's sale.
In general, the borrower, or any other person having a junior encumbrance on the
real estate, may, during a statutorily prescribed reinstatement period, cure a
monetary default by paying the entire amount in arrears plus other designated
costs and expenses incurred in enforcing the obligation. Generally, state law
controls the amount of foreclosure expenses and costs, including attorney's
fees, which may be recovered by a lender. After the reinstatement period has
expired without the default having been cured, the borrower or junior lienholder
no longer has the right to reinstate the loan and must pay the loan in full to
prevent the scheduled foreclosure sale. If the deed of trust is not reinstated
within any applicable cure period, a notice of sale must be posted in a public
place and, in most states, including California, published for a specific period
of time in one or more newspapers. In addition, some state laws require that a
copy of the notice of sale be posted on the property and sent to all parties
having an interest of record in the real property. In California, the entire
process from recording a notice of default to a non-judicial sale usually takes
four to five months.
MORTGAGES. Foreclosure of a mortgage is generally accomplished by judicial
action. The action is initiated by the service of legal pleadings upon all
parties having an interest in the real property. Delays in completion of the
foreclosure may occasionally result from difficulties in locating necessary
parties. Judicial
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foreclosure proceedings are often not contested by any of the parties. When the
mortgagee's right to foreclosure is contested, the legal proceedings necessary
to resolve the issue can be time consuming. After the completion of a judicial
foreclosure proceeding, the court generally issues a judgment of foreclosure and
appoints a referee or other court officer to conduct the sale of the property.
In some states, mortgages may also be foreclosed by advertisement, pursuant to a
power of sale provided in the mortgage.
Although foreclosure sales are typically public sales, frequently no third
party purchaser bids in excess of the lender's lien because of the difficulty of
determining the exact status of title to the property, the possible
deterioration of the property during the foreclosure proceedings and a
requirement that the purchaser pay for the property in cash or by cashier's
check. Thus the foreclosing lender often purchases the property from the trustee
or referee for an amount equal to the principal amount outstanding under the
loan, accrued and unpaid interest and the expenses of foreclosure in which event
the mortgagor's debt will be extinguished or the lender may purchase for a
lesser amount in order to preserve its right against a borrower to seek a
deficiency judgment in states where deficiency judgments are available.
Thereafter, subject to the right of the borrower in some states to remain in
possession during the redemption period, the lender will assume the burden of
ownership, including obtaining hazard insurance and making repairs at its own
expense as are necessary to render the property suitable for sale. The lender
will commonly obtain the services of a real estate broker and pay the broker's
commission in connection with the sale of the property. Depending upon market
conditions, the ultimate proceeds of the sale of the property may not equal the
lender's investment in the property. Any loss may be reduced by the receipt of
any mortgage guaranty insurance proceeds.
Courts have imposed general equitable principles upon foreclosure, which
are generally designed to mitigate the legal consequences to the borrower of the
borrower's defaults under the loan documents. Examples of judicial remedies that
have been fashioned include judicial requirements that the lender undertake
affirmative and expensive actions to determine the causes of the borrower's
default and the likelihood that the borrower will be able to reinstate the loan.
In some cases, courts have eliminated the right of a lender to realize upon its
security if the default under the security agreement is not monetary, such as
the borrower's failure to maintain the property adequately or the borrower's
execution of secondary financing affecting the property. Finally, some courts
have been faced with the issue of whether federal or state constitutional
provisions reflecting due process concerns for fair notice require that
borrowers under deeds of trust receive notice longer than that prescribed by
statue. For the most part, these cases have upheld the notice provisions as
being reasonable or have found that the sale by a trustee under a deed of trust
does not involve sufficient state action to afford constitutional protection to
the borrower.
When the beneficiary under a junior mortgage or deed of trust cures the
default and reinstates or redeems by paying the full amount of the senior
mortgage or deed of trust, the amount paid by the beneficiary to cure or redeem
becomes a part of the indebtedness secured by the junior mortgage or deed of
trust.
COOPERATIVE LOANS. The cooperative shares owned by the tenant-stockholder
and pledged to the lender are, in almost all cases, subject to restrictions on
transfer as set forth in the cooperative's certificate of incorporation and
bylaws, as well as the proprietary lease or occupancy agreement, and may be
cancelled by the cooperative for failure by the tenant-stockholder to pay rent
or other obligations or charges owed by such tenant-stockholder, including
mechanics' liens against the cooperative apartment building incurred by such
tenant-stockholder. The proprietary lease or occupancy agreement generally
permits the cooperative to terminate such lease or agreement in the event an
obligor fails to make payments or defaults in the performance of covenants
required thereunder. Typically, the lender and the cooperative enter into a
recognition agreement which establishes the rights and obligations of both
parties in the event of a default by the tenant-stockholder on its obligations
under the proprietary lease or occupancy agreement. A default by the
tenant-stockholder under the proprietary lease or occupancy agreement will
usually constitute a default under the security agreement between the lender and
the tenant-stockholder.
The recognition agreement generally provides that, in the event that the
tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the cooperative will take no action to terminate such lease or
agreement until the lender has been provided with an opportunity to cure the
default. The recognition agreement typically provides that if the proprietary
lease or occupancy agreement is terminated, the
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cooperative will recognize the lender's lien against proceeds from the sale of
the cooperative apartment, subject, however, to the cooperative's right to sums
due under such proprietary lease or occupancy agreement. The total amount owed
to the cooperative by the tenant-stockholder, which the lender generally cannot
restrict and does not monitor, could reduce the value of the collateral below
the outstanding principal balance of the cooperative loan and accrued and unpaid
interest thereon.
Recognition agreements also provide that in the event of a foreclosure on a
cooperative loan, the lender must obtain the approval or consent of the
cooperative as required by the proprietary lease before transferring the
cooperative shares or assigning the proprietary lease. Generally, the lender is
not limited in any rights it may have to dispossess the tenant-stockholders.
In some states, foreclosure on the cooperative shares is accomplished by a
sale in accordance with the provisions of Article 9 of the Uniform Commercial
Code and the security agreement relating to those shares. Article 9 requires
that a sale be conducted in a "commercially reasonable" manner. Whether a
foreclosure sale has been conducted in a "commercially reasonable" manner will
depend on the facts in each case. In determining commercial reasonableness, a
court will look to the notice given the debtor and the method, manner, time,
place and terms of the foreclosure. Generally, a sale conducted according to the
usual practice of banks selling similar collateral will be considered reasonably
conducted.
Article 9 also provides that the proceeds of the sale will be applied first
to pay the costs and expenses of the sale and then to satisfy the indebtedness
secured by the lender's security interest. The recognition agreement, however,
generally provides that the lender's right to reimbursement is subject to the
right of the cooperative to receive sums due under the proprietary lease or
occupancy agreement. If there are proceeds remaining, the lender must account to
the tenant-stockholder for the surplus. Conversely, if a portion of the
indebtedness remains unpaid, the tenant-stockholder is generally responsible for
the deficiency. We direct your attention to the discussion on anti-deficiency
legislation below.
In the case of foreclosure on a building which was converted from a rental
building to a building owned by a cooperative under a non-eviction plan, some
states require that a purchaser at a foreclosure sale take the property subject
to rent control and rent stabilization laws which apply to certain tenants who
elected to remain in the building but who did not purchase shares in the
cooperative when the building was so converted.
ENVIRONMENTAL RISKS
Real property pledged as security to a lender may be subject to
environmental risks. Such risks, among other things, could substantially impair
a borrower's ability to repay a loan, result in substantial diminution in the
value of the property pledged as collateral to secure the loan and/or give rise
to liability which could exceed the value of such property or the principal
balance of the related loan.
Under the laws of certain states, contamination of a property may give rise
to a lien on the property to assure the payment of the costs of clean-up. In
several states this type of lien has priority over the lien of an existing
mortgage against the related property. In addition, under the federal
Comprehensive Environmental Response, Compensation and Liability Act of 1980
("CERCLA"), the United States Environmental Protection Agency ("EPA") may impose
a lien on property where the EPA has incurred clean-up costs. However, a CERCLA
lien is subordinate to pre-existing, perfected security interests.
Under the laws of some states, and under CERCLA, it is conceivable that a
secured lender may be held liable as an owner or operator for the costs of
addressing releases or threatened releases of hazardous substances at a
mortgaged property and related costs, even though the environmental damage or
threat was caused by a prior or current owner or operator or another third
party. CERCLA imposes liability for these costs on any and all responsible
parties, including owners or operators. However, CERCLA excludes from the
definition of "owner or operator" a secured creditor who, without participating
in the management of a facility or property, holds indicia of ownership
primarily to protect its security interest (the "secured creditor exclusion").
Thus, if a lender's activities begin to encroach on the actual management of a
contaminated facility or property, the lender may incur liability as an owner or
operator under CERCLA. Similarly, if a lender forecloses and takes title to a
contaminated facility or property, the lender may incur CERCLA liability
55
in various circumstances, including, but not limited to, when it holds the
facility or property as an investment (including leasing the facility or
property to a third party), or fails to market the property in a timely fashion.
If a lender is or becomes liable, it may be entitled to bring an action for
contribution against any other responsible parties, including a previous owner
or operator, who created the environmental hazard, but those persons or entities
may be bankrupt or otherwise judgment-proof. The costs associated with
environmental cleanup and the diminution in value of contaminated property and
related liabilities or losses may be substantial. It is conceivable that the
costs arising from the circumstances set forth above would result in a loss to
securityholders.
CERCLA does not apply to petroleum products, and the secured creditor
exclusion does not govern liability for cleanup costs under federal laws other
than CERCLA, in particular Subtitle I of the federal Resource Conservation and
Recovery Act ("RCRA"), which regulates underground petroleum storage tanks
(except heating oil tanks). The EPA has adopted a lender liability rule for
underground storage tanks under Subtitle I of RCRA. Under that rule, a holder of
a security interest in an underground storage tank or real property containing
an underground storage tank is not considered an operator of the underground
storage tank as long as the holder does not exercise decisionmaking control over
the borrower's enterprise, participate in the management or control of
decisionmaking relating to the operation of a tank, as long as petroleum is not
added to, stored in or dispensed from the tank, or as long as holder does not
deviate from certain other requirements specified in the rule. In addition,
under the Asset Conservation, Lender Liability and Deposit Insurance Protection
Act of 1996, similar protections to those accorded to lenders under CERCLA are
also accorded to holders of security interests in underground tanks. It should
be noted, however, that liability for cleanup of contamination may be governed
by state law, which may not provide for any specific protection for secured
creditors.
Whether actions taken by a lender would constitute participation in the
management of a mortgaged property, or the business of a borrower, so as to
render the secured creditor exemption unavailable to a lender has been a matter
of judicial interpretation of the statutory language, and court decisions have
been inconsistent. In 1990, the Court of Appeals for the Eleventh Circuit
suggested that the mere capacity of the lender to influence a borrower's
decisions regarding disposal of hazardous substances was sufficient
participation in the management of the borrower's business to deny the
protection of the secured creditor exemption to the lender, regardless of
whether lender actually exercised such influence.
This ambiguity appears to have been resolved by the enactment of the Asset
Conservation, Lender Liability and Deposit Insurance Protection Act of 1996. The
legislation provides that in order to be deemed to have participated in the
management of a mortgaged property, a lender must actually participate in the
operational affairs of the property or the borrower. The legislation also
provides that participation in the management of the property does not include
"merely having the capacity to influence, or unexercised right to control"
operations. Rather, a lender will lose the protection of the secured creditor
exclusion only if it exercises decision-making control over the borrower's
environmental compliance and hazardous substance handling and disposal
practices, or assumes day-to-day management of all operational functions of the
secured property. As noted above, the secured creditor exclusion does not govern
liability for cleanup costs except under the federal laws discussed above. In
addition, certain other environmental conditions may be required to be addressed
under other federal, state or local laws or in order to improve the
marketability of a property. Therefore, under certain circumstances, including
but not limited to after foreclosure, a lender may incur costs under applicable
laws or in order to improve the marketability of a property in connection with
environmental conditions associated with that property, such as the presence or
release of regulated materials in underground storage tanks, asbestos-containing
material, lead paint or radon gas. If a lender is or becomes liable, it can
bring an action for contribution against any other "responsible parties"
including a previous owner or operator, who created the environmental hazard,
but those persons or entities may be bankrupt or otherwise judgment-proof. It is
conceivable that the costs arising from such circumstances would result in a
loss to securityholders.
Except as otherwise specified in the prospectus supplement, at the time the
loans were originated, no environmental assessments or very limited
environmental assessments of the properties were conducted.
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RIGHTS OF REDEMPTION
In some states, after sale pursuant to a deed of trust or foreclosure of a
mortgage, the borrower and foreclosed junior lienors are given a statutory
period in which to redeem the property from the foreclosure sale. In certain
other states, including California, this right of redemption applies only to
sales following judicial foreclosure, and not to sales pursuant to a
non-judicial power of sale. In most states where the right of redemption is
available, statutory redemption may occur upon payment of the foreclosure
purchase price, accrued interest and taxes. In other states, redemption may be
authorized if the former borrower pays only a portion of the sums due. The
effect of a statutory right of redemption is to diminish the ability of the
lender to sell the foreclosed property. The exercise of a right of redemption
would defeat the title of any purchaser from the lender subsequent to
foreclosure or sale under a deed of trust. Consequently, the practical effect of
the redemption right is to force the lender to retain the property and pay the
expenses of ownership until the redemption period has run. In some states, there
is no right to redeem property after a trustee's sale under a deed of trust.
ANTI-DEFICIENCY LEGISLATION; BANKRUPTCY LAWS; TAX LIENS
Certain states have imposed statutory and judicial restrictions that limit
the remedies of a beneficiary under a deed of trust or a mortgagee under a
mortgage. In some states, including California, statutes and case law limit the
right of the beneficiary or mortgagee to obtain a deficiency judgment against
borrowers financing the purchase of their residence or following sale under a
deed of trust or certain other foreclosure proceedings. A deficiency judgment is
a personal judgment against the borrower equal in most cases to the difference
between the amount due to the lender and the fair market value of the real
property at the time of the foreclosure sale. As a result of these prohibitions,
it is anticipated that in most instances the servicer will utilize the
non-judicial foreclosure remedy and will not seek deficiency judgments against
defaulting borrowers.
Some state statutes require the beneficiary or mortgagee to exhaust the
security afforded under a deed of trust or mortgage by foreclosure in an attempt
to satisfy the full debt before bringing a personal action against the borrower.
In certain other states, the lender has the option of bringing a personal action
against the borrower on the debt without first exhausting that security;
however, in some of these states, the lender, following judgment on such
personal action, may be deemed to have elected a remedy and may be precluded
from exercising remedies with respect to the security. Consequently, the
practical effect of the election requirement, when applicable, is that lenders
will usually proceed first against the security rather than bringing a personal
action against the borrower. In some states, exceptions to the anti-deficiency
statutes are provided for in certain instances where the value of the lender's
security has been impaired by acts or omissions of the borrower, for example, in
the event of waste of the property. Finally, other statutory provisions limit
any deficiency judgment against the former borrower following a foreclosure sale
to the excess of the outstanding debt over the fair market value of the property
at the time of the public sale. The purpose of these statutes is generally to
prevent a beneficiary or a mortgagee from obtaining a large deficiency judgment
against the former borrower as a result of low or no bids at the foreclosure
sale.
In addition to anti-deficiency and related legislation, numerous other
federal and state statutory provisions, including the federal bankruptcy laws,
and state laws affording relief to debtors, may interfere with or affect the
ability of the secured mortgage lender to realize upon its security. For
example, in a proceeding under the federal Bankruptcy Code, a lender may not
foreclose on a mortgaged property without the permission of the bankruptcy
court. The rehabilitation plan proposed by the debtor may provide, if the
mortgaged property is not the debtor's principal residence and the court
determines that the value of the mortgaged property is less than the principal
balance of the mortgage loan, for the reduction of the secured indebtedness to
the value of the mortgaged property as of the date of the commencement of the
bankruptcy, rendering the lender a general unsecured creditor for the
difference, and also may reduce the monthly payments due under such mortgage
loan, change the rate of interest and alter the mortgage loan repayment
schedule. The effect of any proceedings under the federal Bankruptcy Code,
including, but not limited to, any automatic stay, could result in delays in
receiving payments on the loans underlying a series of securities and possible
reductions in the aggregate amount of payments.
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The federal tax laws provide priority to certain tax liens over the lien of
a mortgage or secured party.
DUE-ON-SALE CLAUSES
Each conventional loan generally will contain a due-on-sale clause which
will generally provide that if the mortgagor or obligor sells, transfers or
conveys the property, the loan or contract may be accelerated by the mortgagee
or secured party. Court decisions and legislative actions have placed
substantial restrictions on the right of lenders to enforce these clauses in
many states. For instance, the California Supreme Court in August 1978 held that
due-on-sale clauses were generally unenforceable. However, the Garn-St. Germain
Depository Institutions Act of 1982 (the "Garn-St. Germain Act"), subject to
certain exceptions, preempts state constitutional, statutory and case law
prohibiting the enforcement of due-on-sale clauses. As a result, due-on-sale
clauses are generally enforceable except in those states whose legislatures
exercised their authority to regulate the enforceability of the clauses with
respect to mortgage loans that were (a) originated or assumed during the "window
period" under the Garn-St. Germain Act which ended in all cases not later than
October 15, 1982, and (b) originated by lenders other than national banks,
federal savings institutions and federal credit unions. Freddie Mac has taken
the position in its published mortgage servicing standards that, out of a total
of eleven "window period states," five states (Arizona, Michigan, Minnesota, New
Mexico and Utah) have enacted statutes extending, on various terms and for
varying periods, the prohibition on enforcement of due-on-sale clauses with
respect to certain categories of window period loans. Also, the Garn-St. Germain
Act does "encourage" lenders to permit assumption of loans at the original rate
of interest or at some other rate less than the average of the original rate and
the market rate.
As to loans secured by an owner-occupied residence, the Garn-St. Germain
Act sets forth nine specific instances in which a mortgagee covered by the
Garn-St. Germain Act may not exercise its rights under a due-on-sale clause,
notwithstanding the fact that a transfer of the property may have occurred. The
inability to enforce a due-on-sale clause may result in transfer of the related
property to an uncreditworthy person, which could increase the likelihood of
default or may result in a mortgage bearing an interest rate below the current
market rate being assumed by a new home buyer, which may affect the average life
of the loans and the number of loans which may extend to maturity.
In addition, under federal bankruptcy law, due-on-sale clauses may not be
enforceable in bankruptcy proceedings and may, under certain circumstances, be
eliminated in any modified mortgage resulting from such bankruptcy proceeding.
ENFORCEABILITY OF PREPAYMENT AND LATE PAYMENT FEES
Forms of notes, mortgages and deeds of trust used by lenders may contain
provisions obligating the borrower to pay a late charge if payments are not
timely made, and in some circumstances may provide for prepayment fees or
penalties if the obligation is paid prior to maturity. In certain states, there
are or may be specific limitations upon the late charges which a lender may
collect from a borrower for delinquent payments. Certain states also limit the
amounts that a lender may collect from a borrower as an additional charge if the
loan is prepaid. Under certain state laws, prepayment charges may not be imposed
after a certain period of time following the origination of mortgage loans with
respect to prepayments on loans secured by liens encumbering owner-occupied
residential properties. The absence of such a restraint on prepayment,
particularly with respect to fixed rate loans having higher loan rates, may
increase the likelihood of refinancing or other early retirement of the related
loans or contracts. Late charges and prepayment fees are typically retained by
servicers as additional servicing compensation.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980, enacted in March 1980 ("Title V") provides that state usury
limitations shall not apply to certain types of residential first mortgage loans
originated by certain lenders after March 31, 1980. The Office of Thrift
Supervision, as successor to the Federal Home Loan Bank Board, is authorized to
issue rules and regulations and to publish interpretations governing
implementation of Title V. Title V authorized the states to reimpose interest
rate
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limits by adopting, before April 1, 1983, a law or constitutional provision
which expressly rejects application of the federal law. Fifteen states adopted
such a law prior to the April 1, 1983 deadline. In addition, even where Title V
was not so rejected, any state is authorized by the law to adopt a provision
limiting discount points or other charges on mortgage loans covered by Title V.
Certain states have taken action to reimpose interest rate limits and/or to
limit discount points or other charges.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT
Generally, under the terms of the Soldiers' and Sailors' Civil Relief Act
of 1940, as amended (the "Relief Act"), a borrower who enters military service
after the origination of his or her loan (including a borrower who is a member
of the National Guard or is in reserve status at the time of the origination of
the loan and is later called to active duty) may not be charged interest above
an annual rate of 6% during the period of his or her active duty status, unless
a court orders otherwise upon application of the lender. It is possible that
this interest rate limitation could have an effect, for an indeterminate period
of time, on the ability of the servicer to collect full amounts of interest on
certain of the loans. Unless otherwise provided in the prospectus supplement,
any shortfall in interest collections resulting from the application of the
Relief Act could result in losses to securityholders. The Relief Act also
imposes limitations which would impair the ability of the servicer to foreclose
on an affected loan during the borrower's period of active duty status.
Moreover, the Relief Act permits the extension of a loan's maturity and the
re-adjustment of its payment schedule beyond the completion of military service.
Thus, in the event that a loan that is affected by the Relief Act goes into
default, there may be delays and losses occasioned by the inability to realize
upon the property in a timely fashion.
JUNIOR MORTGAGES; RIGHTS OF SENIOR MORTGAGEES
To the extent that the loans comprising the trust for a series are secured
by mortgages which are junior to other mortgages held by other lenders or
institutional investors, the rights of the trust (and therefore the
securityholders), as mortgagee under any such junior mortgage, are subordinate
to those of any mortgagee under any senior mortgage. The senior mortgagee has
the right to receive hazard insurance and condemnation proceeds and to cause the
property securing the loan to be sold upon default of the mortgagor, thereby
extinguishing the junior mortgagee's lien unless the junior mortgagee asserts
its subordinate interest in the property in foreclosure litigation and,
possibly, satisfies the defaulted senior mortgage. A junior mortgagee may
satisfy a defaulted senior loan in full and, in some states, may cure a default
and bring the senior loan current, in either event adding the amounts expended
to the balance due on the junior loan. In most states, absent a provision in the
mortgage or deed of trust, no notice of default is required to be given to a
junior mortgagee.
The standard form of the mortgage used by most institutional lenders
confers on the mortgagee the right both to receive all proceeds collected under
any hazard insurance policy and all awards made in connection with condemnation
proceedings, and to apply those proceeds and awards to any indebtedness secured
by the mortgage, in whatever order the mortgagee may determine. Thus, in the
event improvements on the property are damaged or destroyed by fire or other
casualty, or in the event the property is taken by condemnation, the mortgagee
or beneficiary under a senior mortgage will have the prior right to collect any
insurance proceeds payable under a hazard insurance policy and any award of
damages in connection with the condemnation and to apply the same to the
indebtedness secured by the senior mortgage. Proceeds in excess of the amount of
senior mortgage indebtedness, in most cases, may be applied to the indebtedness
of a junior mortgage.
Another provision sometimes found in the form of the mortgage or deed of
trust used by institutional lenders obligates the mortgagor to pay before
delinquency all taxes and assessments on the property and, when due, all
encumbrances, charges and liens on the property which appear prior to the
mortgage or deed of trust, to provide and maintain fire insurance on the
property, to maintain and repair the property and not to commit or permit any
waste thereof, and to appear in and defend any action or proceeding purporting
to affect the property or the rights of the mortgagee under the mortgage. Upon a
failure of the mortgagor to perform any of these obligations, the mortgagee is
given the right under certain mortgages to perform the obligation itself, at
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its election, with the mortgagor reimbursing the mortgagee for any sums expended
by the mortgagee on behalf of the mortgagor. All sums so expended by the
mortgagee become part of the indebtedness secured by the mortgage.
CONSUMER PROTECTION LAWS
Numerous federal and state consumer protection laws impose substantive
requirements upon mortgage lenders in connection with the originating, servicing
and enforcing of loans secured by single family properties. These laws include
the federal Truth-in-Lending Act and Regulation Z promulgated thereunder, Real
Estate Settlement Procedures Act and Regulation B promulgated thereunder, Equal
Credit Opportunity Act, Fair Credit Billing Act, Fair Credit Reporting Act and
related statutes and regulations. In particular, Regulation Z requires certain
disclosures to borrowers regarding the terms of the loans; the Equal Credit
Opportunity Act and Regulation B promulgated thereunder prohibit discrimination
in the extension of credit on the basis of age, race, color, sex, religion,
marital status, national origin, receipt of public assistance or the exercise of
any right under the Consumer Credit Protection Act; and the Fair Credit
Reporting Act regulates the use and reporting of information related to the
borrower's credit experience. Certain provisions of these laws impose specific
statutory liabilities upon lenders who fail to comply therewith. In addition,
violations of such laws may limit the ability of the servicer to collect all or
part of the principal of or interest on the loans and could subject the sellers
and in some cases their assignees to damages and administrative enforcement.
FEDERAL INCOME TAX CONSEQUENCES
The following discussion summarizes the anticipated material federal income
tax consequences of the purchase, ownership and disposition of the securities,
as based on the advice of GnazzoThill, A Professional Corporation, special tax
counsel to the Issuer. This summary is based on the Internal Revenue Code of
1986, as amended (the "CODE"), regulations (including the REMIC regulations
promulgated by the Treasury Department (the "REMIC Regulations")), rulings and
decisions in effect as of the date of this prospectus, all of which are subject
to change. This summary does not address federal income tax consequences
applicable to all categories of investors, some of which (such as banks and
insurance companies) may be subject to special rules. In addition, the summary
is limited to investors who will hold the securities as "capital assets"
(generally, property held for investment) as defined in section 1221 of the
Code. Investors should consult their own tax advisors in determining the
federal, state, local and any other tax consequences to them of the purchase,
ownership and disposition of the securities. As applied to any particular class
or series of securities, the summary is subject to further discussion or change
as provided in the related prospectus supplement.
OVERVIEW
The federal income tax consequences applicable with respect to a specific
series of securities will vary depending on whether an election is made to treat
the trust estate relating to such series of securities as a real estate mortgage
investment conduit ("REMIC") under Code. The prospectus supplement for each
series of securities will specify whether a REMIC election will be made with
respect to such series. Securities of any series that is not the subject of a
REMIC election ("NON-REMIC SECURITIES") are intended to be classified as
indebtedness of the Issuer for federal income tax purposes.
NON-REMIC SECURITIES
General. If a REMIC election is not made, GnazzoThill, A Professional
Corporation, will deliver its opinion that, although no regulations, published
rulings or judicial decisions exist that specifically discuss the
characterization for federal income tax purposes of securities with terms
substantially the same as the non-REMIC securities, in its opinion such
securities will be treated for federal income tax purposes as indebtedness of
the Issuer and not as an ownership interest in the collateral or an equity
interest in the Issuer.
Status as Real Property Loans. Because, in such counsel's opinion, the
non-REMIC securities will be treated as indebtedness of the Issuer for federal
income tax purposes, (i) such securities held by a thrift institution taxed as a
domestic building and loan association will not constitute "loans . . . secured
by an
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interest in real property" within the meaning of Code section 7701(a)(19)(C)(v),
(ii) interest on non-REMIC securities held by a real estate investment trust
will not be treated as "interest on obligations secured by mortgages on real
property or on interests in real property" within the meaning of Code section
856(c)(3)(B), and non-REMIC securities will not constitute "real estate assets"
or "government securities" within the meaning of Code section 856(c)(4)(A), and
(iii) non-REMIC securities held by a regulated investment company will not
constitute "government securities" within the meaning of Code section
851(b)(4)(A)(i).
Interest on Non-REMIC Securities. Except as described below with respect
to original issue discount, market discount or premium, interest paid or accrued
on non-REMIC securities generally will be treated as ordinary income to the
holder, and will be includible in income in accordance with such holder's
regular method of accounting.
Original Issue Discount. All accrual securities will be, and some or all
of the other securities may be, issued with "original issue discount" within the
meaning of Code section 1273(a). Holders of any class of securities having
original issue discount must generally include original issue discount in
ordinary gross income for federal income tax purposes as it accrues, in
accordance with the constant yield method, in advance of receipt of the cash
attributable to such income. The Issuer will indicate on the face of each
security issued by it information concerning the application of the original
issue discount rules to such security and certain other information that may be
required. The Issuer will report annually to the Internal Revenue Service (the
"IRS") and to holders of record of such securities information with respect to
the original issue discount accruing on such securities during the reporting
period.
Rules governing original issue discount are set forth in Code sections 1271
through 1273, 1275 and 1281 through 1283 and in regulations issued thereunder
(the "OID REGULATIONS"). The Code or the OID Regulations either do not address,
or are subject to varying interpretations with respect to, several issues
relevant to obligations, such as the securities, that are subject to prepayment.
Therefore, there is some uncertainty as to the manner in which the original
issue discount rules of the Code will be applied to the securities.
Original Issue Discount Defined. In general, each security will be treated
as a single installment obligation for purposes of determining the original
issue discount includible in a securityholder's income. The amount of original
issue discount on such a security is the excess of the stated redemption price
at maturity of the security over its issue price. The issue price of a security
is the initial offering price to the public at which a substantial amount of the
securities of that class are first sold to the public (excluding bond houses,
brokers, underwriters or wholesalers), generally as set forth on the cover page
of the prospectus supplement for a series of securities. If less than a
substantial amount of a particular class of securities is sold for cash on or
prior to the date of the their initial issuance, the issue price for such class
will likely be treated as equal to its fair market value on the closing date.
The portion of the initial offering price which consists of payment for interest
accrued on the securities prior to the closing date generally may, at the option
of the initial securityholders, be subtracted from the issue price of the
securities and treated as an offset to interest received on the first payment
date.
The stated redemption price at maturity of a security is equal to the total
of all payments to be made on the security other than "qualified stated interest
payments." "Qualified stated interest payments" are payments on the securities
which are paid at least annually and are based on either a fixed rate or a
"qualified variable rate." Under the OID Regulations, interest is treated as
payable at a "qualified variable rate" and not as contingent interest if,
generally, (i) such interest is unconditionally payable at least annually, (ii)
the issue price of the security does not exceed the total noncontingent
principal payments and (iii) interest is based on a "qualified floating rate,"
an "objective rate," or a combination of "qualified floating rates" that do not
operate in a manner that significantly accelerates or defers interest payments
on such security. Generally, the stated redemption price at maturity of a
security (other than an accrual security or a payment lag security, as defined
below) is its stated principal amount; the stated redemption price at maturity
of an accrual security is the sum of all payments (regardless of how
denominated) scheduled to be received on such security under the Tax Prepayment
Assumption (as defined below). Any payment denominated as interest that does not
constitute a
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qualified stated interest payment is generally referred to as a "contingent
interest payment." The related prospectus supplement will discuss whether the
payments on a security denominated as interest are qualified stated interest
payments and the treatment for federal income tax purposes of any contingent
interest payments.
De Minimis Original Issue Discount. Notwithstanding the general definition
of original issue discount above, any original issue discount with respect to a
security will be considered to be zero if such discount is less than 0.25% of
the stated redemption price at maturity of the security multiplied by its
weighted average life (a "de minimis" amount). The weighted average life of a
security for this purpose is the sum of the following amounts (computed for each
payment included in the stated redemption price at maturity of the security):
(i) the number of complete years (rounded down for partial years) from the
closing date until the date on which each such payment is scheduled to be made
under the Tax Prepayment Assumption, multiplied by(ii) a fraction, the numerator
of which is the amount of the payment, and the denominator of which is the
security's stated redemption price at maturity. Securityholders generally must
report de minimis original issue discount pro rata as principal payments are
received, and such income will be capital gain if the security is held as a
capital asset. However, accrual method holders may elect to accrue all interest
on a security, including de minimis original issue discount and market discount
and as adjusted by any premium, under a constant yield method.
Accrual of Original Issue Discount. The Code requires that the amount and
rate of accrual of original issue discount be calculated based on a reasonable
assumed prepayment rate for the mortgage loans, the mortgage loans underlying
any mortgaged-backed securities and/or other mortgage collateral securing the
securities (the "Tax Prepayment Assumption") and prescribes a method for
adjusting the amount and rate of accrual of such discount if actual prepayment
rates exceed the Tax Prepayment Assumption. However, if such mortgage loans
prepay at a rate slower than the Tax Prepayment Assumption, no deduction for
original issue discount previously accrued, based on the Tax Prepayment
Assumption, is allowed. The Tax Prepayment Assumption is required to be
determined in the manner prescribed by regulations that have not yet been
issued. It is anticipated that the regulations will require that the Tax
Prepayment Assumption be the prepayment assumption that is used in determining
the initial offering price of such securities. The related prospectus supplement
for each series of securities will specify the Tax Prepayment Assumption
determined by the Issuer for the purposes of determining the amount and rate of
accrual of original issue discount. No representation is made that the mortgage
collateral will prepay at the Tax Prepayment Assumption or at any other rate.
Generally, a securityholder must include in gross income the sum of the
"daily portions," as determined below, of the original issue discount that
accrues on a security for each day the securityholder holds that security,
including the purchase date but excluding the disposition date. In the case of
an original holder of a security, a calculation will be made of the portion of
the original issue discount that accrues during each successive period (or
shorter period from date of original issue) (an "accrual period") that ends on
the day in the calendar year corresponding to each of the payment dates on the
securities (or the date prior to each such date). This will be done, in the case
of each full accrual period, by:
(1) adding (A) the present value at the end of the accrual period of
all remaining payments to be received on the securities, computed taking
into account (i) the yield to maturity of the security at the issue date,
(ii) events (including actual prepayments) that have occurred prior to the
end of the accrual period, and (iii) the Tax Prepayment Assumption, and (B)
any payments received during such accrual period, other than payments of
qualified stated interest, and
(2) subtracting from that total the "adjusted issue price" of the
securities at the beginning of such accrual period.
The adjusted issue price of a security at the beginning of the initial accrual
period is its issue price; the adjusted issue price of a security at the
beginning of a subsequent accrual period is the adjusted issue price at the
beginning of the immediately preceding accrual period plus the amount of
original issue discount allocable to such accrual period and reduced by the
amount of any payment other than a payment of qualified stated interest made at
the end of or during such accrual period. The original issue discount accrued
during such
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accrual period will then be divided by the number of days in the period to
determine the daily portion of original issue discount for each day in the
period. With respect to an initial accrual period shorter than a full accrual
period, the daily portions of original issue discount must be determined
according to any reasonable method, provided that such method is consistent with
the method used to determine yield on the securities.
With respect to any security that is a variable rate debt instrument, the
sum of the daily portions of original issue discount that is includible in the
holder's gross income is determined under the same principles described above,
with the following modifications: the yield to maturity on the securities should
be calculated as if the interest index remained at its value as of the issue
date of such securities. Because the proper method of adjusting accruals of
original issue discount on a variable rate debt instrument as a result of
prepayments is uncertain, holders of such instruments should consult their own
tax advisors regarding the appropriate treatment of such securities for federal
income tax purposes.
Subsequent Purchasers of Securities with Original Issue Discount. A
subsequent purchaser of an accrual security or any other security issued with
original issue discount who purchases the security at a cost less than the
remaining stated redemption price at maturity, will also be required to include
in gross income for all days during his or her taxable year on which such
security is held, the sum of the daily portions of original issue discount on
the security. In computing the daily portions of original issue discount with
respect to a security for such a subsequent purchaser, however, the daily
portion for any day shall be reduced by the amount that would be the daily
portion for such day (computed in accordance with the rules set forth above)
multiplied by a fraction, the numerator of which is the amount, if any, by which
the price paid by such holder for the security exceeds its adjusted issue price
(the "acquisition premium"), and the denominator of which is the amount by which
the remaining stated redemption price at maturity exceeds the adjusted issue
price.
Premium. A holder who purchases a security at a cost greater than its
stated redemption price at maturity generally will be considered to have
purchased the security at a premium, which it may elect to amortize as an offset
to interest income on such security (and not as a separate deduction item) on a
constant yield method. Although no regulations addressing the computation of
premium accrual on securities similar to the securities have been issued, the
legislative history of the Tax Reform Act of 1986 indicates that premium is to
be accrued in the same manner as market discount. Accordingly, it appears that
the accrual of premium on a class of securities of a series will be calculated
using the prepayment assumption used in pricing such class. If a holder makes an
election to amortize premium on a security, such election will apply to all
taxable debt instruments (including all REMIC regular interests and all
pass-through certificates representing ownership interests in a trust holding
debt obligations) held by the holder at the beginning of the taxable year in
which the election is made, and to all taxable debt instruments acquired
thereafter by such holder, and will be irrevocable without the consent of the
Internal Revenue Service. Purchasers who pay a premium for the securities should
consult their tax advisers regarding the election to amortize premium and the
method to be employed.
Market Discount. The securities are subject to the market discount
provisions of Code sections 1276 through 1278. These rules provide that if a
subsequent holder of a security purchases it at a market discount, some or all
of any principal payment or of any gain recognized upon the disposition of the
security will be taxable as ordinary interest income. Market discount on a
security means the excess, if any, of (1) the sum of its issue price and the
aggregate amount of original issue discount includible in the gross income of
all holders of the security prior to the acquisition by the subsequent holder
(presumably adjusted to reflect prior principal payments), over (2) the price
paid by the holder for the security. Market discount on a security will be
considered to be zero if such discount is less than .25% of the stated
redemption price at maturity of such security multiplied by its weighted average
life, which presumably would be calculated in a manner similar to weighted
average life (described above), taking into account distributions (including
prepayments) prior to the date of acquisition of such security by the subsequent
purchaser. If market discount on a security is treated as zero under this rule,
the actual amount of such discount must be allocated to the remaining principal
distributions on such security and when each such distribution is made, gain
equal to the discount allocated to such distribution will be recognized.
63
Any principal payment (whether a scheduled payment or a prepayment) or any
gain on the disposition of a market discount security is to be treated as
ordinary income to the extent that it does not exceed the accrued market
discount at the time of such payment or disposition. The amount of accrued
market discount for purposes of determining the tax treatment of subsequent
principal payments or dispositions of the securities is to be reduced by the
amount so treated as ordinary income.
The Tax Reform Act of 1986 grants authority to the U.S. Treasury to issue
regulations providing for the computation of accrued market discount on debt
instruments, the principal of which is payable in more than one installment.
Until such time as regulations are issued by the U.S. Treasury, certain rules
described in the legislative history accompanying the Tax Reform Act of 1986
will apply. Under those rules, the holder of a market discount security may
elect to accrue market discount either on the basis of a constant interest rate
or using one of the following methods. For securities issued with original issue
discount, the amount of market discount that accrues during a period is equal to
the product of (i) the total remaining market discount, multiplied by (ii) a
fraction, the numerator of which is the original issue discount accruing during
the period and the denominator of which is the total remaining original issue
discount at the beginning of the period. For securities issued without original
issue discount, the amount of market discount that accrues during a period is
equal to the product of (i) the total remaining market discount, multiplied by
(ii) a fraction, the numerator of which is the amount of stated interest paid
during the accrual period and the denominator of which is the total amount of
stated interest remaining to be paid at the beginning of the period. For
purposes of calculating market discount under any of the above methods in the
case of instruments (such as the securities) that provide for payments that may
be accelerated by reason of prepayments of other obligations securing such
instruments, the same prepayment assumption applicable to calculating the
accrual of original issue discount shall apply. Regulations are to provide
similar rules for computing the accrual of amortizable security premium on
instruments payable in more than one principal installment. As an alternative to
the inclusion of market discount in income on the foregoing basis, the holder
may elect to include such market discount in income currently as it accrues on
all market discount instruments acquired by such holder in that taxable year or
thereafter. In addition, accrual method holders may elect to accrue all interest
on a security, including de minimis original issue discount and market discount
and as adjusted by any premium, under a constant yield method.
A subsequent holder of a security who acquired the security at a market
discount also may be required to defer, until the maturity date of the security
or the earlier disposition of the security in a taxable transaction, the
deduction of a portion of the amount of interest that the holder paid or accrued
during the taxable year on indebtedness incurred or maintained to purchase or
carry the security in excess of the aggregate amount of interest (including
original issue discount) includible in his or her gross income for the taxable
year with respect to such security. The amount of such net interest expense
deferred in a taxable year may not exceed the amount of market discount accrued
on the security for the days during the taxable year on which the subsequent
holder held the security, and the amount of such deferred deduction to be taken
into account in the taxable year in which the security is disposed of in a
transaction in which gain or loss is not recognized in whole or in part is
limited to the amount of gain recognized on the disposition. This deferral rule
does not apply to a holder that elects to include market discount in income
currently as it accrues on all market discount instruments acquired by such
holder in that taxable year or thereafter.
Because the regulations described above with respect to market discounts
and premiums have not been issued, it is impossible to predict what effect those
regulations might have on the tax treatment of a security purchased at a
discount or premium in the secondary market.
Election to Treat All Interest as Original Issue Discount. The OID
Regulations permit a holder of a security to elect to accrue all interest,
discount (including de minimis market or original issue discount) and premium in
income as interest, based on a constant yield method for securities acquired on
or after April 4, 1994. If such an election were to be made with respect to a
security with market discount, the holder of the security would be deemed to
have made an election to include in income currently market discount with
respect to all other debt instruments having market discount that such holder of
the securities acquires during the year of the election or thereafter.
Similarly, a holder of a security that makes this election for a security that
is acquired at a premium will be deemed to have made an election to amortize
security premium with
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respect to all debt instruments having amortizable security premium that such
holder owns or acquires. The election to accrue interest, discount and premium
on a constant yield method with respect to a security is irrevocable.
Sale or Redemption. If a security is sold, exchanged, redeemed or retired,
the seller will recognize gain or loss equal to the difference between the
amount realized on the sale and the seller's adjusted basis in the security.
Such adjusted basis generally will equal the cost of the security to the seller,
increased by any original issue discount and market discount included in the
seller's gross income with respect to the security and reduced by payments,
other than payments of qualified stated interest, previously received by the
seller and by any amortized premium. If a securityholder is a bank, thrift or
similar institution described in section 582(c) of the Code, gain or loss
realized on the sale or exchange of a security will be taxable as ordinary
income or loss. Any such gain or loss recognized by any other seller generally
will be capital gain or loss provided that the security is held by the seller as
a "capital asset" (generally, property held for investment) within the meaning
of Code section 1221. Such gain or loss will be long-term gain or loss if the
security is held as a capital asset for more than one year. Long-term capital
gains of non-corporate taxpayers are subject to reduced maximum rates while
short-term capital gains are taxable at ordinary rates. The use of capital
losses is subject to limitations.
REMIC SECURITIES
General. If a REMIC election is made with respect to a series of
securities, GnazzoThill, A Professional Corporation will deliver an opinion
generally to the effect that, under existing law, assuming timely filing of a
REMIC election and ongoing compliance with all provisions of the related
Agreements, all or a portion of the trust estate securing such series of
securities will qualify as a REMIC for federal income tax purposes.
The securities in such series will be designated either as one or more
"regular interests" in a REMIC, which generally are treated as debt for federal
income tax purposes, or as "residual interests" in a REMIC, which generally are
not treated as debt for such purposes but rather as representing rights and
responsibilities with respect to the taxable income or loss of the related
REMIC. The prospectus supplement for such series will indicate which classes of
securities are being designated as regular interests ("REGULAR INTEREST
SECURITIES") and which class is being designated as the residual interest
("RESIDUAL INTEREST SECURITIES").
Tiered REMIC Structures. For certain series of securities, two separate
elections may be made to treat designated portions of the related trust estate
as REMICs (referred to as the "UPPER TIER REMIC" and the "LOWER TIER REMIC"
respectively) for federal income tax purposes. Upon the issuance of any such
series of securities, GnazzoThill, A Professional Corporation, will deliver its
opinion generally to the effect that, under existing law, assuming timely filing
of applicable REMIC elections and ongoing compliance with all provisions of the
related Agreements, the Upper Tier REMIC and the Lower Tier REMIC will each
qualify as a REMIC for federal income tax purposes. In certain cases, a single
residual interest security may represent the residual interest in both the Upper
Tier REMIC and the Lower Tier REMIC. In such case, the discussion of residual
interest securities set forth below should be interpreted as applying to each
residual interest separately.
Status as Real Property Loans. Except to the extent otherwise provided in
the related prospectus supplement: (i) REMIC securities held by a "domestic
building and loan association" will constitute assets described in Code section
7701(a)(19)(C)(xi); (ii) REMIC securities held by a "real estate investment
trust" ("REIT") will constitute "real estate assets" within the meaning of Code
section 856(c)(4)(A) and interest on such securities will be considered
"interest on obligations secured by mortgages on real property" within the
meaning of Code section 856(c)(3)(B); and (iii) regular interest securities held
by a "financial assets securitization investment trust" ("FASIT") will qualify
for treatment as "permitted assets" within the meaning of Code section
860L(c)(1)(G) and as "qualified mortgages" within the meaning of Code section
860G(a)(3) of if held by another REMIC. REMIC securities held by REITs or
regulated investment companies will not constitute "government securities"
within the meaning of Code section 856(c)(5)(A) or
65
851(b)(4)(A)(ii), respectively . REMIC securities held by certain financial
institutions will constitute "evidences of indebtedness" within the meaning of
Code section 582(c)(1).
In the case of items (i), (ii) and (iii) above, if less than 95% of the
REMIC's assets are assets qualifying under any of the foregoing Code sections,
the REMIC securities will be qualifying assets only to the extent that the
REMIC's assets are qualifying assets. If a series of securities employs a
multi-tier REMIC structure, both the Upper Tier REMIC and the Lower Tier REMIC
will be treated as a single REMIC for purposes of determining the extent to
which the related REMIC securities and the income thereon will be treated as
such assets and income.
TAXATION OF REGULAR INTEREST SECURITIES.
General. Except as otherwise stated in this discussion, regular interest
securities will be treated for federal income tax purposes as debt instruments
issued by the REMIC and not as ownership interests in the REMIC or its assets.
Holders of regular interest securities that otherwise report income under a cash
method of accounting will be required to report income with respect to regular
interest securities under an accrual method.
Original Issue Discount. Certain classes of regular interest securities
may be issued with original issue discount within the meaning of section 1273(a)
of the Code. The rules governing original issue discount with respect to a
regular interest security are described above under "Non-REMIC
Securities -- Original Issue Discount." Holders of regular interest securities
should be aware, however, that the OID Regulations do not adequately address
certain issues relevant to prepayable securities, such as the regular interest
securities. In view of the complexities and current uncertainties as to the
manner of inclusion in income of original issue discount on regular interest
securities, each investor should consult his own tax advisor to determine the
appropriate amount and method of inclusion in income of original issue discount
on such regular interest securities for federal income tax purposes.
Although unclear at present, the depositor intends to treat interest on a
regular interest security that is a weighted average of the net interest rates
on mortgage loans as qualified stated interest. In such case, the weighted
average rate used to compute the initial pass-through rate on the regular
interest securities will be deemed to be the index in effect through the life of
the regular interest securities. It is possible, however, that the IRS may treat
some or all of the interest on regular interest securities with a weighted
average rate as taxable under the rules relating to obligations providing for
contingent payments. Such treatment may effect the timing of income accruals on
such regular interest securities.
Market Discount. A subsequent purchaser of a regular interest security may
also be subject to the market discount provisions of Code sections 1276 through
1278. These rules are described above under "Non-REMIC Securities -- Market
Discount."
Premium. The rules governing "premium" apply equally to regular interest
securities (see above "Non-REMIC Securities -- Premium").
Effects of Defaults and Delinquencies. Certain series of securities may
contain one or more classes of subordinated securities, and in the event there
are defaults or delinquencies on the mortgage assets, amounts that would
otherwise be distributed on the subordinated securities may instead be
distributed on the senior securities. Subordinated securityholders nevertheless
will be required to report income with respect to such securities under an
accrual method without giving effect to delays and reductions in distributions
on such subordinated securities attributable to defaults and delinquencies on
the mortgage assets, except to the extent that it can be established that such
amounts are uncollectible. As a result, the amount of income reported by a
subordinated securityholder in any period could significantly exceed the amount
of cash distributed to such holder in that period. The holder will eventually be
allowed a loss (or will be allowed to report a lesser amount of income) to the
extent that the aggregate amount of distributions on the subordinated security
is reduced as a result of defaults and delinquencies on the mortgage assets.
Treatment of Realized Losses. Although not entirely clear, it appears that
holders of securities that are corporations should in general be allowed to
deduct as an ordinary loss any loss sustained during the taxable
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year on account of any such securities becoming wholly or partially worthless,
and that, in general, holders of securities that are not corporations should be
allowed to deduct as a short-term capital loss any loss sustained during the
taxable year on account of any such securities becoming wholly worthless.
Although the matter is not entirely clear, non-corporate holders of securities
may be allowed a bad debt deduction at such time that the principal balance of
any such security is reduced to reflect realized losses resulting from any
liquidated mortgage assets. The Internal Revenue Service, however, could take
the position that non-corporate holders will be allowed a bad debt deduction to
reflect realized losses only after all mortgage assets remaining in the related
trust fund have been liquidated or the securities of the related series have
been otherwise retired. Potential investors and holders of the securities are
urged to consult their own tax advisors regarding the appropriate timing, amount
and character of any loss sustained with respect to such securities, including
any loss resulting from the failure to recover previously accrued interest or
discount income. Special loss rules are applicable to banks and thrift
institutions, including rules regarding reserves for bad debts. Such taxpayers
are advised to consult their tax advisors regarding the treatment of losses on
securities.
Sale or Exchange. If a regular interest security is sold, exchanged,
redeemed or retired, the holder will recognize gain or loss equal to the
difference between the amount realized on such disposition and the adjusted
basis in the regular interest security. Similarly, a holder who receives a
payment denominated as principal with respect to a regular interest security
will recognize gain equal to the excess of the amount of such payment over his
adjusted basis in the regular interest security. A holder that receives a final
payment that is less than the holder's adjusted basis in a regular interest
security will generally recognize a loss. The adjusted basis of a regular
interest security generally will equal the cost of the regular interest security
to the holder, increased by any original issue discount or market discount
previously included in the holder's gross income with respect to the regular
interest security, and reduced by payments (other than payments of qualified
stated interest) previously received by the holder on the regular interest
security and by any amortized premium.
Except as note above with respect to market discount and except as noted
below, any such gain or loss on a regular interest security generally will be
capital gain or loss. Such gain or loss will be long-term gain or loss if the
regular interest security is held as a capital asset for more than one year.
Long-term capital gains of non-corporate taxpayers are subject to reduced
maximum rates while short-term capital gains are taxable at ordinary rates. The
use of capital losses is subject to limitations.
If the holder of a regular interest security is a bank, a mutual savings
bank, a thrift, or a similar institution described in section 582 of the Code,
any gain or loss on the sale or exchange of the regular interest security will
be treated as ordinary income or loss.
In the case of other types of holders, gain from the disposition of a
regular interest security that otherwise would be capital gain will be treated
as ordinary income to the extent that the amount actually includible in income
with respect to the regular interest security by the holder during his holding
period is less than the amount that would have been includible in income if the
yield on that regular interest security during the holding period had been 110%
of a specified U.S. Treasury borrowing rate as of the date that the holder
acquired the regular interest security. Although the relevant legislative
history indicates that the portion of the gain from disposition of a regular
interest security that will be recharacterized as ordinary income is limited to
the amount of original issue discount (if any) on the regular interest security
that was not previously includible in income, the applicable Code provision
contains no such limitation.
TAXATION OF HOLDERS OF RESIDUAL INTEREST SECURITIES.
The REMIC will not be subject to Federal income tax except with respect to
income from prohibited transactions and certain other transactions. See
"-- Prohibited Transactions and Contributions Tax" below. Instead, the original
holder of a security representing a residual interest (a "residual interest
security") will report on its federal income tax return, as ordinary income, the
"daily portion" of the taxable income or net loss of the REMIC for each day
during the taxable year on which such holder held the residual interest
security. The daily portion is determined by allocating to each day in any
calendar quarter its ratable portion of the taxable income or net loss of the
REMIC for such quarter, and by allocating that amount among the holders (on such
day) of the residual interest securities in proportion to their respective
holdings on such day.
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The taxable income of the REMIC will be determined under an accrual method
and will be taxable to the holders of residual interest securities without
regard to the timing or amounts of cash distributions by the REMIC. Ordinary
income derived from residual interest securities will be "portfolio income" for
purposes of the taxation of taxpayers subject to the limitations on the
deductibility of "passive losses." As residual interests, the residual interest
securities will be subject to tax rules, described below, that differ from those
that would apply if the residual interest securities were treated for federal
income tax purposes as direct ownership interests in the mortgage assets or as
debt instruments issued by the REMIC.
The holder of a residual interest security may be required to include
taxable income from the residual interest security in excess of the cash
distributed. The reporting of taxable income without corresponding distributions
could occur, for example, in certain REMIC issues in which the loans held by the
REMIC were issued or acquired at a discount, since mortgage prepayments cause
recognition of discount income, while the corresponding portion of the
prepayment could be used in whole or in part to make principal payments on REMIC
Regular Interests issued without any discount or at an insubstantial discount
(if this occurs, it is likely that cash distributions will exceed taxable income
in later years). Taxable income may also be greater in earlier years of certain
REMIC issues as a result of the fact that interest expense deductions, as a
percentage of outstanding principal on REMIC regular interest securities, will
typically increase over time as lower yielding securities are paid, whereas
interest income with respect to loans will generally remain constant over time
as a percentage of loan principal.
In any event, because the holder of a residual interest security is taxed
on the net income of the REMIC, the taxable income derived from a residual
interest security in a given taxable year will not be equal to the taxable
income associated with investment in a corporate security or stripped instrument
having similar cash flow characteristics and pretax yield. Therefore, the
after-tax yield on the residual interest security may be less than that of such
a security or instrument.
A subsequent residual interest securityholder also will report on its
federal income tax return amounts representing a daily share of the taxable
income of the REMIC for each day that such residual interest securityholder owns
such residual interest security. Those daily amounts generally would equal the
amounts that would have been reported for the same days by an original residual
interest securityholder, as described above. The legislative history to the Code
provisions governing this matter indicates that certain adjustments may be
appropriate to reduce (or increase) the income of a subsequent holder of a
residual interest security that purchased such residual interest security at a
price greater than (or less than) the adjusted basis such residual interest
security would have in the hands of an original residual interest
securityholder. See "-- Sale or Exchange" below. It is not clear, however,
whether such adjustments will in fact be permitted or required and, if so, how
they would be made. The REMIC Regulations do not provide for any such
adjustments.
Limitation on Losses. The REMIC will have a net loss for any calendar
quarter in which its deductions exceed its gross income. The amount of the
REMIC's net loss that a holder may take into account currently is limited to the
holder's adjusted basis at the end of the calendar quarter in which such loss
arises. A holder's basis in a residual interest security will initially equal
such holder's purchase price, and will subsequently be increased by the amount
of the REMIC's taxable income allocated to the holder, and decreased (but not
below zero) by the amount of distributions made and the amount of the REMIC's
net loss allocated to the holder. Any disallowed loss may be carried forward
indefinitely, but may be used only to offset income of the REMIC generated by
the same REMIC. The ability of holders of residual interest securities to deduct
net losses may be subject to additional limitations under the Code, as to which
such holders should consult their tax advisers.
Distributions. Distributions on a residual interest security (whether at
their scheduled times or as a result of prepayments) will generally not result
in any additional taxable income or loss to a holder of a residual interest
security. If the amount of such payment exceeds a holder's adjusted basis in the
residual interest security, however, the holder will recognize gain (treated as
gain from the sale of the residual interest security) to the extent of such
excess.
Sale or Exchange. A holder of a residual interest security will recognize
gain or loss on the sale or exchange of a residual interest security equal to
the difference, if any, between the amount realized and such
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holder's adjusted basis in the residual interest security at the time of such
sale or exchange. In general, any such gain or loss will be capital gain or loss
provided the residual interest security is held as a capital asset. However,
residual interest securities will be "evidences of indebtedness" within the
meaning of Code Section 582(c)(1), so that gain or loss recognized from sale of
a residual interest security by a bank or thrift institution to which such
section applies would be ordinary income or loss. Any loss upon disposition of a
residual interest security may be disallowed if the selling holder acquires any
residual interest in a REMIC or similar mortgage pool within six months before
or after such disposition. In that event, any loss will increase such regular
interest securityholder's adjusted basis in the newly acquired interest.
Excess Inclusions. The excess inclusion portion of a REMIC's income is
generally equal to the excess, if any, of (a) REMIC taxable income for the
quarterly period allocable to a residual interest security, over (b) the daily
accruals for such quarterly period. For this purpose, daily accruals are
determined by allocating to each day in the calendar quarter its ratable portion
of the "adjusted issue price" of the residual interest security at the beginning
of such quarterly period and 120% of the long term applicable federal rate in
effect on the date the residual interest security is issued. The adjusted issue
price of a residual interest at the beginning of each calendar quarter will
equal its issue price (calculated in a manner analogous to the determination of
the issue price of a Regular Interest), increased by the aggregate of the daily
accruals for prior calendar quarters, and decreased (but not below zero) by the
amount of loss allocated to a holder and the amount of distributions made on the
residual interest security before the beginning of the quarter. The long-term
federal rate, which is announced monthly by the Treasury Department, is an
interest rate that is based on the average market yield of outstanding
marketable obligations of the United States government having remaining
maturities in excess of nine years.
The portion of the REMIC taxable income of a holder of a residual interest
security consisting of "excess inclusion" income will be subject to federal
income tax in all events and may not be offset by unrelated deductions or
losses, including net operating losses, on such holder's federal income tax
return. Further, if the holder of a residual interest security is an
organization subject to the tax on unrelated business income imposed by Code
section 511, such holder's excess inclusion income will be treated as unrelated
business taxable income of such holder. If a residual interest security is owned
by a foreign person, excess inclusion income is subject to tax at a rate of 30%
which may not be reduced by treaty, is not eligible for treatment as "portfolio
interest" and is subject to certain additional limitations. The Small Business
Job Protection Act of 1996 has eliminated the special rule permitting section
593 institutions ("thrift institutions") to use net operating losses and other
allowable deductions to offset their excess inclusion income from REMIC residual
securities that have "significant value" within the meaning of the REMIC
Regulations, effective for taxable years beginning after December 31, 1995,
except with respect to residual securities continuously held by a thrift
institution since November 1, 1995.
In the case of any residual interest securities held by a real estate
investment trust, the Code provides that under regulations to be issued the
aggregate excess inclusions with respect to such residual interest securities,
reduced (but not below zero) by the real estate investment trust taxable income
(within the meaning of Code Section 857(b)(2), excluding any net capital gain),
will be allocated among the shareholders of such trust in proportion to the
dividends received by such shareholders from such trust, and any amount so
allocated will be treated as an excess inclusion with respect to a residual
interest security as if held directly by such shareholder. Regulated investment
companies, common trust funds and certain cooperatives are subject to similar
rules. No such regulations have been issued to date and it is unclear how this
provision would be applied in practice.
In addition, the Small Business Job Protection Act of 1996 provides three
rules for determining the effect of excess inclusions on the alternative minimum
taxable income of a residual holder. First, alternative minimum taxable income
for such residual holder is determined without regard to the special rule that
taxable income cannot be less than excess inclusions. Second, a residual
holder's alternative minimum taxable income for a tax year cannot be less than
excess inclusions for the year. Third, the amount of any alternative minimum tax
net operating loss deductions must be computed without regard to any excess
inclusions.
Restrictions on Ownership and Transfer of Residual Interest Securities. As
a condition to qualification as a REMIC, reasonable arrangements must be made to
prevent the ownership of a residual interest security
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by any "disqualified organization." Disqualified organizations include the
United States, any State or political subdivision thereof, any foreign
government, any international organization, or any agency or instrumentality of
any of the foregoing, a rural electric or telephone cooperative described in
section 1381(a)(2)(C) of the Code, or any entity exempt from the tax imposed by
sections 1-1399 of the Code, if such entity is not subject to tax on its
unrelated business income. Accordingly, the applicable Pooling and Servicing
Agreement will prohibit disqualified organizations from owning a residual
interest security. In addition, no transfer of a residual interest security will
be permitted unless the proposed transferee shall have furnished to the Trustee
an affidavit representing and warranting that it is neither a Disqualified
Organization nor an agent or nominee acting on behalf of a Disqualified
Organization.
If a residual interest security is transferred to a Disqualified
Organization (in violation of the restrictions set forth above), a substantial
tax will be imposed on the transferor of such residual interest security at the
time of the transfer. In addition, if a Disqualified Organization holds an
interest in a pass-through entity (including, among others, a partnership,
trust, real estate investment trust, regulated investment company, or any person
holding as nominee), that owns a residual interest security, the pass-through
entity will be required to pay an annual tax on its allocable share of the
excess inclusion income of the REMIC. The pass-through entity otherwise liable
for the tax, for any period during which the disqualified organization is the
record holder of an interest in such entity, will be relieved of liability for
the tax if such record holder furnishes to such entity an affidavit that such
record holder is not a disqualified organization and, for such period, the
pass-through entity does not have actual knowledge that the affidavit is false.
Except as may be provided in Treasury regulations not yet issued, any person
holding an interest in a pass-through entity as a nominee for another will, with
respect to such interest, be treated as a pass-through entity. Under the
Taxpayer Relief Act of 1997, large partnerships (generally with 250 or more
partners) will be taxable on excess inclusion income as if all partners were
disqualified organizations.
Under the REMIC Regulations, if a residual interest security is a
"noneconomic residual interest," as described below, such transfer of a residual
interest security to a United States person will be disregarded for all Federal
tax purposes unless no significant purpose of the transfer was to impede the
assessment or collection of tax. A residual interest security is a "noneconomic
residual interest" unless at the time of the transfer (i) the present value of
the expected future distributions on the residual interest security at least
equals the product of the present value of the anticipated excess inclusions and
the highest rate of tax for the year in which the transfer occurs, and (ii) the
transferor reasonably expects that the transferee will receive distributions
from the REMIC at or after the time at which the taxes accrue on the anticipated
excess inclusions in an amount sufficient to satisfy the accrued taxes. A
significant purpose to impede the assessment or collection of tax exists if the
transferor, at the time of the transfer, either knew or should have known that
the transferee would be unwilling or unable to pay taxes due on its share of the
taxable income of the REMIC. A transferor is presumed not to have such knowledge
if (i) the transferor conducted a reasonable investigation of the transferee and
(ii) the transferee acknowledges to the transferor that the residual interest
may generate tax liabilities in excess of the cash flow and the transferee
represents that it intends to pay such taxes associated with the residual
interest as they become due. In addition, proposed Treasury regulations issued
on February 4, 2000 would also require the present value of the anticipated tax
liabilities associated with holding the residual interest does not exceed the
present value of the sum of (i) any consideration given to the transferee to
acquire the interest, (ii) the expected future distributions on the interest,
and (iii) any anticipated tax savings associated with holding the interest as
the REMIC generates losses. If a transfer of a "noneconomic residual security"
is disregarded, the transferor would continue to be treated as the owner of the
residual interest security and would continue to be subject to tax on its
allocable portion of the net income of the REMIC.
Foreign Investors. The REMIC Regulations provide that the transfer of a
residual interest security that has a "tax avoidance potential" to a "foreign
person" will be disregarded for federal income tax purposes. This rule appears
to apply to a transferee who is not a U.S. Person unless such transferee's
income in respect of the residual interest security is effectively connected
with the conduct of a United Sates trade or business. A residual interest
security is deemed to have a tax avoidance potential unless, at the time of
transfer, the transferor reasonably expect that the REMIC will distribute to the
transferee amounts that will equal at least
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30 percent of each excess inclusion, and that such amounts will be distributed
at or after the time the excess inclusion accrues and not later than the end of
the calendar year following the year of accrual. If the non-U.S. Person
transfers the residual interest security to a U.S. Person, the transfer will be
disregarded, and the foreign transferor will continue to be treated as the
owner, if the transfer has the effect of allowing the transferor to avoid tax on
accrued excess inclusions. The Agreements will provide that no residual interest
security may be transferred to a non-U.S. Person. In addition, no transfer of a
residual interest security will be permitted unless the proposed transferee
shall have furnished to the Trustee an affidavit representing and warranting
that it is not a Non-U.S. Person.
The Agreements provide that any attempted transfer or pledge in violation
of the transfer restrictions shall be absolutely null and void and shall vest no
rights in any purported transferee. Investors in residual interest securities
are advised to consult their own tax advisors with respect to transfers of the
residual interest securities and, in addition, pass-through entities are advised
to consult their own tax advisors with respect to any tax which may be imposed
on a pass-through entity.
Mark to Market Rules. Prospective purchasers of a residual interest
security should be aware that such a security acquired after January 3, 1995
cannot be marked-to-market.
Administrative Matters. The REMIC's books must be maintained on a calendar
year basis and the REMIC must file an annual federal income tax return. The
REMIC will also be subject to the procedural and administrative rules of the
Code applicable to partnerships, including the determination of any adjustments
to, among other things, items of REMIC income, gain, loss, deduction, or credit,
by the IRS in a unified administrative proceeding.
TAXATION OF THE REMIC
General. Although a REMIC is a separate entity for federal income tax
purposes, a REMIC is not generally subject to entity-level tax. Rather, the
taxable income or net loss of a REMIC is taken into account by the holders of
residual interests. As described above, the regular interests are generally
taxable as debt of the REMIC.
Qualification as a REMIC. The trust estate or one or more designated pools
of the assets of the trust estate may elect to be treated under the Code as a
REMIC in which the regular interest securities and residual interest securities
will constitute the "regular interests" and "residual interests," respectively,
if a REMIC election is in effect and certain tests concerning (i) the
composition of the REMIC's assets and (ii) the nature of the holders' interests
in the REMIC are met on a continuing basis. A loss of REMIC status could have a
number of consequences for holders. If, as the result of REMIC disqualification,
the trust estate were treated as an association taxable as a corporation,
distributions on the security could be recharacterized in part as dividends from
a non-includible corporation and in part as returns of capital. Alternatively,
distributions on a regular interest security could continue to be treated as
comprised of interest and principal notwithstanding REMIC disqualification, in
which case a cash-basis holder might not be required to continue to recognize
interest and market discount with respect to the security on a accrual basis.
Under the first alternative, a loss of REMIC status would, and under the second
alternative, a loss of REMIC status could cause the securities and the
associated distributions not to be qualified assets and income for the various
purposes of domestic building and loan associations, FASITs and REITs described
under "REMIC Securities -- Status as Real Property Loans" above, although such a
loss would not affect the status of the securities as "government securities"
for REITs. The securities should continue to qualify as "government securities"
for regulated investment companies, regardless of whether REMIC status is lost.
Calculation of REMIC Income. The taxable income or net loss of a REMIC is
determined under an accrual method of accounting and in the same manner as in
the case of an individual, with certain adjustments. In general, the taxable
income or net loss will be the difference between (i) the gross income produced
by the REMIC's assets, including stated interest and any original issue discount
or market discount on loans and other assets, and (ii) deductions, including
stated interest and original issue discount accrued on regular interest
securities, amortization of any premium with respect to loans, and servicing
fees and other expenses of the REMIC. A holder of a residual interest security
that is an individual or a "pass-through
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interest holder" (including certain pass-through entities, but not including
real estate investment trusts) will be unable to deduct servicing fees payable
on the loans or other administrative expenses of the REMIC for a given taxable
year, to the extent that such expenses, when aggregated with such holder's other
miscellaneous itemized deductions for that year, do not exceed two percent of
such holder's adjusted gross income.
For purposes of computing its taxable income or net loss, the REMIC should
have an initial aggregate tax basis in its assets equal to the aggregate fair
market value of the regular interests and the residual interests on the Startup
Day (generally, the day that the interests are issued). That aggregate basis
will be allocated among the assets of the REMIC in proportion to their
respective fair market values.
The original issue discount provisions of the Code apply to loans of
individuals originated on or after March 2, 1984, and the market discount
provisions apply to loans originated after July 18, 1984. Subject to possible
application of the de minimis rules, the method of accrual by the REMIC of
original issue discount income on such loans will be equivalent to the method
under which holders of [pay-through securities] accrue original issue discount
(i.e., under the constant yield method taking into account the Prepayment
Assumption). The REMIC will deduct original issue discount on the regular
interest securities in the same manner that the holders of the regular interest
securities include such discount in income, but without regard to the de minimis
rules. See "Taxation of Regular Interest Securities" above. However, a REMIC
that acquires loans at a market discount must include such market discount in
income currently, as it accrues, on a constant interest basis.
To the extent that the REMIC's basis allocable to loans that it holds
exceeds their principal amounts, the resulting premium, if attributable to
mortgages originated after September 27, 1985, will be amortized over the life
of the loans (taking into account the Prepayment Assumption) on a constant yield
method. Although the law is somewhat unclear regarding recovery of premium
attributable to loans originated on or before such date, it is possible that
such premium may be recovered in proportion to payments of loan principal.
Prohibited Transactions and Contributions Tax. The REMIC will be subject
to a 100% tax on any net income derived from a "prohibited transaction." For
this purpose, net income will be calculated without taking into account any
losses from prohibited transactions or any deductions attributable to any
prohibited transaction that resulted in a loss. In general, prohibited
transactions include: (i) subject to limited exceptions, the sale or other
disposition of any qualified mortgage transferred to the REMIC; (ii) subject to
limited exceptions, the sale or other disposition of a cash flow investment;
(iii) the receipt of any income from assets not permitted to be held by the
REMIC pursuant to the Code; or (iv) the receipt of any fees or other
compensation for services rendered by the REMIC. It is anticipated that a REMIC
will not engage in any prohibited transactions in which it would recognize a
material amount of net income. In addition, subject to a number of exceptions, a
tax is imposed at the rate of 100% on amounts contributed to a REMIC after the
close of the three-month period beginning on the Startup Day. The holders of
residual interest securities will generally be responsible for the payment of
any such taxes imposed on the REMIC. To the extent not paid by such holders or
otherwise, however, such taxes will be paid out of the trust fund and will be
allocated pro rata to all outstanding classes of securities of such REMIC.
WITHHOLDING WITH RESPECT TO CERTAIN FOREIGN INVESTORS
Interest paid to or accrued by a beneficial owner of a security who is a
not a U.S. Person (a "foreign person") generally will be considered portfolio
interest and generally will not be subject to United States federal income tax
and withholding tax, provided the interest is not effectively connected with the
conduct of a trade or business within the United States by the foreign person
and the foreign person (i) is not actually or constructively a 10 percent
shareholder of the depositor or its affiliates or a controlled foreign
corporation with respect to which the depositor or its affiliates is a related
person (all within the meaning of the Code) and (ii) provides the Indenture
Trustee or other person who is otherwise required to withhold U.S. tax with
respect to the securities (the "withholding agent") with an appropriate
statement on Form W-8BEN (Certificate of Foreign Status of Beneficial Owner for
United States Tax Withholding). If a security is held through a securities
clearing organization or certain other financial institutions, the organization
or institution may provide the relevant signed statement to the withholding
agent; in that case, however, the signed
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statement must be accompanied by a Form W-8BEN provided by the foreign person
that owns the security. If the information shown on Form W-8BEN changes, a new
Form W-8BEN must be filed. If interest on the securities is not portfolio
interest, then it will be subject to United States federal income and
withholding tax at a rate of 30 percent, unless reduced or eliminated pursuant
to an applicable tax treaty.
Under recently issued Treasury regulations, a payment to a foreign
partnership is treated, with some exceptions, as a payment directly to the
partners, so that the partners are required to provide any required
certifications. Foreign persons that intend to hold a security through a
partnership or other pass-through entity should consult their own tax advisors
regarding the application of those Treasury regulations to an investment in a
security.
Any capital gain realized on the sale, redemption, retirement or other
taxable disposition of a security by a foreign person will be exempt from United
States federal income and withholding tax, provided that (i) such gain is not
effectively connected with the conduct of a trade or business in the United
States by the foreign person and (ii) in the case of a foreign person who is an
individual, the foreign person is not present in the United States for 183 days
or more in the taxable year.
For purposes of this discussion, the term "U.S. Person" means (i) a citizen
or resident of the United States; (ii) a corporation (or entity treated as a
corporation for tax purposes) created or organized in the United States or under
the laws of the United States or of any state including the District of
Columbia; (iii) a partnership (or entity treated as a partnership for tax
purposes) organized in the United States or under the laws of the United States
or of any state including the District of Columbia (unless provided otherwise by
future Treasury regulations); (iv) an estate whose income is includible in gross
income for United States income tax purposes regardless of its source; or (v) a
trust, if a court within the United States is able to exercise primary
supervision over the administration of the trust and one or more U.S. Persons
have authority to control all substantial decisions of the trust.
Notwithstanding the last clause of the preceding sentence, to the extent
provided in Treasury regulations, certain trusts that were in existence on
August 20, 1996, that were treated as U.S. Persons prior to such date and that
elect to continue to be treated as U.S. Persons also will be U.S. Persons.
BACKUP WITHHOLDING
Under federal income tax law, a securityholder, beneficial owner, financial
intermediary or other recipient of a payment on behalf of a beneficial owner may
be subject to "backup withholding" under certain circumstances. Backup
withholding may apply to such person who is a United States person if such
person, among other things, (i) fails to furnish his social security number or
other taxpayer identification number, (ii) furnishes an incorrect taxpayer
identification number, (iii) fails to report properly interest and dividends, or
(iv) under certain circumstances, fails to provide a certified statement, signed
under penalties of perjury, that the taxpayer identification number provided is
correct and that such person is not subject to backup withholding. Backup
withholding may apply, under certain circumstances, to a securityholder who is a
Non-U.S. Person if the securityholder fails to provide securities broker with a
Foreign Person Certification. Backup withholding applies to "reportable
payments," which include interest payments and principal payments to the extent
of accrued original issue discount, as well as distributions of proceeds from
the sale of regular interest securities or residual interest securities. The
backup withholding rate is generally the fourth lowest rate of income tax as in
effect from time to time. Backup withholding, however, does not apply to
payments on a security made to certain exempt recipients, such as tax-exempt
organizations, and to certain Non-U.S. Persons. Securityholders should consult
their tax advisors for additional information concerning the potential
application of backup withholding to payments received by them with respect to a
security.
DUE TO THE COMPLEXITY OF THE FEDERAL INCOME TAX RULES APPLICABLE TO
SECURITYHOLDERS AND THE CONSIDERABLE UNCERTAINTY THAT EXISTS WITH RESPECT TO
MANY ASPECTS OF THOSE RULES, POTENTIAL INVESTORS ARE URGED TO CONSULT THEIR OWN
TAX ADVISORS REGARDING THE TAX TREATMENT OF THE ACQUISITION, OWNERSHIP, AND
DISPOSITION OF THE SECURITIES.
73
STATE TAX CONSIDERATIONS
In addition to the federal income tax consequences described above,
potential investors should consider the state income tax consequences of the
acquisition, ownership, and disposition of the securities. State income tax law
may differ substantially from the corresponding federal law, and this discussion
does not purport to describe any aspect of the income tax laws of any state.
Therefore, potential investors should consult their own tax advisors with
respect to the various state tax consequences of an investment in the
securities.
ERISA CONSIDERATIONS
The following describes certain considerations under ERISA and Section 4975
of the Code, which apply only to securities of a series that are not divided
into subclasses. If securities are divided into subclasses, the prospectus
supplement will contain information concerning considerations relating to ERISA
and the Code that are applicable to such securities.
ERISA and Section 4975 of the Code impose requirements on employee benefit
plans (and on certain other retirement plans and arrangements, including
individual retirement accounts and annuities and certain Keogh plans, and on
collective investment funds and separate accounts in which such plans, accounts
or arrangements are invested) (collectively "Plans") subject to ERISA or to
Section 4975 of the Code and on persons who are fiduciaries with respect to such
Plans. Generally, ERISA applies to investments made by Plans. Among other
things, ERISA requires that the assets of Plans be held in trust and that the
trustee, or other duly authorized fiduciary, have exclusive authority and
discretion to manage and control the assets of such Plans. ERISA also imposes
certain duties on persons who are fiduciaries of Plans. Under ERISA, any person
who exercises any discretionary authority or control respecting the management
or disposition of the assets of a Plan is considered to be a fiduciary of such
Plan (subject to certain exceptions not here relevant). Certain employee benefit
plans, such as governmental plans (as defined in Section 3(32) of ERISA) and, if
no election has been made under Section 410(d) of the Code, church plans (as
defined in Section 3(33) of ERISA), are not subject to ERISA requirements.
Accordingly, assets of such plans may be invested in securities without regard
to the ERISA considerations described above and below, subject to the provisions
of applicable state law. Any such plan which is qualified and exempt from
taxation under Sections 401(a) and 501(a) of the Code, however, is subject to
the prohibited transaction rules set forth in Section 503 of the Code.
In addition to the imposition of general fiduciary standards of investment
prudence and diversification, ERISA prohibits a broad range of transactions
involving Plan assets and persons ("Parties in Interest") having certain
specified relationships to a Plan and imposes additional prohibitions where
Parties in Interest are fiduciaries with respect to such Plan. Certain Parties
in Interest that participate in a prohibited transaction may be subject to
excise taxes imposed pursuant to Section 4975 of the Code, or a penalty imposed
pursuant to Section 502(i) of ERISA, unless a statutory, regulatory or
administrative exemption is available.
On November 13, 1986, the United States Department of Labor (the "DOL")
issued final regulations concerning the definition of what constitutes the
assets of a Plan. Under this regulation, the underlying assets and properties of
corporations, partnerships, trusts and certain other entities in which a Plan
acquires an "equity" interest could be deemed for purposes of ERISA and Section
4975 of the Code to be assets of the investing Plan in certain circumstances
unless certain exceptions apply.
Under the Plan Asset Regulation, the term "equity" interest is defined as
any interest in an entity other than an instrument that is treated as
indebtedness under "applicable local law" and which has no "substantial equity
features." If the securities of a series consist of notes that are not treated
as equity interests in the issuing trust for purposes of the Plan Asset
Regulation, a Plan's investment in such notes would not cause the trust assets
to be deemed Plan assets. However, the depositor, the servicer, the trustee and
the underwriter may be the depositor of or investment advisor with respect to
one or more Plans. Because such parties may receive certain benefits in
connection with the sale of the notes, the purchase of notes using Plan assets
over which any such parties (or any affiliates thereof) has investment authority
might be deemed to be a violation of the prohibited transaction rules of ERISA
and the Code for which no exemption may be available.
74
Accordingly, notes may not be purchased using the assets of any Plan if the
depositor, the servicer, the trustee, the underwriter or any of their affiliates
(a) has investment or administrative discretion with respect to such Plan
assets; (b) has authority or responsibility to give, or regularly gives,
investment advice with respect to such Plan assets for a fee and pursuant to an
agreement of understanding that such advice (i) will serve as a primary basis
for investment decisions with respect to such Plan assets and (ii) will be based
on the particular investment needs for such Plan; or (c) is an employer
maintaining or contributing to such Plan.
In addition, the issuing trust or an affiliate might be considered or might
become a Party in Interest with respect to a Plan. Also, any holder of
certificates issued by the trust, because of its activities or the activities of
its respective affiliates, may be deemed to be a Party in Interest with respect
to certain Plans, including but not limited to Plans depositored by such holder.
In either case, the acquisition or holding of notes by or on behalf of such a
Plan could be considered to give rise to a prohibited transaction within the
meaning of ERISA and the Code, unless it is subject to one or more exemptions
such as:
- Prohibited Transaction Class Exemption ("PTCE") 84-14, which exempts
certain transactions effected on behalf of a Plan by a "qualified
professional asset manager";
- PTCE 90-1, which exempts certain transactions involving insurance company
pooled separate accounts;
- PTCE 91-38, which exempts certain transactions involving bank collective
investment funds;
- PTCE 95-60, which exempts certain transactions involving insurance
company general accounts; or
- PTCE 96-23, which exempts certain transactions effected on behalf of a
Plan by certain "in-house asset managers."
The prospectus supplement for a series of securities may require that Plans
investment in notes represent that the relevant conditions for exemptive relief
under at least one of the foregoing exemptions have been satisfied.
The Plan Asset Regulation provides that, generally, the assets of an entity
in which a Plan invests will not be deemed for purposes of ERISA to be assets of
such Plan if the equity interest acquired by the investing Plan is a
publicly-offered security, or if equity participation by benefit plan investors
is not significant. In general, a publicly-offered security, as defined in the
Plan Asset Regulation, is a security that is widely held, freely transferable
and registered under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). Equity participation in an entity by benefit plan investors is
not significant if, after the most recent acquisition of an equity interest in
the entity, less than 25% of the value of each class of equity interest in the
entity is held by "benefit plan investors," which include benefit plans
described in ERISA or under Section 4975 of the Code, whether or not they are
subject to ERISA, as well as entities whose underlying assets include assets of
a Plan by reason of a Plan's investment in the entity.
If no exception under the Plan Asset Regulation applies and if a Plan (or a
person investing Plan assets, such as an insurance company general account)
acquires an equity interest in a trust established for a series of securities,
then the trust assets would be considered to be assets of the Plan. Because the
loans held by the trust may be deemed Plan assets of each Plan that purchases
equity securities, an investment in the securities by a Plan might be a
prohibited transaction under Sections 406 and 407 of ERISA and subject to an
excise tax under Section 4975 of the Code and may cause transactions undertaken
in the course of operating the trust to constitute prohibited transactions,
unless a statutory or administrative exemption applies.
The DOL has issued PTCE 83-1, which exempts from ERISA's prohibited
transaction rules certain transactions relating to the operation of residential
mortgage pool investment trusts and the purchase, sale and holding of "mortgage
pool pass-through certificates" in the initial issuance of such certificates. If
the general conditions (discussed below) of PTEC 83-1 are satisfied, investments
by a Plan in certificates that provide for pass-through payments of principal
and interest and represent beneficial undivided fractional interests in a fixed
investment pool consisting solely of interest-bearing obligations secured by
first or second mortgages or deeds of trust on single-family residential
property, property acquired in foreclosure and undistributed cash ("Single
Family Securities") will be exempt from the prohibitions of Sections 406(a) and
407 of ERISA
75
(relating generally to transactions with Parties in Interest who are not
fiduciaries) if the Plan purchases the Single Family Securities at no more than
fair market value and will be exempt from the prohibitions of ERISA Sections
406(b)(1) and (2) (relating generally to transactions with fiduciaries) if, in
addition, the purchase is approved by an independent fiduciary, no sales
commission is paid to the pool depositor, the Plan does not purchase more than
25% of all Single Family Securities, and at least 50% of all Single Family
Securities are purchased by persons independent of the pool depositor or pool
trustee. PTCE 83-1 does not provide an exemption for transactions involving
subordinate securities.
The discussion in this and the next succeeding paragraph applies only to
Single Family Securities. PTCE 83-1 sets forth three general conditions which
must be satisfied for any transaction to be eligible for exemption:
- the maintenance of a system of insurance or other protection for the
pooled mortgage loans and property securing such loans, and for
indemnifying certificateholders against reductions in pass-through
payments due to property damage or defaults in loan payments in an amount
not less than the greater of one percent of the aggregate principal
balance of all covered pooled mortgage loans or the principal balance of
the largest covered pooled mortgage loan;
- the existence of a pool trustee who is not an affiliate of the pool
depositor; and
- a limitation on the amount of the payment retained by the pool depositor,
together with other funds inuring to its benefit, to not more than
adequate consideration for selling the mortgage loans plus reasonable
compensation for services provided by the pool depositor to the pool.
The depositor believes that the first general condition referred to above
will be satisfied with respect to the certificates issued without a
subordination feature, or the senior certificates only in a series issued with a
subordination feature, provided that the subordination and reserve account,
subordination by shifting of interests, the pool insurance or other form of
credit enhancement described under "Credit Enhancement" in this prospectus (such
subordination, pool insurance or other form of credit enhancement being the
system of insurance or other protection referred to above) with respect to a
series of certificates is maintained in an amount not less than the greater of
one percent of the aggregate principal balance of the loans or the principal
balance of the largest loan. See "Description of the Securities" in this
prospectus. In the absence of a ruling that the system of insurance or other
protection with respect to a series of certificates satisfies the first general
condition referred to above, there can be no assurance that these features will
be so viewed by the DOL. The trustee will not be affiliated with the depositor.
Each Plan fiduciary who is responsible for making the investment decisions
whether to purchase or commit to purchase and to hold Single Family Securities
must make its own determination as to whether the first and third general
conditions, and the specific conditions described briefly in the preceding
paragraphs, of PTCE 83-1 have been satisfied, or as to the availability of any
other prohibited transaction exemptions. Each Plan fiduciary should also
determine whether, under the general fiduciary standards of investment prudence
and diversification, an investment in the certificates is appropriate for the
Plan, taking into account the overall investment policy of the Plan and the
composition of the Plan's investment portfolio.
The DOL has issued to various underwriters individual prohibited
transaction exemptions which generally exempt from the application of certain
prohibited transaction provisions of ERISA and the Code transactions with
respect to the initial purchase, the holding and the subsequent resale by Plans
of securities issued by the investment pools whose assets consist of:
- certain types of secured receivables, secured loans and other secured
obligations, including home equity loans, obligations secured by shares
issued by a cooperative housing association, and obligations that bear
interest or are purchased at a discount and which are secured by
single-family residential real property and/or multi-family residential
real property (including obligations secured by leasehold interests on
residential real property);
- property securing a permitted obligation;
76
- undistributed cash, cash credited to a "pre-funding account" or a
"capitalized interest account", and certain temporary investments made
therewith; and
- certain types of credit support arrangements, including yield supplement
agreements and interest-rate swaps that meet certain requirements set
forth in exemptions.
The securities covered by the underwriter exemptions include certificates
representing a beneficial ownership interest in the assets of a trust (including
a grantor trust, owner trust or REMIC) and which entitle the holder to payments
of principal, interest and/or other payments made with respect to the assets of
such trust.
Among the conditions that must be satisfied for the underwriter exemptions
to apply are the following:
- the plan must acquire the securities on terms, including the security
price, that are at least as favorable to the plan as they would be in an
arm's-length transaction with an unrelated party;
- the securities must not be subordinated to any other class of securities
issued by the same issuer, unless the securities are issued in a
"designated transaction";
- at the time of acquisition, the securities acquired by the plan must have
received a rating in one of the three (or, in the case of designated
transactions, four) highest generic rating categories from Standard and
Poor's Rating Services, Moody's Investors Service, Inc. or Fitch, Inc.,
each referred to herein as a "rating agency";
- the trustee must not be an affiliate of any other member of the
"restricted group";
- the sum of all payments made to and retained by the underwriter must not
total more than reasonable compensation for underwriting the securities,
the sum of all payments made to and retained by the issuer's depositor
for assigning the obligations to the issuer must not total more than the
fair market value of the obligations, and the sum of all payments made to
and retained by any servicer must not total more than reasonable
compensation and expense reimbursement for its services;
- the plan must be an "accredited investor" as defined in Rule 501(a)(1) of
Regulation D of the commission under the Securities Act of 1933; and
- in the event that all of the obligations used to fund the issuer have not
been transferred to the issuer on the closing date, additional
obligations having an aggregate value equal to no more than 25% of the
total principal amount of the securities being offered may be transferred
to the issuer under a pre-funding feature within ninety days or three
months following the closing date.
The issuer must also meet the following requirements:
- the assets of the issuer must consist solely of assets of the type that
have been included in other investment pools;
- securities evidencing interests in other investment pools must have been
rated in one of the three (or in the case of designated transactions,
four) highest rating categories by a rating agency for at least one year
prior to the plan's acquisition of securities; and
- investors other than plans must have purchased securities evidencing
interests in the other investment pools for at least one year prior to
the plan's acquisition of securities.
For purposes of the underwriter exemptions, the term "designated
transaction" includes any securitization transaction in which the assets of the
issuer consist solely of home equity loans, obligations secured by shares issued
by a cooperative housing association and/or obligations that bear interest or
are purchased at a discount and which are secured by single-family residential
real property and/or multi-family residential real property (including
obligations secured by leasehold interests on residential real property). Such
home equity loans and residential mortgage loans may be less than fully secured,
provided that:
- the securities acquired by a plan in the designated transaction are not
subordinated to any other class of securities issued by the same issuer;
77
- at the time of acquisition, the securities acquired by the plan must have
received a rating in one of the two highest generic rating categories
from a rating agency; and
- the obligations must be secured by collateral whose fair market value on
the closing date of the designated transaction is at least equal to 80%
of the sum of (i) the outstanding principal balance due under the
obligation and (ii) the outstanding principal balance of any other
obligations of higher priority (whether or not held by the issuer) which
are secured by the same collateral.
The underwriter exemptions also provide relief from various
self-dealing/conflict of interest prohibited transactions that may occur when a
plan fiduciary causes a plan to acquire securities of an issuer and the
fiduciary, or its affiliate, is an obligor with respect to obligations or
receivables contained in the issuer; provided that, among other requirements:
- in the case of an acquisition in connection with the initial issuance of
the securities, at least fifty percent of each class of securities in
which plans have invested is acquired by persons independent of the
restricted group and at least fifty percent of the aggregate interest in
the issuer is acquired by persons independent of the restricted group;
- the fiduciary, or its affiliate, is an obligor with respect to five
percent or less of the fair market value of the obligations or
receivables contained in the issuer;
- the plan's investment in each class of securities does not exceed
twenty-five percent of all of the securities of that class outstanding at
the time of acquisition; and
- immediately after the plan acquires the securities, no more than
twenty-five percent of the plan's assets for which the person is a
fiduciary are invested in certificates representing an interest in one or
more trusts containing assets sold or serviced by the same entity.
The underwriter exemptions do not apply to plans depositored by a member of
the restricted group, which includes the depositor, the servicer (and any
subservicer), the trustee, the underwriter, any obligor with respect to
obligations or receivables included in the issuer constituting more than five
percent of the aggregate unamortized principal balance of the issuer's assets,
any insurer, the counterparty to any interest-rate swap entered into by the
issuer and any affiliate of these parties.
Prohibited transaction exemption 2000-58 amended the underwriter exemptions
and extended the relief available thereunder to transactions involving the
initial purchase, the holding and the subsequent resale by plans of securities
denominated as debt that are issued by, and are obligations of, investment pools
whose assets are held in trust. The same conditions described above relating to
certificates must also be met with respect to notes. In addition, prior to the
issuance of the notes, the issuer must receive a legal opinion to the effect
that the noteholders will have a perfected security interest in the issuer's
assets. As with certificates, exemptive relief would not be available for plans
depositored by a member of the restricted group.
The prospectus supplement will provide further information that plans
should consider before purchasing the securities. Any plan fiduciary that
proposes to cause a plan to purchase securities is encouraged to consult with
its counsel concerning the impact of ERISA and the Code, the applicability of
PTE 83-1, the availability and applicability of any underwriter exemption or any
other exemptions from the prohibited transaction provisions of ERISA and the
Code and the potential consequences in their specific circumstances, before
making the investment. Moreover, each plan fiduciary should determine whether
under the general fiduciary standards of investment prudence and diversification
an investment in the securities is appropriate for the plan, taking into account
the overall investment policy of the plan and composition of the plan's
investment portfolio.
LEGAL INVESTMENT
The prospectus supplement for each series of securities will specify which,
if any, of the classes of securities offered thereby constitute "mortgage
related securities" for purposes of the Secondary Mortgage Market Enhancement
Act of 1984 ("SMMEA"). Classes of securities that qualify as mortgage related
78
securities will be legal investments for persons, trusts, corporations,
partnerships, associations, business trusts, and business entities (including
depository institutions, life insurance companies and pension funds) created
pursuant to or existing under the laws of the United States or of any state
(including the District of Columbia and Puerto Rico) whose authorized
investments are subject to state regulations to the same extent as, under
applicable law, obligations issued by or guaranteed as to principal and interest
by the United States or any such entities. Under SMMEA, if a state enacted
legislation prior to October 4, 1991 specifically limiting the legal investment
authority of any of these entities with respect to mortgage related securities,
securities will constitute legal investments for entities subject to such
legislation only to the extent provided therein. Approximately twenty-one states
adopted such legislation prior to the October 4, 1991 deadline. SMMEA provides,
however, that in no event will the enactment of this type of legislation affect
the validity of any contractual commitment to purchase, hold or invest in
securities, or require the sale or other disposition of securities, so long as
such contractually commitment was made or such securities were acquired prior to
the enactment of the legislation.
SMMEA also amended the legal investment authority of federally-chartered
depository institutions as follows: federal savings and loan associations and
federal savings banks may invest in, sell or otherwise deal in securities
without limitations as to the percentage of their assets represented thereby,
federal credit unions may invest in mortgage related securities, and national
banks may purchase securities for their own account without regard to the
limitations generally applicable to investment securities set forth in 12 U.S.C.
24 (Seventh), subject in each case to such regulations as the applicable federal
authority may prescribe. In this connection, federal credit unions should review
the National Credit Union Administration ("NCUA") Letter to Credit Unions No.
96, as modified by NCUA Letter to Credit Unions No. 108, which includes
guidelines to assist federal credit unions in making investment decisions for
mortgage related securities and the NCUA's regulation "Investment and Deposit
Activities" (12C.F.R. Part 703), which sets forth certain restrictions on
investments by federal credit unions in mortgage related securities (in each
case whether or not the class of securities under consideration for purchase
constituted a mortgage related security).
All depository institutions considering an investment in the securities
(whether or not the class of securities under consideration for purchase
constitutes a mortgage related security) should review the Federal Financial
Institutions Examination Council's Supervisory Policy Statement on the
Securities Activities (to the extent adopted by their respective regulators)
setting forth, in relevant part, certain securities trading and sales practices
deemed unsuitable for an institution's investment portfolio, and guidelines for
(and restrictions on) investing in mortgage derivative products, including
mortgage related securities which are "high-risk mortgage securities" as defined
in the Policy Statement. According to the Policy Statement, high-risk mortgage
securities include securities not entitled to distributions allocated to
principal or interest and subordinate securities. Under the Policy Statement, it
is the responsibility of each depository institution to determine, prior to
purchase (and at stated intervals thereafter), whether a particular mortgage
derivative product is a high-risk mortgage security, and whether the purchase
(or retention) of such a product would be consistent with the Policy Statement.
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines or agreements generally
governing investments made by a particular investor, including, but not limited
to, "prudent investor" provisions which may restrict or prohibit investment in
securities which are not "interest bearing" or "income paying."
There may be other restrictions on the ability of certain investors,
including depository institutions, either to purchase securities or to purchase
securities representing more than a specified percentage of the investor's
assets. Investors should consult their own legal advisors in determining whether
and to what extent the securities constitute legal investments for them.
79
METHOD OF DISTRIBUTION
The securities are being offered hereby in series from time to time (each
series evidencing or relating to a separate trust) through any of the following
methods:
- by negotiated firm commitment underwriting and public reoffering by
underwriters;
- by agency placements through one or more placement agents primarily with
institutional investors and dealers; and
- by placement directly by the depositor with institutional investors.
A prospectus supplement will be prepared for each series which will
describe the method of offering being used for that series and will set forth:
- the identity of any underwriters thereof;
- either the price at which such series is being offered, the nature and
amount of any underwriting discounts or additional compensation to the
underwriters and the proceeds of the offering to the depositor or the
method by which the price at which the underwriters will sell the
securities will be determined;
- information regarding the nature of the underwriters' obligations;
- any material relationship between the depositor and any underwriter; and
- where appropriate, information regarding any discounts or concessions to
be allowed or reallowed to dealers or others and any arrangements to
stabilize the market for the securities so offered.
In firm commitment underwritten offerings, the underwriters will be
obligated to purchase all of the securities of the related series if any of
those securities are purchased. Securities may be acquired by the underwriters
for their own accounts and may be resold from time to time in one or more
transactions, including negotiated transactions, at a fixed public offering
price or at varying prices determined at the time of sale.
Underwriters and agents may be entitled under agreements entered into with
the depositor to indemnification by the depositor against certain civil
liabilities, including liabilities under the securities Act of 1933, as amended,
or to contribution with respect to payments which such underwriters or agents
may be required to make in respect thereof.
Redwood Trust, Inc. or other affiliates of the depositor may purchase
securities and pledge them to secure indebtedness or, together with its pledges,
donees, transferees or other successors in interest, sell the securities, from
time to time, either directly or indirectly through one or more underwriters,
underwriting syndicates or designated agents.
If a series is offered other than through underwriters, the prospectus
supplement relating to that series will contain information regarding the nature
of the offering and any agreements to be entered into between the depositor and
purchasers of securities of that series.
LEGAL MATTERS
The validity of the securities will be passed upon for the depositor by
Tobin & Tobin, a professional corporation, San Francisco, California. Certain
federal income tax consequences with respect to the securities will be passed
upon for the depositor by GnazzoThill, A Professional Corporation, San
Francisco, California.
FINANCIAL INFORMATION
A new trust will be formed with respect to each series of securities and no
trust will engage in any business activities or have any assets or obligations
prior to the issuance of the related series of securities.
80
Accordingly, no financial statements with respect to any trust will be included
in this prospectus or in the prospectus supplement.
AVAILABLE INFORMATION
The depositor has filed with the SEC a registration statement under the
Securities Act of 1933, as amended, with respect to the securities. This
prospectus, which forms a part of the registration statement, and the supplement
relating to each series of securities contain information set forth in the
registration statement pursuant to the rules and regulations of the SEC. For
further information, reference is made to such registration statement and the
exhibits thereto, which may be inspected and copied at the facilities maintained
by the SEC at its Public Reference Section, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at its regional offices located as follows:
<Table>
Chicago Regional Office, New York Regional Office
500 West Madison Street, Suite 1400 233 Broadway
Chicago, Illinois 60661 New York, New York 10279
</Table>
Please call the SEC at 1-800-732-0330 for further information on the public
reference rooms. The SEC maintains a website at http://www.sec.gov that contains
reports, proxy and information statements and other information regarding
registrants including the depositor, that file electronically with the SEC.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The SEC allows us to incorporate by reference some of the information we
file with it, which means that we can disclose important information to you by
referring you to those documents. Any statement contained in a document
incorporated or deemed to be incorporated by reference in this prospectus shall
be deemed to be modified or superseded for all purposes of this prospectus to
the extent that a statement contained in this prospectus (or in the accompanying
supplement) or in any other subsequently filed document which also is or is
deemed to be incorporated by reference modifies or replaces such statement. Any
such statement so modified or superseded shall not be deemed, except as modified
or superseded, to constitute a part of this prospectus. Neither the depositor
nor the servicer for any series intends to file with the SEC periodic reports
with respect to the related trust following completion of the reporting period
required by Rule 15d-1 or Regulation 15D under the Exchange Act.
All documents filed by or on behalf of the trust referred to in the
accompanying prospectus supplement with the SEC pursuant to Section 13(a),
13(c), 14 or 15(d) of the Exchange Act on or after the date of that prospectus
supplement and prior to the termination of any offering of the securities issued
by the trust shall be deemed to be incorporated by reference in this prospectus
and to be a part of this prospectus from the date of the filing of those
documents.
The trust will provide without charge to each person to whom this
prospectus is delivered, on the written or oral request of such person, a copy
of any or all of the documents referred to above that have been or may be
incorporated by reference in this prospectus (not including exhibits to the
information that is incorporated by reference unless such exhibits are
specifically incorporated by reference into the information that this prospectus
incorporates). Requests for these documents should be directed to the corporate
trust office of the trustee specified in the accompanying prospectus supplement.
RATING
It is a condition to the issuance of the securities of each series offered
hereby and by the supplement that they shall be rated in one of the four highest
rating categories by the nationally recognized statistical rating agency or
agencies specified in the prospectus supplement.
Ratings on asset-backed securities address the likelihood of receipt by
securityholders of all distributions on the trust assets. These ratings address
the structural, legal and issuer-related aspects associated with such
81
securities, the nature of the trust assets and the credit quality of the credit
enhancer or guarantor, if any. Ratings on asset-backed securities do not
represent any assessment of the likelihood of principal prepayments by
mortgagors or of the degree by which actual prepayments might differ from those
originally anticipated. As a result, securityholders might suffer a lower than
anticipated yield, and, in addition, holders of stripped securities in extreme
cases might fail to recoup their underlying investments.
A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning rating
organization. Further, security ratings do not address the effect of prepayments
on the yield anticipated by the investor. Each security rating should be
evaluated independently of any other security rating.
82
INDEX OF DEFINED TERMS
<Table>
<Caption>
Accrual Securities.......................................... 26
accrued period.............................................. 62
acquisition premium......................................... 63
adjusted issue price........................................ 62, 69
Agreement................................................... 11
backup withholding.......................................... 73
balloon payment............................................. 12
Beneficial Owners........................................... 31
buydown..................................................... 16
capital asset............................................... 65
CERCLA...................................................... 55
Class Security Balance...................................... 25
Code........................................................ 25, 60
collateral value............................................ 14
Collection Account.......................................... 42
components.................................................. 29
contingent interest payment................................. 62
Cut-Off Date................................................ 11
daily portions.............................................. 62
disqualified organization................................... 70
DOL......................................................... 74
DTC......................................................... 9
due on sale................................................. 13
EPA......................................................... 55
ERISA....................................................... 25
evidences of indebtedness................................... 66
Exchange Act................................................ 75
FASIT....................................................... 65
FHA loans................................................... 14
Garn-St. Germain Act........................................ 58
government securities....................................... 65
Indemnified Parties......................................... 48
IRS......................................................... 61
lockout periods............................................. 12
Lower Tier REMIC............................................ 65
mortgage related securities................................. 78
NCUA........................................................ 79
noneconomic residual interest............................... 70
non-REMIC Securities........................................ 60
OID Regulations............................................. 61
Parties in Interest......................................... 74
passive losses.............................................. 68
permitted assets............................................ 65
Permitted Investments....................................... 36
Plans....................................................... 74
Policy Statement............................................ 79
portfolio income............................................ 68
</Table>
83
<Table>
<Caption>
PTCE........................................................ 75
qualified mortgages......................................... 65
RCRA........................................................ 56
Refinance Loan.............................................. 14
regular interest securities................................. 65
REIT........................................................ 65
Relief Act.................................................. 59
REMIC....................................................... 60
REMIC Regulations........................................... 60
residual interest securities................................ 65
Secured Creditor Exclusion.................................. 55
Single Family Securities.................................... 75
SMMEA....................................................... 78
strip....................................................... 30
structuring range........................................... 29
Tax Prepayment Assumption................................... 62
Title V..................................................... 58
Upper Tier REMIC............................................ 65
US person................................................... 73
VA loans.................................................... 14
withholding agent........................................... 72
</Table>
84
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS. WE HAVE
NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH ANY OTHER INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS.
THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO NOT CONSTITUTE AN OFFER TO
SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE SECURITIES OFFERED HEREBY BY
ANYONE IN ANY JURISDICTION IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION
IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE ANY SUCH
OFFER OR SOLICITATION. WE REPRESENT THE ACCURACY OF THE INFORMATION IN THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS ONLY AS OF THE DATES ON
THEIR RESPECTIVE COVERS.
$1,041,600,100 (APPROXIMATE)
SEQUOIA MORTGAGE TRUST 10
MORTGAGE PASS-THROUGH CERTIFICATES
SEQUOIA RESIDENTIAL FUNDING, INC.
DEPOSITOR
RWT HOLDINGS, INC.
SELLER
----------------------------
PROSPECTUS SUPPLEMENT
----------------------------
MERRILL LYNCH & CO.
GREENWICH CAPITAL MARKETS, INC.
September 24, 2002
Dealers will be required to deliver a prospectus supplement and
prospectus when acting as underwriters of the certificates offered hereby and
with respect to their unsold allotments or subscriptions. In addition, all
dealers selling the certificates, whether or not participating in this offering,
may be required to deliver a prospectus supplement and prospectus until ninety
days after the date of this prospectus supplement.