PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED OCTOBER 30, 2001)
$838,057,000
(APPROXIMATE, SUBJECT TO CHANGE)
RAFC ASSET-BACKED TRUST 2001-1
RAFC ASSET-BACKED SECURITIES, SERIES 2001-1
We will form a trust and the trust will issue the RAFC
Asset-Backed Securities, Series 2001-1. We are offering for
sale only the certificates listed in the table below:
------------------------------------------------------------------------------------------------------------
Consider ORIGINAL EXPECTED FINAL
carefully the risk PRINCIPAL PASS-THROUGH RATING MATURITY
factors beginning CLASS AMOUNT* RATE (1) S&P Moody's Date
on page S-9 in ------------------------------------------------------------------------------------------------------------
this prospectus
supplement and A-1 $ 53,351,000 (2) A-1+ P-1 December 25, 2002
on page 3 in the ------------------------------------------------------------------------------------------------------------
prospectus. The A-2 $ 85,000,000 (3) AAA Aaa November 25, 2029
certificates ------------------------------------------------------------------------------------------------------------
represent non- A-3 $ 564,106,000 5.115% AAA Aaa November 25, 2029
recourse ------------------------------------------------------------------------------------------------------------
obligations of the M-1 $ 55,574,000 6.695% AA Aa2 June 25, 2032
trust only. ------------------------------------------------------------------------------------------------------------
M-2 $ 44,459,000 7.050% A A2 June 25, 2032
------------------------------------------------------------------------------------------------------------
B-1 $ 35,567,000 7.425% BBB Baa2 June 25, 2032
------------------------------------------------------------------------------------------------------------
* Approximate, subject to change of not more than 5.0%.
(1) The pass-through rate for each class of offered
certificates is subject to a pool cap. See "Description
of the Certificates--Flow of Funds" in this prospectus
supplement. Also, the pass-through rate for each class of
offered certificates (other than class A-1 certificates)
will increase if the servicer does not exercise the
clean-up call.
(2) The pass-through rate for the class A-1 certificates
will be established on December 24, 2001 as a fixed rate
of interest equal to two-month LIBOR plus 0.050%.
(3) The pass-through rate for the class A-2 certificates
will be equal to one-month LIBOR plus 0.390%.
The assets of the trust will primarily consist of a pool of single
family residential mortgage loans. The loans bear fixed rates of
interest and are secured primarily by first and junior liens on
residential properties.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE OFFERED CERTIFICATES OR
DETERMINED THAT THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS IS
ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
Subject to the satisfaction of particular conditions, the underwriters
named below will purchase the class A-1, class A-2 and class B-1
certificates from us. See "Underwriting" in this prospectus supplement.
The underwriters will offer these underwritten certificates to the
public from time to time in negotiated transactions or otherwise at
varying prices to be determined at the time of sale. The underwriters
will pay us an amount equal to approximately 100% of the aggregate
principal balance of the underwritten certificates, before deducting
issuance expenses payable by us estimated to be $345,878.
In addition, Wachovia Securities has agreed to solicit offers from time
to time on a best efforts basis for the class A-3, class M-1 and class
M-2 certificates, at prices to be determined at the time of sale.
First Union Securities, Inc., acting under the trade name Wachovia
Securities, expects to enter into market making transactions in the
underwritten certificates and may act as principal or agent in any of
these transactions. Any such purchases or sales will be made at prices
related to prevailing market prices at the time of sale. This
prospectus supplement and the prospectus may be used by First Union
Securities, Inc. in connection with these transactions.
The offered certificates will be delivered in book-entry form
only on or about December 27, 2001.
---------------------
WACHOVIA SECURITIES
LOOP CAPITAL MARKETS LLP UTENDAHL CAPITAL PARTNERS, L.P.
December 19, 2001
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS
PROSPECTUS SUPPLEMENT AND THE PROSPECTUS
We provide information to you about the offered certificates in two
separate documents that provide progressively more detail:
o the prospectus, which provides general information, some of which
may not apply to the offered certificates; and
o this prospectus supplement, which describes the specific terms of
the offered certificates.
IF THE DESCRIPTION OF YOUR OFFERED CERTIFICATES IN THIS PROSPECTUS
SUPPLEMENT DIFFERS FROM THE RELATED DESCRIPTION IN THE PROSPECTUS, YOU SHOULD
RELY ON THE INFORMATION IN THIS PROSPECTUS SUPPLEMENT.
Cross-references are included in this prospectus supplement and the
accompanying prospectus to captions in these materials where you can find
further discussions about related topics. The following table of contents
provides the pages on which these captions are located.
S-2
TABLE OF CONTENTS
Summary...........................................S-4
Principal Parties..............................S-4
Dates..........................................S-4
Description of the Offered Certificates........S-5
Description of the Trust.......................S-6
Credit Enhancement.............................S-7
Optional Termination...........................S-7
Tax Considerations.............................S-7
Money Market Funds.............................S-7
ERISA Considerations...........................S-8
Legal Investment...............................S-8
Risk Factors......................................S-9
The Mortgage Loans...............................S-13
Yield, Maturity and Prepayment
Considerations...............................S-23
The Servicer.....................................S-34
Delinquency Experience........................S-35
Delinquencies and Charge-Offs (Dollars in
thousands)....................................S-35
The Originator...................................S-36
Description of the Certificates..................S-38
Designations..................................S-38
Distributions on the Certificates.............S-40
Interest Allocations..........................S-41
Principal Allocations.........................S-42
Application of Monthly Excess
Cash Flow....................................S-43
Glossary......................................S-44
Realized Losses...............................S-49
Overcollateralization.........................S-50
Subordination.................................S-50
Credit Enhancement Does Not Apply to
Prepayment and Certain Other Risks...........S-50
Reports to Certificateholders.................S-51
Book-Entry Certificates.......................S-52
The Pooling and Servicing Agreement..............S-57
Assignment of the Loans.......................S-57
Payments on the Loans.........................S-58
Monthly Advances..............................S-60
Compensating Interest.........................S-60
Calculation of LIBOR..........................S-61
Servicing and Other Compensation and
Payment of Expenses.........................S-61
Removal and Resignation of Servicer...........S-62
Termination; Purchase of Loans................S-63
The Trustee...................................S-65
The Certificate Administrator.................S-65
The Custodian.................................S-66
Certain Federal Income Tax
Considerations................................S-66
State Tax Considerations.........................S-68
ERISA Considerations.............................S-68
Legal Investment.................................S-71
Underwriting.....................................S-71
Ratings..........................................S-73
Legal Matters....................................S-73
Annex A Global Clearance, Settlement
And Tax Documentation Procedures.............S-74
Initial Settlement............................S-74
Secondary Market Trading......................S-75
Certain U.S. Federal Income Tax
Documentation Requirements..................S-77
Annex B Notional Amount Schedule for Cap
Agreement.....................................S-79
S-3
SUMMARY
o This summary highlights selected information from this prospectus
supplement 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 offered certificates, you should carefully
read this entire prospectus supplement and the accompanying prospectus.
o This summary provides an overview of certain information to aid your
understanding and is qualified by the full description of this other
information in this prospectus supplement and the accompanying
prospectus.
PRINCIPAL PARTIES
THE TRUST
RAFC Asset-Backed Trust 2001-1
ORIGINATOR
First Union National Bank of Delaware
SELLER
First Union National Bank
SERVICER
HomEq Servicing Corporation
REPLACEMENT SERVICER
Prior to the occurrence of an event of default, the initial holder of the class
X certificates may require the servicer to:
o appoint a special sub-servicer for specific loans; or
o replace HomEq Servicing Corporation as servicer with an entity to be
named by the initial holder of the class X certificates that is
satisfactory to the rating agencies and has been designated at least a
select servicer by Standard & Poor's.
Prior to the occurrence of an event of default, the holders of the offered
certificates will not be entitled to vote on a replacement servicer.
TRANSFEROR
RAFC Transferor Trust
DEPOSITOR
Residential Asset Funding Corporation
TRUSTEE
Citibank, N.A.
CUSTODIAN
First Union National Bank
CERTIFICATE ADMINISTRATOR
First Union National Bank
DATES
CUT-OFF DATE
November 30, 2001. The trust will receive payments made on the loans after this
date.
CLOSING DATE
December 27, 2001.
DISTRIBUTION DATES
The 25th day of each month, or if such day is not a business day, the next
business day, beginning in January 2002.
S-4
RECORD DATES
With respect to the certificates other than the class A-1 and class A-2
certificates, the last business day of the calendar month immediately preceding
a distribution date. With respect to the class A-1 and class A-2 certificates,
the business day immediately preceding the applicable distribution date.
DESCRIPTION OF THE OFFERED CERTIFICATES
CLASSES
We are offering for sale the following classes of certificates pursuant to this
prospectus supplement and the accompanying prospectus:
ORIGINAL PRINCIPAL
CLASS AMOUNT* PASS-THROUGH RATE(1)
- -------- ------------------ --------------------
A-1 $53,351,000 (2)
A-2 $85,000,000 (3)
A-3 $564,106,000 5.115%
M-1 $55,574,000 6.695%
M-2 $44,459,000 7.050%
B-1 $35,567,000 7.425%
- -----------
Only the class A-1, class A-2 and class B-1 certificates will be sold to the
underwriters and offered to the public on the closing date. The class A-3, class
M-1 and class M-2 certificates will initially be retained by First Union
National Bank. Wachovia Securities has agreed to solicit offers for the purchase
of these securities on a best efforts basis.
* Approximate, subject to change of not more than 5.0%.
(1) The pass-through rate for each class of offered certificates is subject to a
pool cap. See "Description of the Certificates--Flow of Funds" in this
prospectus supplement. In addition, the pass-through rate on the class A-2
certificates will be subject to a fixed cap, which is 10.700% per annum. Also,
the pass-through rate for each class of offered certificates (other than class
A-1 certificates) will increase if the servicer does not exercise the clean-up
call.
(2) The pass-through rate for the class A-1 certificates will be established on
December 24, 2001 as a fixed rate of interest equal to two month LIBOR plus
0.050%.
(3) The pass-through rate for the class A-2 certificates will be equal to
one-month LIBOR plus 0.390%.
The trust also will issue class B-2 certificates, class X certificates and class
R certificates. These certificates are not being offered for sale.
DENOMINATIONS
The offered certificates will be issued in book-entry form in minimum
denominations of $25,000 and in multiples of $1,000 in excess thereof.
You may hold your offered certificates through The Depository Trust Company,
Clearstream Banking, societe anonyme or the Euroclear System.
INTEREST
o Interest Accrual Period--For the class A-1 and class A-2 certificates,
initially, the period beginning on the closing date and ending on the
day immediately preceding the first distribution date, and thereafter,
the period beginning on a distribution date and ending on the day
immediately preceding the next distribution date. With respect to the
other offered certificates and any distribution date, the calendar
month immediately preceding such distribution date.
o Interest Calculations--With respect to the class A-1 and class A-2
certificates, interest will be calculated on an actual/360 basis, and
with respect to the other offered certificates, interest will be
calculated on a 30/360 basis.
S-5
o Pool Cap--The pass-through rate for each class of offered certificates
will be subject to a pool cap, which is based on the weighted average
of the mortgage rates less certain fees and expenses. In addition, the
pass-through rate on the class A-2 certificates is subject to a fixed
rate cap of 10.700%.
o Cap Agreement--Payments from a cap agreement will be available to make
payments of supplemental interest to the class A-2 certificates for
payments not made due to operation of the fixed cap. Such cash flows
will not be available to pay the principal of any certificate or to
cover losses on the mortgage loans.
o Margin Increase--On each distribution date following the date when the
outstanding balance of the loans declines to 10% or less of their
balance as of the cut-off date, the margin used to determine the
pass-through rate for the class A-2 certificates will double. With
respect to the other offered certificates (other than the class A-1
certificates), the fixed rate coupon will increase by 50 basis points.
Please see "Description of the Certificates-- Distributions on the Certificates"
in this prospectus supplement for a description of how the interest rate for
each class of offered certificates is calculated and the adjustments that may be
made for each distribution date.
PRINCIPAL
Principal payments on the certificates will be made from:
o principal collections received on the loans; and
o excess interest received on the loans.
Please see "Description of the Certificates-- Distributions on the Certificates"
in this prospectus supplement for a complete description of the amount of
principal payable on each distribution date.
ADVANCES
With respect to actuarial loans, the servicer will advance delinquent payments
of principal and interest (net of the servicing fee), unless the servicer
determines that the advance would not be recovered from future payments on such
loans. The servicer is also not required to make advances to compensate for
reductions in payments due to bankruptcy proceedings or the application of the
Soldiers' and Sailors' Civil Relief Act of 1940, as amended. Additionally, the
servicer is not required to make advances on simple interest loans. These
advances are only intended to maintain a regular flow of scheduled payments on
the offered certificates and are not intended to guarantee or insure against
losses.
COMPENSATING INTEREST
If a loan prepays, the servicer will make a payment of compensating interest
equal to a full month's interest on the prepaid mortgage loan. The servicer will
not be required to make payments of compensating interest in excess of the
servicing fee. The servicer will not make a payment of interest on any mortgage
loan that is subject to the Solders' and Sailors' Civil Relief Act of 1940, as
amended.
DESCRIPTION OF THE TRUST
The trust will primarily consist of a pool of single family, residential
mortgage loans originated or purchased by First Union National Bank of Delaware
or its subsidiaries. The loans bear fixed rates of interest and are secured
primarily by first and junior liens on residential properties.
S-6
The trust will also include a certain interest rate cap agreement and related
supplemental interest payments, which will be deemed to be held in a separate
sub-trust.
CREDIT ENHANCEMENT
The credit enhancement for the offered certificates will consist primarily of
the following:
o overcollateralization,
o subordination, and
o excess spread
OVERCOLLATERALIZATION
On the closing date, the principal balance of the loans will exceed the
principal balance of the certificates. This excess is referred to as
overcollateralization and serves as credit enhancement. The initial level of
overcollateralization is expected to be approximately 1.00%. We also will pay
additional principal on the certificates with some of the interest we receive on
the loans. This will increase the amount of overcollateralization. If borrowers
default on their loan payments, the loans may experience losses. If excess
spread is not sufficient to cover these losses, the amount of
overcollateralization will be reduced. The certificates will not experience any
losses unless the overcollateralization is eliminated.
SUBORDINATION
Certain classes of certificates are senior in right of payment to other,
subordinated classes. The certificates rank in the following order of priority,
from most senior to most subordinated: class A-1, class A-2 and class A-3, class
M-1, class M-2, class B-1, class B-2, class X and class R. This subordination
will be effected through the priority of payments described under "Distributions
on the Certificates--Flow of Funds" in this prospectus supplement.
EXCESS SPREAD
We expect that the interest due on the loans will exceed the sum of the interest
due on the certificates and the fees and expenses payable to the transaction
parties. Some of this excess interest, or "excess spread," will be available to
offset the losses realized on the loans.
OPTIONAL TERMINATION
The servicer may terminate the trust when the then outstanding aggregate
principal balance of the loans is equal to or less than 10% of the aggregate
principal balance of the loans as of the cut-off date.
TAX CONSIDERATIONS
One or more elections will be made to treat certain assets of the trust as one
or more REMICs for federal income tax purposes.
Except as discussed under "The Class A-2 Certificates," the offered certificates
will be treated as newly originated debt instruments, and beneficial owners of
the certificates will be required to report income on such certificates in
accordance with the accrual method of accounting. Holders of the class A-2
certificates will be treated for federal income tax purposes as owning two
separate investments: (i) a REMIC regular interest, and (ii) the right to
receive Supplemental Interest Payments.
MONEY MARKET FUNDS
The class A-1 certificates will be eligible for purchase by money market funds
under Rule 2a-7 under the Investment Company Act of 1940, as amended. A money
market fund should consult its legal advisers regarding the eligibility of such
S-7
notes under Rule 2a-7 and whether an investment in such certificates satisfies
such fund's investment policies and objectives.
ERISA CONSIDERATIONS
Subject to the considerations discussed in this prospectus supplement under
"ERISA Considerations," the offered certificates may be purchased by employee
benefit plans.
LEGAL INVESTMENT
The certificates will not be mortgage related securities for purposes of the
Secondary Mortgage Market Enhancement Act of 1984.
S-8
RISK FACTORS
The offered certificates are not suitable investments for all
investors. In particular, you should not purchase any class of offered
certificates unless you understand the prepayment, credit, liquidity and market
risks associated with that class.
An investment in the offered certificates involves significant risks.
Before you decide to invest, you should consider carefully the following risk
factors and the risk factors discussed under the heading "Risk Factors" in the
prospectus.
THE INITIAL HOLDER OF THE CLASS X Prior to the occurrence of an event of default, the initial
CERTIFICATES MAY REPLACE THE holder of the class x certificates may require the
SERVICER servicer to:
o appoint a special sub-servicer for specific loans; or
o replace HomEq Servicing Corporation as servicer
with an entity to be named by the initial holder of
the class X certificates that is satisfactory to the
rating agencies and has been designated at least a
select servicer by Standard & Poor's.
Prior to the occurrence of an event of default, the
holders of the offered certificates will not be entitled to
vote on a replacement servicer.
Any transfer of servicing may result in short-term
increases in delinquencies on the loans and other
interruptions in servicing.
YOU MAY HAVE DIFFICULTY We will not list the offered certificates on any securities
SELLING YOUR CERTIFICATES exchange. As a result, if you want to sell your
certificates you must locate a purchaser that is willing to
purchase those certificates. The underwriter intends to
make a secondary market for the underwritten
certificates. The underwriter will do so by offering to
buy the underwritten certificates from investors that
wish to sell. However, the underwriter will not be
obligated to make offers to buy the underwritten
certificates and may stop making offers at any time. In
addition, the prices offered, if any, may not reflect prices
that other potential purchasers would be willing to pay,
were they to be given the opportunity. There have been
times in the past where there have been very few buyers
of asset backed securities, i.e., there has been a lack of
liquidity, and there may be similar times in the future.
As a result, you may not be able to sell your certificates
S-9
when you want to do so or you may not be able to obtain
the price that you wish to receive.
THE TRUST HAS LIMITED The loans will be the sole sources of payment for the
ASSETS TO MAKE PAYMENTS certificates. The subordination of the more
ON YOUR CERTIFICATES. subordinate classes to the more senior classes, the
availability of excess spread and the
overcollateralization provisions of the trust are the
sole sources of protection against losses on loans
and other shortfalls in available funds. If losses or
other shortfalls exceed the protection afforded by
such mechanisms, certificateholders will bear such
losses and shortfalls.
DEFAULTS ON JUNIOR LIENS MAY Many of the loans are secured by junior liens on the
RESULT IN MORE SEVERE LOSSES related collateral. If a borrower on such a loan
defaults, the trust's right to liquidation proceeds
is subordinate to the rights of the holders of the
prior liens. There may be insufficient proceeds to
pay the holders of the prior liens and the trust.
GEOGRAPHIC CONCENTRATION Approximately 7.22%, 6.62%, 6.62%, 6.61%, 5.51% and
MAY RESULT IN MORE 5.33% of the loans, by principal balance, are secured
FREQUENT LOSSES by residential properties located in the states of
Ohio, Florida, North Carolina, Alabama, New York, and
Georgia, respectively. These states may suffer
economic problems to a greater degree than other
states. This may lead to higher levels of
delinquencies and losses than would be the case if
the loans were more geographically diversified.
THE SUBORDINATE If the trust has insufficient funds to make all required
CERTIFICATES HAVE A GREATER distributions, the certificates will receive interest
RISK OF LOSS THAN THE SENIOR payments in the following order of priority: class A-1,
CERTIFICATES class A-2 and class A-3 concurrently, then class M-1, class
M-2, class B-1 and class B-2. Also, the certificates will
receive principal that they are entitled to receive on each
distribution date in the following order of priority: class
A-1, then class A-2 and class A-3 concurrently, class M-1,
class M-2, class B-1 and class B-2. Therefore, it is more
likely that the holders of the more subordinate certificates
will realize losses than the more senior certificates if
there are insufficient assets in the trust.
YOUR PASS-THROUGH RATE MAY You may not receive interest at your pass-through rate as a
BE LIMITED result of a pool cap. The class A-2 certificates are also
subject to a fixed cap, which will be set at 10.700% per
S-10
annum. With respect to the class A-2 certificates, any
interest not paid as the result of the fixed cap may
subsequently be paid to you as supplemental interest from
the cap agreement. There is no provision for supplemental
interest for the other classes of certificates or for
interest not paid as a result of the pool cap.
OUR PARENT'S INSOLVENCY MAY So long as adverse events do not occur, the cash payments
RESULT IN OTHERS OWNING THE received on the loans and other funds will be held by First
TRUST'S ASSETS Union National Bank, as certificate administrator. First
Union National Bank may commingle this cash with its other
funds for specified periods. The trustee may be unable to
access this cash in a timely manner if First Union National
Bank becomes subject to an insolvency proceeding,
receivership or conservatorship.
RECENT DEVELOPMENTS MAY INCREASE On September 11, 2001, the United States was subjected to
THE RISK OF LOSS ON THE MORTGAGE multiple terrorist attacks, resulting in the loss of many
LOANS lives and massive property damage and destruction in the New
York and Washington, D.C. metropolitan areas. Although the
damaged and destroyed properties consisted primarily of
commercial and government buildings, these tragic events may
nevertheless have an adverse effect on the value of
residential real estate in the United States, particularly
in the New York and Washington, D.C. metropolitan areas. In
addition, it is possible (although we cannot predict the
likelihood) that these events, or any consequential or
subsequent events involving the United States, may have a
temporary or sustained adverse effect on the financial
markets (including the market for mortgage-backed
securities) or the U.S. economy generally or economic
conditions in the New York or Washington, D.C. metropolitan
areas or other areas of the United States.
We have not made a determination as to whether any of the
borrowers under the mortgage loans may have been a victim or
the dependent of a victim of the terrorist attacks or a
person involved in the ongoing rescue, recovery and response
efforts, or a dependent of such person. However, it is
possible that there could be an increase in the number of
delinquencies and foreclosures of the mortgage loans as a
result of these events.
As a result of the terrorist attacks, President Bush on
September 14, 2001 authorized the placement of 55,000
S-11
military reservists on active duty status. To the extent
that any such person is a borrower under a loan, the
interest rate limitations and other provisions of the
Soldiers' and Sailors' Civil Relief Act of 1940, as amended,
would apply to the loan during the period of active duty. It
is possible that the number of reservists placed on active
duty status in the near future may increase. In addition,
other borrowers who enter military service after the
origination of their loans (including borrowers who are
members of the National Guard at the time of the origination
of their loans and are later called to active duty) would be
covered by the terms of the Soldiers' and Sailors' Civil
Relief Act.
THE CAP AGREEMENT IS LIMITED IN The cap agreement features a notional balance which is
TERM AND AMOUNT initially equal to the class A-2 original principal amount,
then declines over time until March 26, 2012, when it will
terminate. To the extent that the rate of interest on the
class A-2 certificates was reduced by application of the
fixed cap after the cap agreement had terminated or on a
date when the notional balance was less than the class A-2
principal balance, payments under the cap agreement would
not be sufficient to make supplemental interest payments.
S-12
THE MORTGAGE LOANS
GENERAL
The statistical information presented in this prospectus supplement
concerning the loans is based on the characteristics as of the cut-off date of
the pool expected to be sold to the trust on the closing date. On the closing
date, we will sell the principal balances of the loans as of the cut-off date,
after giving effect to all payments received on the loans on or before this
date.
The loans consist of mortgages, deeds of trust or other security
instruments, and the related promissory notes, secured primarily by one- to
four-family residences. The aggregate principal balance of the loans as of the
cut-off date was approximately $889,185,900. The loans were originated and
underwritten, or purchased and re-underwritten, by the originator, substantially
in accordance with the underwriting criteria described in this prospectus
supplement under the heading "The Mortgage Loans-Underwriting Criteria." Certain
of the loans contain provisions requiring the related mortgagor to pay a penalty
in connection with certain prepayments.
Each loan bears a fixed rate of interest and is secured primarily by a
first or junior lien on the related mortgaged property. As of the cut-off date,
80.81% of the loans were secured by a first lien and 19.19% of the loans were
secured by a junior lien.
As of the cut-off date, none of the loans were delinquent.
As of the cut-off date, the interest rates of the loans ranged from
6.650% to 16.080% per annum and the weighted average interest rate of the loans
was 11.281% per annum.
As of the cut-off date, approximately 86.51% of the loans were
actuarial loans and approximately 13.49% of the loans were simple interest
loans.
As of the cut-off date, the average principal balance of the loans was
approximately $52,060. As of the cut-off date, the weighted average remaining
term to stated maturity of the loans will be no more than approximately 212
months and the weighted average term to stated maturity of the loans at
origination was 235 months.
As of the cut-off date, 38.90% of the loans were balloon loans. No loan
provides for negative amortization.
Based upon the original principal balance of the loans, as of the
cut-off date, 54.88% of the loans had a combined loan-to-value ratio exceeding
80%. As of the cut-off date, no loan had a combined loan-to-value ratio
exceeding 100%. The weighted average combined loan-to-value ratio of the loans,
as of the cut-off date, was 80.37%. The loans are not insured or guaranteed by
any governmental entity.
Set forth below is a description of certain characteristics of the
loans as of the cut-off date. Certain of the percentage columns may not sum to
100% due to rounding.
S-13
GEOGRAPHIC DISTRIBUTION OF THE MORTGAGE LOANS
PERCENTAGE OF
MORTGAGE LOANS
NUMBER AGGREGATE BY AGGREGATE
GEOGRAPHIC LOCATION OF LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -------------------------------------------- ----------------- -------------------------- -------------------------
Alabama 1,316 $58,774,291.88 6.61%
Alaska 2 103,581.12 0.01
Arizona 148 6,403,907.21 0.72
Arkansas 362 13,355,417.97 1.50
California 190 11,974,827.59 1.35
Colorado 81 4,845,625.04 0.54
Connecticut 132 8,123,312.42 0.91
Delaware 38 2,162,682.09 0.24
District of Columbia 37 2,453,847.48 0.28
Florida 1,204 58,908,006.71 6.62
Georgia 832 47,353,845.53 5.33
Idaho 41 1,526,209.53 0.17
Illinois 688 42,099,099.25 4.73
Indiana 724 36,567,421.94 4.11
Iowa 180 9,256,971.20 1.04
Kansas 234 9,992,587.45 1.12
Kentucky 280 15,021,311.50 1.69
Louisiana 252 11,429,212.61 1.29
Maine 42 2,065,877.50 0.23
Maryland 311 20,033,002.74 2.25
Massachusetts 263 14,508,505.04 1.63
Michigan 567 31,057,731.01 3.49
Minnesota 306 16,547,891.45 1.86
Mississippi 132 5,725,094.41 0.64
Missouri 700 34,300,177.14 3.86
Montana 1 20,341.93 0.00*
Nebraska 141 6,893,570.45 0.78
Nevada 38 2,036,310.95 0.23
New Hampshire 50 2,362,250.86 0.27
New Jersey 651 42,139,133.79 4.74
New Mexico 39 1,758,381.27 0.20
New York 768 49,029,868.04 5.51
North Carolina 1,114 58,902,411.64 6.62
North Dakota 3 215,965.96 0.02
Ohio 1,280 64,200,333.11 7.22
Oklahoma 204 8,238,594.67 0.93
Oregon 63 3,056,489.34 0.34
Pennsylvania 971 43,484,405.14 4.89
Rhode Island 65 3,068,648.11 0.35
South Carolina 522 25,732,732.04 2.89
South Dakota 4 178,555.46 0.02
Tennessee 356 19,790,896.79 2.23
Texas 489 30,278,957.35 3.41
Utah 78 3,796,223.60 0.43
Vermont 11 1,274,477.36 0.14
Virginia 566 27,034,999.86 3.04
Washington 172 8,980,228.81 1.01
West Virginia 61 2,813,338.68 0.32
Wisconsin 361 18,917,727.43 2.13
Wyoming 10 390,619.73 0.04
- -------------------------------------------- ----------------- -------------------------- -------------------------
TOTAL 17,080 $889,185,900.18 100.00%
================= ========================== =========================
*Less than 0.01%.
S-14
CUT-OFF DATE PRINCIPAL BALANCES OF THE MORTGAGE LOANS
PERCENTAGE OF
MORTGAGE LOANS
NUMBER AGGREGATE BY AGGREGATE
CUT-OFF DATE PRINCIPAL BALANCES ($) OF LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -------------------------------------------- ----------------- -------------------------- -------------------------
0.01 - 25,000.00 4,133 $72,768,943.81 8.18%
25,000.01 - 50,000.00 6,027 222,882,416.59 25.07
50,000.01 - 75,000.00 3,723 227,947,629.48 25.64
75,000.01 - 100,000.00 1,582 135,462,293.73 15.23
100,000.01 - 125,000.00 809 90,262,770.75 10.15
125,000.01 - 150,000.00 346 47,003,132.85 5.29
150,000.01 - 175,000.00 191 30,659,424.71 3.45
175,000.01 - 200,000.00 110 20,530,181.05 2.31
200,000.01 - 225,000.00 50 10,553,489.72 1.19
225,000.01 - 250,000.00 49 11,566,846.34 1.30
250,000.01 - 275,000.00 15 3,974,442.09 0.45
275,000.01 - 300,000.00 14 3,999,889.44 0.45
300,000.01 - 325,000.00 4 1,259,893.81 0.14
325,000.01 - 350,000.00 9 3,047,977.68 0.34
350,000.01 - 375,000.00 4 1,428,061.99 0.16
375,000.01 - 400,000.00 4 1,541,929.25 0.17
400,000.01 - 425,000.00 6 2,452,145.13 0.28
425,000.01 - 450,000.00 2 878,326.00 0.10
450,000.01 - 475,000.00 1 474,663.78 0.05
475,000.01 - 500,000.00 1 491,441.98 0.06
- -------------------------------------------- ----------------- -------------------------- -------------------------
TOTAL 17,080 $889,185,900.18 100.00%
================= ========================== =========================
S-15
ORIGINAL PRINCIPAL BALANCES OF THE MORTGAGE LOANS
PERCENTAGE OF
MORTGAGE LOANS
NUMBER AGGREGATE BY AGGREGATE
ORIGINAL PRINCIPAL BALANCES ($) OF LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -------------------------------------------- ----------------- -------------------------- -------------------------
0.01 - 25,000.00 3,819 $65,521,521.40 7.37%
25,000.01 - 50,000.00 6,074 217,377,946.79 24.45
50,000.01 - 75,000.00 3,856 230,992,763.38 25.98
75,000.01 - 100,000.00 1,661 139,902,864.22 15.73
100,000.01 - 125,000.00 806 88,513,207.67 9.95
125,000.01 - 150,000.00 383 50,961,878.88 5.73
150,000.01 - 175,000.00 201 31,870,599.14 3.58
175,000.01 - 200,000.00 114 20,995,043.13 2.36
200,000.01 - 225,000.00 54 11,281,614.22 1.27
225,000.01 - 250,000.00 50 11,721,280.51 1.32
250,000.01 - 275,000.00 12 3,107,714.88 0.35
275,000.01 - 300,000.00 18 5,067,033.18 0.57
300,000.01 - 325,000.00 4 1,236,414.27 0.14
325,000.01 - 350,000.00 9 3,036,999.80 0.34
350,000.01 - 375,000.00 5 1,760,512.57 0.20
375,000.01 - 400,000.00 3 1,147,873.20 0.13
400,000.01 - 425,000.00 6 2,426,432.86 0.27
425,000.01 - 450,000.00 3 1,298,094.32 0.15
475,000.01 - 500,000.00 2 966,105.76 0.11
- -------------------------------------------- ----------------- -------------------------- -------------------------
TOTAL 17,080 $889,185,900.18 100.00%
================= ========================== =========================
GROSS MORTGAGE RATES OF THE MORTGAGE LOANS
PERCENTAGE OF
MORTGAGE LOANS
NUMBER AGGREGATE BY AGGREGATE
GROSS MORTGAGE RATES (%) OF LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -------------------------------------------- ----------------- -------------------------- -------------------------
6.001 - 7.000 1 $39,346.62 0.00%*
7.001 - 8.000 99 8,183,848.58 0.92
8.001 - 9.000 669 49,093,753.69 5.52
9.001 - 10.000 2,055 136,655,269.51 15.37
10.001 - 11.000 3,208 197,377,954.27 22.20
11.001 - 12.000 4,851 251,053,196.29 28.23
12.001 - 13.000 3,301 147,314,791.17 16.57
13.001 - 14.000 1,940 70,675,336.66 7.95
14.001 - 15.000 824 25,523,114.19 2.87
15.001 - 16.000 131 3,232,523.45 0.36
16.001 - 17.000 1 36,765.75 0.00*
- -------------------------------------------- ----------------- -------------------------- -------------------------
TOTAL 17,080 $889,185,900.18 100.00%
================= ========================== =========================
*Less than 0.01%.
S-16
STATED PURPOSE OF THE MORTGAGE LOANS
PERCENTAGE OF
MORTGAGE LOANS
NUMBER AGGREGATE BY AGGREGATE
STATED PURPOSE OF LOAN OF LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -------------------------------------------- ----------------- -------------------------- -------------------------
Cash-Out Refinance 15,999 $808,688,418.74 90.95%
Purchase 958 73,665,092.55 8.28
Rate/Term Refinance 123 6,832,388.89 0.77
- -------------------------------------------- ----------------- -------------------------- -------------------------
TOTAL 17,080 $889,185,900.18 100.00%
================= ========================== =========================
COMBINED LOAN-TO-VALUE RATIO OF THE MORTGAGE LOANS(1)
PERCENTAGE OF
MORTGAGE LOANS
NUMBER AGGREGATE BY AGGREGATE
COMBINED LOAN-TO-VALUE RATIO (%) OF LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -------------------------------------------- ----------------- -------------------------- -------------------------
0.01 - 10.00 7 $209,082.99 0.02%
10.01 - 20.00 74 1,479,105.75 0.17
20.01 - 30.00 180 4,621,890.48 0.52
30.01 - 40.00 297 8,976,073.54 1.01
40.01 - 50.00 445 16,404,242.84 1.84
50.01 - 60.00 777 30,160,232.19 3.39
60.01 - 70.00 1,794 83,547,052.97 9.40
70.01 - 80.00 4,561 255,767,117.17 28.76
80.01 - 90.00 7,909 452,161,856.33 50.85
90.01 - 100.00 1,036 35,859,245.92 4.03
- -------------------------------------------- ----------------- -------------------------- -------------------------
TOTAL 17,080 $889,185,900.18 100.00%
================= ========================== =========================
(1) The combined loan-to-value ratios shown above are equal, with respect to
each loan, to (i) the sum of (a) the original principal balance of such
loan at the date of origination plus (b) the remaining balance of the
senior lien(s), if any, at the date of origination of such loan, minus (ii)
premiums for credit life insurance, if any, divided by (iii) the lesser of
(a) the value of the related mortgaged property, based upon the appraisal
made at the time of origination of such loan or (b) the purchase price of
such mortgaged property if the loan proceeds from such loan are used to
purchase such mortgaged property.
S-17
OCCUPANCY STATUS OF THE MORTGAGED PROPERTY OF THE MORTGAGE LOANS
PERCENTAGE OF
MORTGAGE LOANS
NUMBER AGGREGATE BY AGGREGATE
OCCUPANCY STATUS OF LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -------------------------------------------- ----------------- -------------------------- -------------------------
Owner Occupied 16,372 $857,111,006.78 96.39%
Second Home 626 28,291,350.55 3.18
Investor Owned 82 3,783,542.85 0.43
- -------------------------------------------- ----------------- -------------------------- -------------------------
TOTAL 17,080 $889,185,900.18 100.00%
================= ========================== =========================
FICO SCORE OF THE MORTGAGE LOANS
PERCENTAGE OF
MORTGAGE LOANS
NUMBER AGGREGATE BY AGGREGATE
FICO SCORE OF LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -------------------------------------------- ----------------- -------------------------- -------------------------
451 - 475 12 $817,390.99 0.09%
476 - 500 619 35,248,462.60 3.96
501 - 525 1,512 85,547,518.97 9.62
526 - 550 2,358 130,254,803.97 14.65
551 - 575 2,207 119,283,575.93 13.41
576 - 600 2,207 114,810,855.60 12.91
601 - 625 2,210 107,625,506.05 12.10
626 - 650 1,813 84,678,496.10 9.52
651 - 675 1,982 102,878,691.81 11.57
676 - 700 1,104 56,596,102.38 6.36
701 - 725 541 26,225,863.53 2.95
726 - 750 266 13,282,119.13 1.49
751 - 775 165 8,279,351.70 0.93
776 - 800 70 3,137,353.81 0.35
801 - 825 14 519,807.61 0.06
- -------------------------------------------- ----------------- -------------------------- -------------------------
TOTAL 17,080 $889,185,900.18 100.00%
================= ========================== =========================
S-18
REMAINING TERM TO STATED MATURITY OF THE MORTGAGE LOANS
PERCENTAGE OF
MORTGAGE LOANS
REMAINING TERM NUMBER AGGREGATE BY AGGREGATE
TO STATED MATURITY (MONTHS) OF LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -------------------------------------------- ----------------- -------------------------- -------------------------
13 - 24 17 $143,159.01 0.02%
25 - 36 26 328,251.41 0.04
37 - 48 58 1,133,294.55 0.13
49 - 60 28 453,776.15 0.05
61 - 72 32 821,777.92 0.09
73 - 84 174 4,038,527.22 0.45
85 - 96 302 6,910,363.24 0.78
97 - 108 457 11,054,126.69 1.24
109 - 120 69 1,923,149.74 0.22
121 - 132 20 1,092,284.80 0.12
133 - 144 1,110 54,363,538.15 6.11
145 - 156 3,014 158,437,733.20 17.82
157 - 168 4,521 234,259,027.98 26.35
169 - 180 404 22,168,030.96 2.49
181 - 192 4 275,951.87 0.03
193 - 204 490 21,618,313.25 2.43
205 - 216 1,106 49,319,856.72 5.55
217 - 228 1,912 78,389,720.37 8.82
229 - 240 242 9,760,893.60 1.10
253 - 264 14 855,243.81 0.10
265 - 276 140 7,640,453.22 0.86
277 - 288 105 4,226,555.61 0.48
289 - 300 2 127,201.64 0.01
301 - 312 4 247,165.67 0.03
313 - 324 281 20,877,631.12 2.35
325 - 336 1,012 77,640,319.31 8.73
337 - 348 1,360 107,484,123.88 12.09
349 - 360 176 13,595,429.09 1.53
- -------------------------------------------- ----------------- -------------------------- -------------------------
TOTAL 17,080 $889,185,900.18 100.00%
================= ========================== =========================
S-19
ORIGINAL TERM TO STATED MATURITY OF THE MORTGAGE LOANS
PERCENTAGE OF
MORTGAGE LOANS
ORIGINAL TERM NUMBER AGGREGATE BY AGGREGATE
TO STATED MATURITY (MONTHS) OF LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -------------------------------------------- ----------------- -------------------------- -------------------------
49 - 60 88 $1,337,561.70 0.15%
61 - 72 10 143,140.10 0.02
73 - 84 58 1,287,779.43 0.14
85 - 96 15 411,330.71 0.05
97 - 108 4 117,495.07 0.01
109 - 120 966 22,855,818.60 2.57
121 - 132 3 153,132.70 0.02
133 - 144 24 681,062.38 0.08
145 - 156 2 56,435.03 0.01
157 - 168 2 164,887.99 0.02
169 - 180 9,058 469,825,805.14 52.84
181 - 192 1 41,521.15 0.00*
193 - 204 2 122,830.40 0.01
229 - 240 3,753 159,292,976.43 17.91
289 - 300 261 12,849,454.28 1.45
337 - 348 1 29,351.74 0.00*
349 - 360 2,832 219,815,317.33 24.72
- -------------------------------------------- ----------------- -------------------------- -------------------------
TOTAL 17,080 $889,185,900.18 100.00%
================= ========================== =========================
*Less than 0.01%
S-20
TYPES OF MORTGAGED PROPERTIES OF THE MORTGAGE LOANS
PERCENTAGE OF
MORTGAGE LOANS
NUMBER AGGREGATE BY AGGREGATE
PROPERTY TYPE OF LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -------------------------------------------- ----------------- -------------------------- -------------------------
Single Family - Detached 15,909 $838,680,941.38 94.32%
Mobile Home 750 30,611,300.97 3.44
Townhouse 193 8,959,873.70 1.01
Condo 122 5,891,530.73 0.66
Other 106 5,042,253.40 0.57
- -------------------------------------------- ----------------- -------------------------- -------------------------
TOTAL 17,080 $889,185,900.18 100.00%
================= ========================== =========================
S-21
PAYMENTS ON THE LOANS
The loans, other than balloon loans, will generally provide for a
schedule of payments which will be, if timely paid, sufficient to amortize fully
the principal balance of the related loan on or before its maturity date.
Interest with respect to the loans will accrue on either an actuarial interest
method or a simple interest method.
The actuarial interest method provides that interest is charged and
payments are due as of a scheduled day of each month which is fixed at the time
of origination. Scheduled monthly payments on such loans received either earlier
or later (other than delinquent) than the scheduled due dates thereof will not
affect the amortization schedule or the relative application of such payments to
principal and interest.
The simple interest method provides for the amortization of the amount
of each loan over a series of equal monthly payments. However, unlike the
monthly payment under the actuarial interest method, each monthly payment
consists of an installment of interest which is calculated on the basis of the
outstanding principal balance at the stated interest rate and based upon the
period elapsed since the preceding payment of principal was made, using the
method permitted by applicable law. As payments are received under the loan, the
amount received is applied first to interest accrued to the date of payment and
the balance, if any, is applied to reduce the unpaid principal balance.
Accordingly, if a borrower pays a fixed monthly installment on such a loan
before its scheduled due date, the portion of the payment allocable to interest
for the period since the preceding payment was made will be less than it would
have been had the payment been made as scheduled, and the portion of the payment
applied to reduce the unpaid principal balance will be correspondingly greater.
Conversely, if a borrower pays a fixed monthly installment on the loan after its
scheduled due date, the portion of the payment allocable to interest for the
period since the preceding payment was made will be greater than it would be had
the payment been made as scheduled, and the portion of the payment applied to
reduce the unpaid principal balance will be correspondingly reduced. In
addition, a late charge may be imposed with respect to the past due amount. This
will not affect the total amount of principal to be received by the
certificateholders over the life of the transaction, but it may affect the
weighted average lives of the certificates.
The amount of interest payable to the certificateholders on each
distribution date will not be affected by interest accruing on the loans based
on the simple interest method. On each distribution date, the certificateholders
are entitled to interest on the actual number of days from the last distribution
date (or, in the case of the first distribution date, from the closing date) to
but not including the upcoming distribution date at the applicable pass-through
rate on the outstanding principal balances of the applicable class of
certificates immediately prior to such distribution date. The servicer is
required to remit to the certificate administrator the excess, if any, of the
amount of interest the certificateholders are entitled to receive on each
distribution date over the interest collected on the loans during the related
collection period and available to pay interest on the certificates. See "The
Pooling and Servicing Agreement--Monthly Advances" and "--Compensating Interest"
herein.
Similarly, the compensation payable to the transaction parties will not
be affected by interest accruing on the loans based on the simple interest
S-22
method. The transaction parties are entitled to receive a fee based on the
principal balance of the loans, not upon the portion of a monthly payment
allocable to interest. See "The Pooling and Servicing Agreement--Servicing and
Other Compensation and Payment of Expenses" herein.
YIELD, MATURITY AND PREPAYMENT CONSIDERATIONS
Because the loans will bear fixed interest rates, when the level of
prevailing interest rates for similar loans significantly declines, the rate of
prepayment of such loans is likely to increase, although the prepayment rate is
influenced by a number of other factors, including general economic conditions
and homeowner mobility. Similarly, when the level of interest rates for similar
loans significantly rises, the rate of prepayment of such loans may decrease. No
prediction can be made as to the prepayment rate that the loans will actually
experience.
Generally, junior priority mortgage loans have smaller average
principal balances than first priority mortgage loans and are not viewed by
borrowers as permanent financing. Accordingly, the loans included in the trust
that are secured by junior liens may experience a higher rate of prepayment than
traditional first priority mortgage loans. In addition, any future limitations
on the right of borrowers to deduct interest payments on mortgage loans for
Federal income tax purposes may result in a higher rate of prepayment of such
junior loans. The obligation of the servicer to enforce the "due-on-sale"
provisions of the loans may also increase prepayments. The prepayment experience
of the loans may be affected by a wide variety of factors, including general and
local economic conditions, mortgage market interest rates, the availability of
alternative financing and homeowner mobility.
Unscheduled payments, delinquencies, purchases of defective loans and
defaulted loans and defaults on the loans will affect the amount of funds
available to make distributions on each distribution date. In addition, the
servicer may, at its option, on any date on which the then outstanding aggregate
principal balance of the loans is less than or equal to 10% of the aggregate
principal balance as of the cut-off date of the loans delivered to the trust on
the closing date, purchase from the trust all of the loans and any other assets
in the trust at a price equal to the sum of:
(1) 100% of the outstanding aggregate principal balances of the loans,
including those evidenced by any mortgaged property title to which has
been acquired in foreclosure or by deed in lien of foreclosure (an "REO
property"), and
(2) interest on the loans for the actual number of days from the last
distribution date to but not including the upcoming distribution date
at the then applicable weighted average loan interest rate.
However, because the loans may prepay, the weighted average life of the
certificates on the date on which the outstanding aggregate principal balances
of the loans will be less than or equal to 10% of the related original principal
balance cannot be determined.
Approximately 38.90% of the loans, by cut-off date principal balance,
are "balloon loans" that provide for a stated maturity of less than the period
of time of the corresponding amortization schedule. As a result, upon the
maturity of a balloon loan, the borrower will be required to make a final
S-23
payment which will be substantially larger than such borrower's previous monthly
payments. Each loan other than a balloon loan is fully amortizing in accordance
with its terms. The loans may be prepaid at any time, subject to applicable
prepayment penalties. In general, when the level of prevailing interest rates
for similar loans significantly declines, the rate of prepayment is likely to
increase, although the prepayment rate is influenced by a number of other
factors, including general economic conditions and prepayment penalties.
Prepayments, liquidations and purchases of the loans will result in
distributions to certificateholders of amounts which would otherwise be
distributed over the remaining terms of the loans.
If prepayments of principal are received on the loans at a rate greater
than that assumed by an investor, the yield will be increased on certificates
purchased by that investor at a price less than par, i.e., the principal balance
of a certificate at the time of its purchase. Similarly, if prepayments of
principal are received on the loans at a rate greater than that assumed by an
investor, the yield will be decreased on certificates purchased at a price
greater than par. The effect on an investor's yield of principal prepayments on
the loans occurring at a rate that is faster (or slower) than the rate
anticipated by the investor in the period immediately following the issuance of
the applicable class of certificates may not be offset by a subsequent like
reduction (or increase) in the rate of principal payments. The weighted average
lives of the certificates will also be affected by the amount and timing of
delinquencies and defaults on the loans and the liquidations of defaulted loans.
Delinquencies will generally slow the rate of payment of principal to the
certificateholders since the servicer is not obligated to advance for delinquent
payments of principal. However, this effect will be offset to the extent that
lump sum recoveries on defaulted loans result in principal payments on the loans
faster than otherwise scheduled.
As described herein, certain classes of certificates will be entitled
to receive payments of principal prior to other classes of certificates. As a
result, the classes of certificates receiving payments of principal first will
immediately be affected by the prepayment rate on the loans. However, the timing
of commencement of principal distributions and the weighted average lives of
each class of certificates will be affected by the prepayment rate experienced
both before and after the commencement of principal distributions on any such
class.
The loans are either "simple interest" or "actuarial method" loans. If
a payment is received on a loan which is a "simple interest" loan later than
scheduled, a smaller portion of such payment will be applied to principal and a
greater portion will be applied to interest than would have been the case had
the payment been received on the scheduled due date, resulting in such loan
having a longer weighted average life than would have been the case had the
payment been made as scheduled. Conversely, if a payment on a loan is received
earlier than scheduled, more of such payment will be applied to principal and
less to interest than would have been the case had the payment been received on
its scheduled due date, resulting in such loan having a shorter weighted average
life than would have been the case had the payment been made as scheduled.
If less than one month's interest is collected on a loan during a
collection period, whether due to prepayment in full or a curtailment, the
servicer is obligated to pay compensating interest with respect to the loan, but
only to the extent of the aggregate servicing fee for the related distribution
date. To the extent any shortfalls exceed the amount of compensating interest
that the servicer is obligated to pay, and are not otherwise covered by credit
support, the yield on the certificates will be adversely affected. Any shortfall
S-24
in collections of interest resulting from the early receipt of a scheduled
payment will not be covered by compensating interest, but will be covered by
monthly advances.
The pass-through rate on the class A-2 certificates will be adjusted by
reference to changes in the level of one-month LIBOR, subject to the effects of
the pool cap and the fixed cap.
The pool cap on a distribution date will depend, in part, on the
weighted average of the then current loan interest rates of the loans. If the
loans bearing higher loan interest rates were to prepay, the weighted average
loan interest rate of the loans and, consequently, the applicable pool cap would
be lower than otherwise would be the case.
The final maturity date for each class of offered certificates is set
forth on the cover page of this prospectus supplement.
The final maturity date for the class M-1, class M-2 and class B-1
certificates is the distribution date following the latest date upon which a
loan matures plus 12 months. The weighted average lives of the certificates are
likely to be shorter than would be the case if payments actually made on the
loans conformed to the foregoing assumptions, and the final distribution dates
with respect to each class of certificates could occur significantly earlier
than the final maturity dates because the servicer may purchase all of the loans
under the limited circumstances described in this prospectus supplement. In
addition, prepayments are likely to occur on the loans, which also would shorten
the weighted average life of the certificates.
"Weighted average life" refers to the average amount of time that will
elapse from the date of issuance of a security until each dollar of principal of
such security will be repaid to the investor. The weighted average lives of the
certificates will be influenced by the priorities established in the pooling and
servicing agreement, and by the rate at which principal payments on the loans
are paid, which may be in the form of scheduled amortization or prepayments.
The following tables have been prepared assuming that the pool is
comprised of loans having the following characteristics:
S-25
ASSUMED MORTGAGE LOAN CHARACTERISTICS
Gross Original Original Remaining Remaining
Assumed Cut-Off Mortgage Term of Balloon Term to Balloon
Date Principal Interest Amortization Term Maturity Term Amortization
Balance ($) Rate (%) (months) (months) (months) (months) Method
- --------- -------------------- ------------- -------------- ------------- ------------- ------------- -------------
1 345,925,853.14 11.284 360 180 337 157 LEVEL
2 1,112,572.19 11.644 60 n/a 37 n/a LEVEL
3 24,716,054.47 11.550 118 n/a 94 n/a LEVEL
4 125,308,913.12 11.510 180 n/a 155 n/a LEVEL
5 159,428,383.91 11.418 240 n/a 217 n/a LEVEL
6 12,849,454.28 11.568 300 n/a 274 n/a LEVEL
7 219,844,669.07 10.997 360 n/a 337 n/a LEVEL
S-26
The following tables also have been prepared assuming:
o all distributions with respect to the certificates will be made at
the scheduled time as described below under "Description of the
Certificates--Distributions on the Certificates,"
o distributions on the certificates are received in cash on the 25th
day of each month, commencing in January 2002,
o prepayments represent payment in full of individual loans and are
received on the last day of each month (commencing in December
2001) and include 30 days' interest thereon at the applicable loan
interest rate,
o the servicing fee for each loan will be 0.548% per annum of the
unpaid balance of the loans,
o The certificate administrator and custodian will receive aggregate
fees for each loan equal to 0.018% per annum of the principal
balance thereof,
o no delinquencies or defaults in payments by borrowers of principal
and interest on the loans are experienced,
o no right of optional termination is exercised except as noted
below,
o the offered certificates are purchased on the closing date,
o with respect to the class A-2 certificates only, that one-month
LIBOR remains constant at 1.93125%,
o that the pass-through rate for the class A-1 certificates is
1.970%,
o the targeted overcollateralization amount is initially set at the
highest level specified by the pooling and servicing agreement and
thereafter decreases in accordance with the provisions of the
pooling and servicing agreement.
Prepayments on loans are commonly measured relative to a prepayment
standard or model. The model used in this prospectus supplement is a prepayment
assumption which represents an assumed constant prepayment rate ("CPR") each
month relative to the then outstanding principal balance of a pool of mortgage
loans for the life of such mortgage loans. The prepayment assumption used to
price the related certificates assumes a CPR each month of 28% per annum of the
then outstanding principal balance of the loans. As used in the table below, 0%
CPR assumes prepayment rates equal to 0% per annum of the then outstanding
principal balance of the loans, i.e. no prepayments on the mortgage loans having
the characteristics described below.
Neither the prepayment assumption nor any other prepayment model or
assumption purports to be an historical description of prepayment experience or
S-27
a prediction of the anticipated rate of prepayment of any pool of mortgage
loans, including the loans included in the trust. Variations in the actual
prepayment experience and the balance of the loans that prepay may increase or
decrease each weighted average life shown in the following tables. Such
variations may occur even if the average prepayment experience of all such loans
equals any of the specified percentages of CPR.
S-28
PERCENTAGE OF ORIGINAL PRINCIPAL BALANCE OUTSTANDING
CLASS A-1
---------------------------------------------------------------------------------------
CPR ASSUMPTION
----------- ------------ ------------ ------------ -------------- -------------
Distribution Date 0% 21% 25% 28% 30% 35%
----------- ------------ ------------ ------------ -------------- -------------
Initial Balance 100% 100% 100% 100% 100% 100%
December 25, 2002 76 0 0 0 0 0
December 25, 2003 49 0 0 0 0 0
December 25, 2004 19 0 0 0 0 0
December 25, 2005 0 0 0 0 0 0
Weighted Average Life(1)
to Maturity (years) 1.938 0.159 0.142 0.128 0.119 0.111
Weighted Average Life(1)
to Call (years) 1.938 0.159 0.142 0.128 0.119 0.111
- ----------------------------
(1) The weighted average life of any class of certificates is determined by (i)
multiplying the assumed net reduction, if any, in the certificate principal
balance on each distribution date of such class of certificates by the
number of years from the date of issuance of the certificates to the
related distribution date, (ii) summing the results and (iii) dividing the
sum by the aggregate amount of the assumed net reduction in the certificate
principal balance of such class of certificates.
S-29
PERCENTAGE OF ORIGINAL PRINCIPAL BALANCE OUTSTANDING
CLASS A-2 AND CLASS A-3
------------------------------------------------------------------------------------------------
CPR ASSUMPTION
------------ --------------- -------------- -------------- --------------- ---------------
Distribution Date 0% 21% 25% 28% 30% 35%
------------ --------------- -------------- -------------- --------------- ---------------
Initial Balance 100% 100% 100% 100% 100% 100%
December 25, 2002 100 78 72 68 66 59
December 25, 2003 100 54 46 40 36 27
December 25, 2004 100 35 26 20 16 7
December 25, 2005 99 29 23 20 16 7
December 25, 2006 96 22 17 14 12 7
December 25, 2007 92 17 13 10 8 5
December 25, 2008 89 13 9 7 6 3
December 25, 2009 84 10 7 5 4 2
December 25, 2010 80 8 5 3 3 1
December 25, 2011 76 6 3 2 2 1
December 25, 2012 71 4 2 2 1 *
December 25, 2013 65 3 2 1 1 0
December 25, 2014 59 2 1 1 * 0
December 25, 2015 23 1 * 0 0 0
December 25, 2016 21 * 0 0 0 0
December 25, 2017 19 * 0 0 0 0
December 25, 2018 17 0 0 0 0 0
December 25, 2019 14 0 0 0 0 0
December 25, 2020 13 0 0 0 0 0
December 25, 2021 12 0 0 0 0 0
December 25, 2022 11 0 0 0 0 0
December 25, 2023 10 0 0 0 0 0
December 25, 2024 9 0 0 0 0 0
December 25, 2025 7 0 0 0 0 0
December 25, 2026 6 0 0 0 0 0
December 25, 2027 4 0 0 0 0 0
December 25, 2028 2 0 0 0 0 0
December 25, 2029 0 0 0 0 0 0
Weighted Average Life(1)
to Maturity (years) 13.207 3.377 2.816 2.460 2.242 1.738
Weighted Average Life(1)
to Call (years) 13.016 3.161 2.608 2.261 2.058 1.582
- ---------------------------------------------
* Less than 0.5% but greater than 0.
(1) The weighted average life of any class of certificates is determined by (i)
multiplying the assumed net reduction, if any, in the certificate principal
balance on each distribution date of such class of certificates by the
number of years from the date of issuance of the certificates to the
related distribution date, (ii) summing the results and (iii) dividing the
sum by the aggregate amount of the assumed net reduction in the certificate
principal balance of such class of certificates.
S-30
PERCENTAGE OF ORIGINAL PRINCIPAL BALANCE OUTSTANDING
CLASS M-1
------------------------------------------------------------------------------------------------
CPR ASSUMPTION
------------- --------------- --------------- -------------- -------------- --------------
Distribution Date 0% 21% 25% 28% 30% 35%
------------- --------------- --------------- -------------- -------------- --------------
Initial Balance 100% 100% 100% 100% 100% 100%
December 25, 2002 100 100 100 100 100 100
December 25, 2003 100 100 100 100 100 100
December 25, 2004 100 100 100 100 100 100
December 25, 2005 100 73 59 50 66 100
December 25, 2006 100 56 43 35 31 37
December 25, 2007 100 43 31 25 21 13
December 25, 2008 100 33 23 17 14 8
December 25, 2009 100 25 17 12 10 5
December 25, 2010 100 19 12 8 6 3
December 25, 2011 100 14 9 6 4 0
December 25, 2012 100 11 6 4 2 0
December 25, 2013 100 8 4 1 0 0
December 25, 2014 100 6 2 0 0 0
December 25, 2015 58 0 0 0 0 0
December 25, 2016 53 0 0 0 0 0
December 25, 2017 48 0 0 0 0 0
December 25, 2018 43 0 0 0 0 0
December 25, 2019 36 0 0 0 0 0
December 25, 2020 34 0 0 0 0 0
December 25, 2021 31 0 0 0 0 0
December 25, 2022 29 0 0 0 0 0
December 25, 2023 25 0 0 0 0 0
December 25, 2024 22 0 0 0 0 0
December 25, 2025 19 0 0 0 0 0
December 25, 2026 15 0 0 0 0 0
December 25, 2027 11 0 0 0 0 0
December 25, 2028 6 0 0 0 0 0
December 25, 2029 0 0 0 0 0 0
Weighted Average Life(1)
to Maturity (years) 17.662 6.355 5.596 5.231 5.093 5.147
Weighted Average Life(1)
to Call (years) 17.187 5.850 5.077 4.756 4.661 4.764
- ---------------------------
(1) The weighted average life of any class of certificates is determined by (i)
multiplying the assumed net reduction, if any, in the certificate principal
balance on each distribution date of such class of certificates by the
number of years from the date of issuance of the certificates to the
related distribution date, (ii) summing the results and (iii) dividing the
sum by the aggregate amount of the assumed net reduction in the certificate
principal balance of such class of certificates.
S-31
PERCENTAGE OF ORIGINAL PRINCIPAL BALANCE OUTSTANDING
CLASS M-2
-------------------------------------------------------------------------------------------
CPR ASSUMPTION
------------ --------------- -------------- ------------ --------------- ------------
Distribution Date 0% 21% 25% 28% 30% 35%
------------ --------------- -------------- ------------ --------------- ------------
Initial Balance 100% 100% 100% 100% 100% 100%
December 25, 2002 100 100 100 100 100 100
December 25, 2003 100 100 100 100 100 100
December 25, 2004 100 100 100 100 100 100
December 25, 2005 100 73 59 50 45 40
December 25, 2006 100 56 43 35 31 21
December 25, 2007 100 43 31 25 21 13
December 25, 2008 100 33 23 17 14 8
December 25, 2009 100 25 17 12 10 5
December 25, 2010 100 19 12 8 6 0
December 25, 2011 100 14 9 6 3 0
December 25, 2012 100 11 6 2 0 0
December 25, 2013 100 8 3 0 0 0
December 25, 2014 100 6 0 0 0 0
December 25, 2015 58 0 0 0 0 0
December 25, 2016 53 0 0 0 0 0
December 25, 2017 48 0 0 0 0 0
December 25, 2018 43 0 0 0 0 0
December 25, 2019 36 0 0 0 0 0
December 25, 2020 34 0 0 0 0 0
December 25, 2021 31 0 0 0 0 0
December 25, 2022 29 0 0 0 0 0
December 25, 2023 25 0 0 0 0 0
December 25, 2024 22 0 0 0 0 0
December 25, 2025 19 0 0 0 0 0
December 25, 2026 15 0 0 0 0 0
December 25, 2027 11 0 0 0 0 0
December 25, 2028 6 0 0 0 0 0
December 25, 2029 0 0 0 0 0 0
Weighted Average Life(1)
to Maturity (years) 17.654 6.345 5.505 5.055 4.836 4.535
Weighted Average Life(1)
to Call (years) 17.187 5.845 5.016 4.614 4.437 4.193
- --------------------------
(1) The weighted average life of any class of certificates is determined by (i)
multiplying the assumed net reduction, if any, in the certificate principal
balance on each distribution date of such class of certificates by the
number of years from the date of issuance of the certificates to the
related distribution date, (ii) summing the results and (iii) dividing the
sum by the aggregate amount of the assumed net reduction in the certificate
principal balance of such class of certificates.
S-32
PERCENTAGE OF ORIGINAL PRINCIPAL BALANCE OUTSTANDING
CLASS B-1
-------------------------------------------------------------------------------------------------
CPR ASSUMPTION
------------- --------------- -------------- -------------- --------------- ---------------
Distribution Date 0% 21% 25% 28% 30% 35%
------------- --------------- -------------- -------------- --------------- ---------------
Initial Balance 100% 100% 100% 100% 100% 100%
December 25, 2002 100 100 100 100 100 100
December 25, 2003 100 100 100 100 100 100
December 25, 2004 100 100 100 100 100 100
December 25, 2005 100 73 59 50 45 33
December 25, 2006 100 56 43 35 31 21
December 25, 2007 100 43 31 25 21 13
December 25, 2008 100 33 23 17 14 8
December 25, 2009 100 25 17 12 10 *
December 25, 2010 100 19 12 8 3 0
December 25, 2011 100 14 8 1 0 0
December 25, 2012 100 11 2 0 0 0
December 25, 2013 100 7 0 0 0 0
December 25, 2014 100 2 0 0 0 0
December 25, 2015 58 0 0 0 0 0
December 25, 2016 53 0 0 0 0 0
December 25, 2017 48 0 0 0 0 0
December 25, 2018 43 0 0 0 0 0
December 25, 2019 36 0 0 0 0 0
December 25, 2020 34 0 0 0 0 0
December 25, 2021 31 0 0 0 0 0
December 25, 2022 29 0 0 0 0 0
December 25, 2023 25 0 0 0 0 0
December 25, 2024 22 0 0 0 0 0
December 25, 2025 19 0 0 0 0 0
December 25, 2026 15 0 0 0 0 0
December 25, 2027 11 0 0 0 0 0
December 25, 2028 2 0 0 0 0 0
December 25, 2029 0 0 0 0 0 0
Weighted Average Life(1)
to Maturity (years) 17.627 6.314 5.404 4.922 4.674 4.253
Weighted Average Life(1)
to Call (years) 17.187 5.841 4.986 4.547 4.336 3.965
- --------------------------------------------
* Less than 0.5% but greater than 0.
(1) The weighted average life of any class of certificates is determined by (i)
multiplying the assumed net reduction, if any, in the certificate principal
balance on each distribution date of such class of certificates by the
number of years from the date of issuance of the certificates to the
related distribution date, (ii) summing the results and (iii) dividing the
sum by the aggregate amount of the assumed net reduction in the certificate
principal balance of such class of certificates.
S-33
THE SERVICER
HomEq Servicing Corporation will act as the servicer of the loans.
HomEq Servicing Corporation, successor by merger to TMS Mortgage, Inc.,
is a New Jersey corporation. HomEq Servicing Corporation is headquartered in
North Highlands, California, and is a wholly owned subsidiary of The Money Store
Inc. On June 30, 1998, The Money Store Inc. became a wholly-owned subsidiary of
First Union National Bank, the principal banking subsidiary of Wachovia
Corporation. Wachovia Corporation is also the ultimate parent of First Union
Securities, Inc. See "Risk Factors--Our Parent's Insolvency May Result In Others
Owning the Trust's Assets."
Prior to June 23, 2000, TMS Mortgage, Inc. and its subsidiaries were
engaged in the business of originating, purchasing, selling and servicing home
equity and home improvement loans. On June 26, 2000, TMS Mortgage, Inc. and its
subsidiaries stopped accepting applications for home equity and home improvement
loans and after August 31, 2000 ceased originating and purchasing home equity
and home improvement loans. On November 1, 2000, TMS Mortgage, Inc. merged with,
and changed its name to, HomEq Servicing Corporation.
Currently, HomEq Servicing Corporation and its subsidiaries service the
home equity and home improvement mortgage loans which it and its subsidiaries
previously originated or purchased. In addition, HomEq Servicing Corporation and
its subsidiaries service a home equity mortgage loan portfolio of approximately
$11 billion for First Union National Bank and its affiliates. On February 8,
2001, S&P announced that HomEq Servicing Corporation had been added to its
select servicer list. HomEq Servicing Corporation is now a select residential
subprime servicer, a select alternative residential mortgage servicer, and a
select residential special servicer. To be included on the select servicer list
S&P has deemed that HomEq Servicing Corporation has met the criteria for
attaining at least an average ranking with an outlook of stable. Inclusion on
the list reflects that a firm is, at the very least, performing its duties in an
effective and controlled manner, and is in general compliance with investor,
regulatory, or agency requirements.
In addition, on December 19, 2001, Fitch, Inc. assigned to HomEq
Servicing Corporation its "RPS2-" residential primary servicer ratings for
subprime and Alt-A products, which was based upon the company's ability to
service, collect and liquidate those assets, and its "RSS2-" residential special
servicer rating, which reflects the company's ability to manage and liquidate
non-performing residential mortgage loans and REO assets. Fitch has reviewed the
company's servicing operation and believes that it has "developed a solid
servicing infrastructure through restructuring its servicing sites, retaining
key personnel, hiring experienced managers and staff, strategic utilization of
vendors and implementing advanced technology." Fitch, Inc. rates residential
primary, master and special servicers on a scale of 1 to 5, with 1 being the
highest rating level, and further differentiates these rate levels with plus (+)
and minus (-) as well as the flat ratings.
For the years ended December 31, 1998, 1999 and 2000, HomEq Servicing
Corporation (which includes its predecessor TMS Mortgage, Inc.), and its
S-34
subsidiaries serviced approximately $13.4 billion, $12.6 billion and $10.7
billion of mortgage loans, respectively. Of those mortgage loans, approximately
82.84%, 78.76% and 71.62%, respectively, by principal amount were home equity
loans and approximately 17.16%, 21.24% and 28.38%, respectively, by principal
amount were home improvement loans (including Title I loans guaranteed by the
FHA). The business strategy of HomEq Servicing Corporation is to provide a
mortgage loan servicing platform for the outstanding portfolio of HomEq
Servicing Corporation, as well as to provide mortgage loan servicing functions
to other areas of Wachovia Corporation and to unaffiliated third parties.
DELINQUENCY EXPERIENCE
The following table sets forth the delinquency and charge-off
experience of HomEq Servicing Corporation (which includes its predecessor TMS
Mortgage, Inc.), with respect to its portfolio of home equity loans as of the
dates indicated. There can be no assurance, and no representation is made, that
the delinquency and charge-off experience with respect to the loans included in
the trust will be similar to that reflected in the table below.
DELINQUENCIES AND CHARGE-OFFS
(DOLLARS IN THOUSANDS)
-------------------------------------------------------
FOR THE PERIOD FOR THE PERIOD FOR THE PERIOD
ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1999(1) 2000(2) 2001(2)
------- ------- -------
30 days past due(3)............................ 2.22% 2.64% 2.45%
60 days past due(3)............................ 1.11% 0.99% 1.04%
90+ days past due( 3).......................... 6.50% 3.99% 3.85%
Loans in the serviced loan portfolio(4)........ $9,550,452 $18,324,494 $17,549,928
Loans charged-off, net......................... $190,424 $295,735 $181,642
Loans charged-off, net as a percentage of the 1.99% 1.61% 1.04%
serviced loan portfolio(5).....................
- ----------------------
(1) Includes only home equity loans originated by TMS Mortgage, Inc. and
its subsidiaries.
(2) HomEq started servicing the First Union National Bank of Delaware
portfolio as of December 2000. Includes home equity loans originated
by both TMS Mortgage, Inc. and First Union National Bank of Delaware.
(3) The delinquency percentages are calculated based upon the aggregate
principal balances of the loans which are delinquent by the number of
days indicated divided by the total aggregate principal balances of
the loans contained in HomeEq Servicing Corporation's total serviced
loan portfolio.
S-35
(4) Amounts shown are the aggregate principal balances of the loans in
HomeEq Servicing Corporation's total serviced loan portfolio as of
the last day of the indicated period (excluding high loan-to-value
loans and home improvement loans).
(5) The percentages of loans charged-off are calculated based upon the
dollar amount of charge-offs divided by the dollar amount of the
principal portion of the loans indicated in HomeEq Servicing
Corporation's total serviced loan portfolio.
CERTAIN LITIGATION
Because of the nature of the business which the predecessor entity to
HomEq Servicing Corporation, TMS Mortgage, Inc., and its affiliates were
involved in, including the collection of numerous accounts, the validity of
liens and compliance with state and federal lending laws, as well as HomEq
Servicing Corporations continuing operations as a mortgage loan servicer, HomEq
Servicing Corporation and its affiliates are subject to claims and legal actions
in the ordinary course of their business. It is impossible to estimate with
certainty the ultimate legal and financial liability with respect to these
claims, especially claims arising from actions taken by TMS Mortgage Inc. and
its affiliates. HomeEq Servicing Corporation will continue to aggressively
defend against all liabilities asserted from time to time in order to limit the
potential monetary damages that may have a material adverse effect on the
financial condition of HomeEq Servicing Corporation or its affiliates.
THE ORIGINATOR
The originator, First Union National Bank of Delaware ("FUNB
Delaware"), is a national bank subsidiary of the holding company Wachovia
Corporation. Prior to June 26, 2000, the loans were originated by FUNB Delaware
under the name First Union Home Equity Bank, National Association. Wachovia
Corporation was created through the September 1, 2001 merger of First Union
Corporation and Wachovia Corporation. The mortgage lending activities of FUNB
Delaware consist primarily of originating and purchasing mortgage loans. These
mortgage loans are primarily secured by one- to four-family residential
properties, including single-family detached homes, condominiums, single-family
attached homes, and manufactured homes. It has been FUNB Delaware's policy
generally not to make mortgage loans secured by cooperative residences,
residential properties in commercially-zoned areas, or other categories of
properties that management believes have demonstrated relatively high levels of
risk. The majority of Mortgage Loans are to borrowers who own a single-family
detached home.
The following is a description of the origination, underwriting, and
other procedures used by FUNB Delaware in connection with its Mortgage Loan
program.
MORTGAGE LOAN ORIGINATION
FUNB Delaware originates and purchases mortgage loans through three
loan delivery channels. These delivery channels are called, broker,
correspondent, and Equity Direct.
The broker channel originates through lending relationships with
independent brokers. Broker channel account executives located in various states
contact brokers to secure loan applications. Brokers participating in this
program must satisfy certain requirements established by FUNB Delaware
S-36
pertaining to experience, and various licenses and approvals. Brokers submit
loan applications for review and approval to a loan-processing unit, Sales
Support Center (SSC), in Charlotte, North Carolina. The loan applications are
under the direction of management, underwritten and structured by SSC personnel,
who evaluate and process the loan application of a prospective borrower. The
loans are closed in the name of First Union National Bank of Delaware.
The correspondent channel purchases loans through relationships with
various lenders or mortgage bankers. These relationships are established by
account executives, who offer loan products to specific geographic regions.
These loans are closed in the name of the originating lender, and subsequently
presented to FUNB Delaware for review and potential purchase. Every loan
submitted by a correspondent lender is reviewed by an underwriter. Each loan is
also reviewed by the loan purchasing department to verify that adequate loan
documentation exists in the loan file.
The third loan delivery channel for FUNB Delaware is called Equity
Direct. Equity Direct secures loan applications directly from consumers through
pre-approved direct mail campaigns and Internet sources. The entire application
and approval process for this channel is conducted by telephone. Equity Direct
loan processors evaluate and process loan applications of prospective borrowers
based on information obtained from the borrower.
UNDERWRITING CRITERIA
The following is a brief description of the general underwriting
standards used by FUNB Delaware. Supervision of all FUNB Delaware underwriting
and administrative functions are conducted from its headquarters in Wilmington,
Delaware and Charlotte, North Carolina. The underwriting process is intended to
assess both the prospective borrower's ability to repay and the adequacy of the
real property security as collateral for the loan granted.
The FUNB Delaware objective in originating and underwriting mortgage
loans is to provide loans to borrowers with satisfactory income and credit
histories deemed sufficient to demonstrate the ability to repay their loan. The
primary underwriting policy is to analyze the applicant's creditworthiness.
Creditworthiness is assessed by examination of a number of factors, which
include calculating a debt-to-income ratio obtained by dividing a borrower's
fixed monthly debt by the borrower's gross monthly income. Fixed monthly debt
generally includes (1) the monthly payment under the related prior mortgages,
(2) the monthly payment on the loan applied for and (3) other installment debt,
including, for revolving debt, the required monthly payment thereon or if no
such payment is specified, 3% of the balance as of the date of calculation.
Fixed monthly debt does not include any debt (other than revolving credit debt)
described above that matures within less than 6 months of the date of
calculation. Creditworthiness is also assessed by examining the applicant's
credit history through standard credit reporting bureaus, and by checking the
applicant's payment history with respect to the first mortgage, if any, on the
property.
The second underwriting policy for mortgage loans is a determination of
the Combined Loan-to-Value Ratio. Combined Loan-to-Value Ratio guidelines are
established depending on the type of loan. Generally, FUNB Delaware confirms the
value of the property by appraisals performed by independent appraisers. If an
S-37
appraisal is not required to be obtained for a Mortgage Loan, the value of the
related mortgaged property, as represented by the borrower, may be evaluated
through other methods such as a drive-by appraisal, an automated valuation
method (AVM) assessment or tax assessments. All Combined Loan-to-Value Ratios
are determined prior to approval of the loans.
FUNB Delaware uses several procedures to verify information obtained
from an applicant. The applicant's outstanding balance and payment history on
any senior mortgage may be verified by calling the senior mortgage lender. FUNB
Delaware may rely upon information provided by the applicant, such as a recent
statement from the senior lender and verification of payment, such as canceled
checks, or upon information provided by national credit bureaus.
To verify an applicant's employment status, FUNB Delaware may obtain
recent tax returns or other tax forms (e.g., W-2 forms) or current pay stubs,
may telephone the applicant's employer or obtain written verification from the
employer.
FUNB Delaware will not close a mortgage loan prior to receiving
evidence that the property securing the loan is insured. It is a requirement
that the insurance carrier name FUNB Delaware as a loss payee under the
insurance policy.
In August 1999, Wachovia Corporation undertook a strategic initiative
to align consumer lending underwriting criteria between FUNB Delaware, First
Union National Bank, First Union Mortgage Finance, and The Money Store. The
objective of this strategic initiative was to ensure similarly situated
customers coming to Wachovia Corporation through like delivery channels would
receive similar underwriting consideration. This alignment initiative resulted
in significantly revised underwriting criteria related to, but not limited to,
credit grade, borrower bankruptcy and foreclosure treatment, derogatory credit
considerations, and acceptable collateral valuation methods.
DESCRIPTION OF THE CERTIFICATES
The certificates will be issued pursuant to a pooling and servicing
agreement dated as of November 30, 2001 among the depositor, the transferor,
trustee, the certificate administrator and the custodian. A copy of the pooling
and servicing agreement will be included as an exhibit to a Current Report on
Form 8-K to be filed by the depositor on behalf of the trust. The following
summaries describe material provisions of the certificates, but do not purport
to be complete and are subject to, and are qualified in their entirety by
reference to, all of the provisions of the certificates and the pooling and
servicing agreement. Terms used in this prospectus supplement and not otherwise
defined will have the meanings set forth in the pooling and servicing agreement.
See "The Pooling and Servicing Agreement" in this prospectus supplement.
DESIGNATIONS
Class A Certificates
o Class A-1 Certificates
o Class A-2 Certificates
S-38
o Class A-3 Certificates
Class M Certificates
o Class M-1 Certificates
o Class M-2 Certificates
Class B Certificates
o Class B-1 Certificates
o Class B-2 Certificates
Offered Certificates
o Class A-1 Certificates
o Class A-2 Certificates
o Class A-3 Certificates
o Class M-1 Certificates
o Class M-2 Certificates
o Class B-1 Certificates
Non-Offered Certificates
o Class B-2 Certificates
o Class X Certificates
o Class R Certificates
Underwritten Certificates
o Class A-1 Certificates
o Class A-2 Certificates
o Class B-1 Certificates
The certificates represent beneficial interests in the trust only and
will not represent obligations of the depositor, the originator, the seller, the
transferor, the trustee, the certificate administrator, the custodian or any of
their respective affiliates. The offered certificates will be issued in
book-entry form in minimum denominations of $25,000 original principal amount
and integral multiples of $1,000 in excess of $25,000.
Definitive certificates, if issued, will be transferable and
exchangeable at the corporate trust office of the certificate administrator or,
at the election of the certificate administrator, at the office of a certificate
registrar appointed by the certificate administrator. No service charge will be
made for any registration of exchange or transfer, but the trustee may require
payment of a sum sufficient to cover any tax or other governmental charge.
S-39
The assets of the trust will consist of:
o the loans;
o payments received on the loans after the cut-off date;
o with respect to the class A-2 certificates only, a cap agreement
and related supplemental interest payments;
o all rights under any insurance policy covering a loan or the
related mortgaged property; and
o property and any proceeds thereof acquired by foreclosure of a
loan, deed in lieu of foreclosure or a comparable conversion.
DISTRIBUTIONS ON THE CERTIFICATES
On the 25th day of each month or, if the 25th day is not a business
day, the first business day immediately following, commencing in January 2002,
until the class principal balance of each class of certificates has been reduced
to zero, the certificate administrator (or a paying agent selected by the
certificate administrator that meets the criteria specified in the pooling and
servicing agreement) will be required to distribute to the persons in whose name
a certificate is registered, on the related record date, the holder's percentage
interest multiplied by the amount available to be paid to the respective class
of certificates for the applicable distribution date. The record date with
respect to each distribution date is at the close of business on the last day of
the month immediately preceding the month of the related distribution date,
except that with respect to the class A-1 and class A-2 certificates, the record
date with respect to each distribution date is the business day immediately
prior to such distribution date. A "business day" is any day other than a
Saturday or Sunday or a day on which banking institutions in the States of
California, New York or North Carolina are authorized or obligated by law or
executive order to be closed. For so long as the offered certificates are in
book-entry form with DTC, the only "Holder" of the Certificates will be Cede &
Co. See "--Book-Entry Certificates" in this section.
Distributions with respect to the certificates will be payable, after
payment of particular fees and other amounts pursuant to the pooling and
servicing agreement, generally from the following amounts:
o receipts on the loans; and
o monthly advances and payments of compensating interest by the
servicer for the loans.
Current Interest
On each distribution date, to the extent of available funds as further
described herein, the holders of each class of certificates will receive an
amount equal to the interest accrued at the applicable pass-through rate during
S-40
the related interest accrual period on the certificate principal balance of such
certificate, minus each class' interest percentage of Relief Act shortfalls for
such distribution date.
Interest with respect to the class A-1 and class A-2 certificates will
accrue on the basis of a 360-day year consisting of the actual number of days
elapsed since interest was last paid or in the case of the first distribution
date, from the closing date. Interest with respect to the other offered
certificates will accrue on the basis of a 360-day year consisting of twelve
30-day months.
The amount of interest each class of certificates is entitled to
receive on each distribution date at the related pass-through rate is referred
to as the "current interest" for the class.
Each class of certificates will bear interest for each interest accrual
period at a pass-through rate equal to the lesser of:
o the applicable pass-through rate as noted on the front cover of
this prospectus supplement; provided, however, that for each
distribution date after the optional termination date, the margin
relating to the class A-2 certificates will double and the fixed
coupon for the other offered certificates, other than the class A-1
certificates, will increase by 50 basis points; and
o the then applicable pool cap (or, in the case of the class A-2
certificates, the lesser of the pool cap and the fixed cap).
If on a particular distribution date, the remaining interest remittance
amount is less than the current interest for that class of certificates, the
amount of the shortfall, together with interest on the shortfall at the
applicable pass-through rate to the extent permitted by law will be carried
forward and distributed as described below. Interest shortfall carryforward
amounts do not include any supplemental interest.
If on any distribution date, the pass-through rate for the class A-2
certificates has been reduced by operation of the fixed cap, such class will be
entitled to receive a supplemental interest payment to be paid from the cap
agreement in an amount equal to the excess of the class A-2 certificate current
interest calculated at the pass-through rate without regard to the fixed cap,
over the amount payable to the holders of the class A-2 certificates in respect
of current interest on such distribution date. The strike price under the cap
agreement is equal to 5.10%, and the notional balance thereof will initially be
equal to the principal balance of the class A-2 certificates and will decline
over time as set forth in Annex B.
INTEREST ALLOCATIONS
The certificate administrator will apply that portion of the available
funds, which represents the Interest Remittance Amount for that distribution
date to the payment of any administrative fees of the trust which are due on
that distribution date, the trustee will then apply the remaining Interest
Remittance Amount to the payment of interest then due on the certificates in the
following order of priority:
S-41
(i) first, concurrently, to the holders of the class A-1, class A-2 and
class A-3 certificates, the current interest and any interest shortfall
carryforward amount for each such class;
(ii) second, to the holders of the class M-1 certificates, the current
interest and any interest shortfall carryforward amount for such class;
(iii) third, to the holders of the class M-2 certificates, the current
interest and any interest shortfall carryforward amount for such class;
(iv) fourth, to the holders of the class B-1 certificates, the current
interest and any interest shortfall carryforward amount for such class; and
(v) fifth, to the holders of the class B-2 certificates, the current
interest and any interest shortfall carryforward amount for such class; and
(vi) sixth, any remaining Interest Remittance Amount will be applied as
described below under "--Application of Monthly Excess Cashflow."
PRINCIPAL ALLOCATIONS
On each distribution date (a) prior to the Stepdown Date or (b) on
which a Trigger Event is in effect, the holders of each class of certificates
shall be entitled to receive distributions in respect of principal to the extent
of the Principal Remittance Amount in the following amounts and order of
priority:
(i) first, to the holders of the class A-1 certificates, the entire
amount of the Principal Distribution Amount, until the certificate balance of
the class A-1 certificates has been reduced to zero;
(ii) second, concurrently, to the holders of the class A-2 and class
A-3 certificates, the remaining Principal Distribution Amount, until the
certificate balances of the class A-2 and class A-3 certificates have been
reduced to zero, such payment to be made pro rata between such classes on the
basis of the certificate principal balances of such classes immediately prior to
such distribution date;
(iii) third, if the certificate balance of the class A certificates has
been reduced to zero, to the holders of the class M-1 certificates, the
remaining Principal Distribution Amount until the certificate balance of the
class M-1 certificates has been reduced to zero;
(iv) fourth, if the certificate balances of the class A and class M-1
certificates have been reduced to zero, to the holders of the class M-2
certificates, the remaining Principal Distribution Amount until the certificate
balance of the class M-2 certificates has been reduced to zero;
(v) fifth, if the certificate balances of the class A and class M
certificates have been reduced to zero, to the holders of the class B-1
certificates, the remaining Principal Distribution Amount until the certificate
balance of the class B-1 certificates has been reduced to zero;
S-42
(vi) sixth, if the certificate balances of the class A, class M and
class B-1 certificates have been reduced to zero, to the holders of the class
B-2 certificates, the remaining Principal Distribution Amount until the
certificate balance of the class B-2 certificates has been reduced to zero; and
(vii) seventh, any remaining Principal Distribution Amount will be
applied as described Under "--Application of Monthly Excess Cashflow."
On each distribution date (a) on or after the Stepdown Date and (b) on
which a Trigger Event is not in effect, the holders of each class of
certificates shall be entitled to receive distributions in respect of principal
to the extent of the Principal Remittance Amount in the following amounts and
order of priority:
(i) first, the appropriate percentage of the Principal Distribution
Amount so as to maintain the credit enhancement levels applicable to the class A
certificates,
(a) to the holders of the class A-1 certificates, until the
principal balance of the class A-1 certificates is reduced to zero; and
(b) to the holders of the class A-2 and class A-3 certificates,
such payment to be made pro rata between such classes on the basis of
the principal balances of such classes immediately prior to such
distribution date, until the principal balances of the class A-2 and
class A-3 certificates are reduced to zero;
(ii) second, to the holders of the class M-1 certificates, the
appropriate percentage of the Principal Distribution Amount so as to maintain
the credit enhancement levels applicable to the class M-1 certificates;
(iii) third, to the holders of the class M-2 certificates, the
appropriate percentage of the Principal Distribution Amount so as to maintain
the credit enhancement levels applicable to the class M-2 certificates;
(iv) fourth, to the holders of the class B-1 certificates, the
appropriate percentage of the Principal Distribution Amount so as to maintain
the credit enhancement levels applicable to the class B-1 certificates;
(v) fifth, to the holders of the class B-2 certificates, the
appropriate percentage of the Principal Distribution Amount so as to maintain
the credit enhancement levels applicable to the class B-2 certificates; and
(vi) sixth, any remaining Principal Distribution Amount will be applied
as described under "-- Application of Monthly Excess Cashflow."
APPLICATION OF MONTHLY EXCESS CASH FLOW
On each distribution date, the holders of each class of certificates
will be entitled to receive distributions to the extent of excess Interest
Remittance Amounts and Principal Remittance Amounts in the following order of
priority:
S-43
(i) to the class A certificates, any unpaid interest shortfall
carryforward amounts for those classes, such payment to be made pro rata among
these classes on the basis of the shortfalls for each class;
(ii) to fund the Accelerated Principal Distribution Amount, if any;
(iii) to the class M-1 certificates, any unpaid interest shortfalls for
that class;
(iv) to the class M-1 certificates, any unpaid Applied Realized Loss
Amount for that class;
(v) to the class M-2 certificates, any unpaid interest shortfalls for
that class;
(vi) to the class M-2 certificates, any unpaid Applied Realized Loss
Amount for that class;
(vii) to the class B-1 certificates, any unpaid interest shortfalls for
that class;
(viii) to the class B-1 certificates, any unpaid Applied Realized Loss
Amount for that class;
(ix) to the class B-2 certificates, any unpaid interest shortfalls for
that class;
(x) to the class B-2 certificates, any unpaid Applied Realized Loss
Amount for that class; and
(xi) any remainder, to the holders of the class X and class R
certificates.
GLOSSARY
Set forth below are the definitions of principal terms used in this
prospectus supplement to help describe the flow of funds on the certificates.
Accelerated Principal Distribution Amount: For any distribution date,
the lesser of:
(1) the Overcollateralization Deficiency Amount for the
distribution date, calculated for this purpose without giving
effect to payment of the Accelerated Principal Distribution
Amount and prior to taking into account the Applied Realized
Loss Amount for the applicable distribution date; and
(2) the remaining Interest Remittance Amount set forth in item
(vi) under "Interest Allocations" above.
Applied Realized Loss Amount: For each distribution date, after taking
into account all realized losses experienced during the preceding collection
period on loans and after taking into account all distributions of principal
with respect to the certificates, an amount equal to the excess, if any, of:
o the aggregate class principal balance of the certificates, over
S-44
o the aggregate principal balance of the loans as of the end of the
related collection period.
Available Funds: For each distribution date, all amounts received on
the trust assets during the related collection period or advanced by the
servicer in respect of amounts due on the loans during such collection period,
less the servicing fee and reimbursement of the servicer.
Collection Period: With respect to any distribution date means the
period from the second day of the calendar month preceding the month in which
such distribution date occurs through the first day of the month in which such
distribution date occurs.
Credit Enhancement Levels: With respect to distributions of principal,
the credit enhancement levels are as described below:
Class Approximate Target Credit
Enhancement
A-1, A-2, A-3 42.00%
M-1 29.50%
M-2 19.50%
B-1 11.50%
B-2 2.00%
Determination Date: For each month the later of:
o the third business day preceding the distribution date occurring in
that month; and
o the seventh business day of that month.
Excess Proceeds: With respect to any liquidated loan, the excess, if
any, of:
o the total net liquidation proceeds received on that loan, over
o the principal balance of the loan as of the date it became a
liquidated loan plus 30 days interest on the loan.
Interest Carry Forward Amount: For any class of certificates and any
distribution date the sum of (a) the excess, if any, of the current interest and
any Interest Carry Forward Amount for the prior distribution date, over the
amount in respect of interest actually distributed on such class on such
distribution date and (b) interest on such excess at the applicable pass-through
rate (x) with respect to the offered certificates (other than the class A-1 and
class A-2 certificates) on the basis of a 360-day year consisting of twelve
30-day months and (y) with respect to the class A-1 and class A-2 certificates,
S-45
on the basis of the actual number of days elapsed since the prior distribution
date.
Interest Remittance Amount: For any distribution date is that portion
of Available Funds allocable to interest collected or advanced during the
related collection period, less servicing fees and trust administrative fees and
expenses.
A "liquidated loan" is a defaulted loan as to which all amounts that
the servicer reasonably expects to recover on account of the loan have been
received.
Liquidation Proceeds: Cash, including insurance proceeds, proceeds of
any foreclosed property, revenues received with respect to the conservation and
disposition of a foreclosed property, and any other amounts received in
connection with the liquidation of defaulted loans, whether through trustee's
sale, foreclosure sale or otherwise.
A "London banking day" is any business day on which dealings in
deposits in United States dollars are transacted in the London interbank market.
Net Liquidation Proceeds: Liquidation proceeds less:
o any reimbursements to the servicer, and
o amounts required to be released to the related obligor pursuant to
applicable law.
Optional Servicer Termination Date: The first distribution date on
which the aggregate outstanding principal balance of the loans is less than or
equal to 10% of the original principal balance.
Overcollateralization Amount: For any distribution date, the excess,
if any, of:
(1) the aggregate principal balance of the loans as of the last day of
the related collection period, over
(2) the aggregate class principal balances of the certificates, after
taking into account all distributions of principal on that
distribution date.
Overcollateralization Deficiency Amount: For any distribution date,
the excess, if any, of:
(1) the targeted overcollateralization amount for that distribution
date, over
(2) the then current overcollateralization amount after giving effect
to all payments previously made to the certificates on that
distribution date.
Overcollateralization Release Amount: With respect to any distribution
date on or after the Stepdown Date on which a Trigger Event is not in effect,
the lesser of (x) the Principal Remittance Amount for such distribution date and
(y) the excess, if any, of (i) the overcollateralization amount of such
distribution date, assuming that 100% of the Principal Remittance Amount is
S-46
applied as a principal payment on the certificates on such distribution date,
over (ii) the Targeted Overcollateralization Amount for such distribution date.
With respect to any distribution date on which a Trigger Event is in effect or
prior to the Stepdown Date, the overcollateralization release amount will be
zero.
Percentage Interest: With respect to any certificate, the fraction,
expressed as a percentage, the numerator of which is the original denomination
represented by that certificate and the denominator of which is the original
aggregate class principal balance of the respective class of certificates. With
respect to a class of certificates, the fraction, expressed as a percentage, the
numerator of which is the original class principal balance of that class of
certificates and the denominator of which is the original aggregate class
principal balance of all classes of certificates.
Prepayment Period: With respect to any distribution date means the
calendar month preceding the month which such distribution date occurs.
Pool Cap: As to any distribution, the weighted average of the net
mortgage interest rates (for each mortgage loan, the applicable interest rate
less the sum of the servicing fee the certificate administrator fee, trustee fee
and the document custodian collection fee), weighted on the basis of the
mortgage loan balances as of the first day of the related collection period.
Principal Distribution Amount: For each Distribution Date, the sum of
(i) the Principal Remittance Amount minus the Overcollateralization Release
Amount, if any, and (ii) the Accelerated Principal Distribution Amount.
Principal Remittance Amount: For each distribution date, the sum (less
certain amounts available for reimbursement of servicing advances and certain
other reimbursable expenses), without duplication with respect to the mortgage
loans and the immediately preceding collection period, of
(1) each scheduled payment of principal received by the
servicer on or prior to the determination date, including
any advances with respect thereto,
(2) all full and partial principal prepayments received by
the servicer during the related prepayment period,
(3) the principal portion of all insurance proceeds, released
mortgaged property proceeds and net liquidation proceeds
received by the servicer during the related prepayment
period,
(4) that portion of the purchase price for any loan purchased
by the servicer during the related prepayment period or
the depositor which represents principal,
(5) any substitution adjustments, received on or prior to the
previous determination date and not yet distributed, and
S-47
(6) any proceeds representing principal received by or on
behalf of the trustee in connection with the liquidation
or termination of the trust.
Realized Loss: With respect to each liquidated loan, generally, an
amount (not less than zero or greater than the related outstanding principal
balance as of the date of the final liquidation) equal to the outstanding
principal balance of the loan as of the date of such liquidation, minus the net
liquidation proceeds relating to such liquidated loan (such net liquidation
proceeds to be applied first to the principal balance of the liquidated loan and
then to interest thereon).
Senior Enhancement Percentage: For any distribution date is the
percentage obtained by dividing (x) the sum of (i) the aggregate certificate
principal balance of the class M and class B certificates and (ii) the
overcollateralization amount, in each case before taking into account the
distribution of the Principal Distribution Amount on such distribution date by
(y) the aggregate principal balance of the mortgage loans as of the last day of
the related collection period.
Senior Specified Enhancement Percentage: On any date of determination
thereof means approximately 42.00%.
Shortfall Amounts: The sum of all amounts paid to the certificates with
respect to all related:
o Interest Shortfall Carryforward Amounts for the class M-1, class
M-2, class B-1 and class B-2 certificates; and
o Applied Realized Loss Amounts.
Sixty-Day Delinquency Ratio: As of any distribution date and with
respect to the loans, a fraction, expressed as a percentage, the numerator of
which is the aggregate of the outstanding principal balances of all loans that
were delinquent 60 days or more as of the end of the related collection period
(including loans in respect of which the related borrower is in bankruptcy, the
related real estate is in the process of foreclosure or has been foreclosed upon
but is still in inventory), and the denominator of which is the sum of the
principal balances of all the loans as of the end of the related collection
period.
Stepdown Date: Means the later to occur of:
(A) the earlier to occur of (i) the distribution date in
January 2005, and (ii) the distribution date on which
the aggregate certificate principal balance of the
Class A-1, Class A-2 and Class A-3 Certificates is
reduced to zero;
(B) the first distribution date on which the senior
enhancement percentage after taking into account
distributions of principal to the certificates on
such distribution date, is greater than or equal to
the senior specified enhancement percentage; and
(C) the distribution date when the collateral balance is
equal to or less than 50% of the original collateral
balance.
S-48
Targeted Overcollateralization Amount: As of the distribution date, (x)
prior to the Stepdown Date, approximately 1.00% of the initial balance of the
mortgage loans and (y) on and after the Stepdown Date, the greater of (A)
approximately 2.00% of the balance of the mortgage loans as of the last day of
the related collection period and (B) approximately 0.50% of the initial balance
of the mortgage loans.
Trigger Event: On a distribution date if (i) the Sixty-Day Delinquency
Ratio equals or exceeds 35% of the Senior Enhancement Percentage; or (ii) if the
aggregate amount of realized losses incurred since the cut-off date through the
last day of the related collection period divided by the initial pool balance
exceeds the applicable percentages set forth below with respect to such
distribution date.
DISTRIBUTION DATE PERCENTAGE PERCENTAGE
---------------------------- ----------
January 25, 2005 to December 26, 2005 3.25%
January 25, 2006 to December 26, 2006 4.25%
January 25, 2007 to December 26, 2007 5.00%
January 25, 2008 and thereafter 5.25%
Upon the occurrence and during the continuance of a trigger event, the
targeted overcollateralization amount will equal the targeted
overcollateralization amount as of the immediately preceding distribution date
and the targeted overcollateralization amount shall never exceed the then
aggregate principal balance of the mortgage loans.
REALIZED LOSSES
General
To the extent that realized losses are experienced, such losses will
reduce the aggregate outstanding balance of the loans. Since the
overcollateralization amount is the excess, if any, of the aggregate principal
balances of the loans over the aggregate class principal balances of the
certificates, realized losses will in the first instance reduce the
overcollateralization amount.
The pooling and servicing agreement requires that the
overcollateralization amount be initially increased to, and thereafter
maintained at, the targeted overcollateralization amount. This increase and
subsequent maintenance is intended to be accomplished by the application of
excess spread to fund accelerated principal distribution amounts. These
accelerated principal distribution amounts, since they are funded from interest
collections on the loans but are distributed as principal on the certificates,
will increase the related overcollateralization amount.
Application of Excess Spread
The weighted average loan interest rate is expected to be higher than
the weighted average of the pass-through rates on the certificates, plus
transaction costs, thus generating excess interest collections which, in the
absence of losses, will not be necessary to fund interest distributions on the
certificates. This excess interest will be applied to the extent available, to
make accelerated payments of principal to the class or classes then entitled to
S-49
receive distributions of principal. This application will cause the aggregate
class principal balance of the certificates to amortize more rapidly than the
loans, resulting in overcollateralization.
If on any distribution date, after taking into account all realized
losses experienced during the prior interest accrual period and the distribution
of principal, including the accelerated principal distribution amount, with
respect to the certificates on the applicable distribution date, the aggregate
class principal balance of the certificates exceeds the aggregate balance of the
loans as of the end of the related collection period, then the class principal
balance of the certificates will be reduced, (i.e. "written down") so that the
level of the overcollateralization amount is zero, rather than negative. This
negative level is an "applied realized loss amount" which will be applied as a
reduction in the class principal balance of the class B-2, class B-1, class M-2
and class M-1 certificates in reverse order of seniority. The agreement does not
permit the "write down" of the class principal balance of the class A-1, class
A-2 or class A-3 certificates.
Once the class principal balance of a class of certificates has been
"written down," the amount of the write down will no longer bear interest, nor
will this amount thereafter be "reinstated" or "written up," although the amount
of this write down may, on future distribution dates, be paid to holders of the
certificates which experienced the write down, in direct order of seniority.
OVERCOLLATERALIZATION
On the closing date, the aggregate principal balances of the underlying
loans will exceed the aggregate class principal balances of the certificates by
approximately 1.00%. For any distribution date, the excess, if any, of the
aggregate principal balance of the mortgage loans as of the last day of the
immediately preceding collection period over the aggregate principal balance of
the offered certificates represents the overcollateralization amount. Also,
excess spread will be applied to pay principal on the certificates. If losses
are realized on the loans and the other forms of credit enhancement have been
exhausted, the certificates will not be allocated any losses unless the
overcollateralization is eliminated.
SUBORDINATION
Certain classes of certificates are senior in right of payment to
other, subordinated classes. The certificates rank in the following order of
priority, from most senior to most subordinated: class A-1, class A-2 and class
A-3, class M-1, class M-2, class B-1, class B-2, class X and class R. This
subordination will be effected through the priority of payments described above
in "--Flow of Funds."
CREDIT ENHANCEMENT DOES NOT APPLY TO PREPAYMENT AND CERTAIN OTHER RISKS
In general, the protection afforded by the credit enhancement is
protection for credit risk and not for prepayment risk and does not apply to the
supplemental interest.
S-50
REPORTS TO CERTIFICATEHOLDERS
On each distribution date, the certificate administrator will be
required to make available to each certificateholder, which will be Cede & Co.,
as registered holder of each class of offered certificates and the nominee of
DTC, unless and until definitive certificates are issued, a statement prepared
by the certificate administrator, based in part on information provided by the
servicer, which generally will set forth, among other things:
(1) the amount being distributed to the certificates on the
applicable distribution date, in the aggregate and by component
and listed separately for the portions relating to each class of
certificates;
(2) the principal distribution amount for the applicable distribution
date, in the aggregate and listed separately by component;
(3) the class current interest requirements for each class of
certificates for the applicable distribution date;
(4) with respect to the class A-2 certificates, LIBOR for the
applicable distribution date;
(5) the pass-through rate for each class of certificates for the
applicable distribution date and if the pass-through rate was
based on the applicable pool cap, what it would be if based on
the pass-through rate as noted on the front cover of this
prospectus supplement;
(6) the pool cap for the loans for the applicable distribution date;
(7) with respect to the class A-2 certificates, the amount of the
distribution, if any, allocable to supplemental interest and the
amount of any unpaid supplemental interest for all prior
distribution dates after giving effect to this distribution;
(8) the overcollateralization amount and the targeted
overcollateralization amount for the applicable distribution
date;
(9) the amount of any applied realized loss amount, realized loss
amount and unpaid applied realized loss amounts for each class as
of the close of the applicable distribution date;
(10) the class principal balances for each class of certificates after
giving effect to the distributions of principal on each class of
certificates on the applicable distribution date;
(11) the number and aggregate principal balances of loans delinquent
(a) 31 to 59 days,
(b) 60 days to 89 days and
S-51
(c) 90 days or more as of the end of the related collection
period;
(12) the number and aggregate principal balances of all loans in
foreclosure or other similar proceedings and the number and
aggregate principal balance of all loans relating to any REO
properties; and
(13) the number and aggregate principal balances of defaulted loans
repurchased at the option of the servicer.
In the case of information furnished pursuant to clauses (1) through
(3) above, the amounts will be expressed as a dollar amount per certificates
with a $25,000 principal denomination.
The certificate administrator will make the statement to
certificateholders available each month via the certificate administrator's
internet website. The certificate administrator's internet website will
initially be located at "www.firstlinkabs.com". Assistance in using the website
can be obtained by calling the certificate administrator's customer service desk
at (781) 768-0000. Parties that are unable to use the above distribution method
are entitled to have a paper copy mailed to them via first class mail by calling
the customer service desk and indicating such.
Within 90 days after the end of each calendar year, the certificate
administrator, upon request, will be required to make available to each person
who at any time was a holder of certificates during the applicable year, a
statement prepared by the certificate administrator containing the information
set forth in clauses (1) through (3) above aggregated for the applicable
calendar year or, in the case of each person who was a holder of a certificate
for a portion of the applicable calendar year, setting forth the information for
each month of the applicable calendar year, or such other information as is
reasonably requested by a holder of certificates and available to the
certificate administrator, which is required in the preparation of such holder's
tax returns.
All reports prepared by the certificate administrator and forwarded to
the trustee will be based upon statements supplied to the certificate
administrator by the servicer.
BOOK-ENTRY CERTIFICATES
The offered certificates will be book-entry certificates. Persons
acquiring beneficial ownership interests in the offered certificates will hold
their certificates through DTC in the United States, or Clearstream, Luxembourg
or Euroclear (in Europe) if they are participants of these systems, or
indirectly through organizations which are participants in these systems. The
book-entry certificates will be issued in one or more certificates which equal
the aggregate principal balance of the offered certificates and will initially
be registered in the name of Cede & Co., the nominees of DTC. Clearstream,
Luxembourg and Euroclear will hold omnibus positions on behalf of their
participants through customers' securities accounts in Clearstream, Luxembourg's
and Euroclear's name on the books of its respective relevant depositary which in
turn will hold positions in customers' securities accounts in such relevant
depositary's name on the books of DTC. Citibank N.A. will act as depositary for
Clearstream, Luxembourg and JP Morgan Chase will act as depositary for
Euroclear. Investors may hold beneficial interests in the book-entry
S-52
certificates in minimum denominations representing original principal balances
of $25,000 and integral multiples of $1,000 in excess of $25,000. Except as
described below, no person acquiring a book-entry certificate will be entitled
to receive a physical certificate representing the offered certificates. Unless
and until definitive certificates are issued, it is anticipated that the only
"certificateholder" of the offered certificates will be Cede & Co., as nominee
of DTC.
The beneficial owner's ownership of a book-entry certificate will be
recorded on the records of the brokerage firm, bank, thrift institution or other
financial intermediary that maintains the beneficial owner's account for this
purpose. In turn, the financial intermediary's ownership of the book-entry
certificate will be recorded on the records of DTC, or of a participating firm
that acts as agent for the financial intermediary, whose interest will in turn
be recorded on the records of DTC, if the beneficial owner's financial
intermediary is not a DTC participant and on the records of Clearstream,
Luxembourg or Euroclear, as appropriate.
Certificate owners will receive all distributions of principal of, and
interest on, the offered certificates from the certificate administrator through
DTC and DTC participants. While the offered certificates are outstanding, except
under the circumstances described below, under the rules, regulations and
procedures creating and affecting DTC and its operations, DTC is required to
make book-entry transfers among participants on whose behalf it acts with
respect to the offered certificates and is required to receive and transmit
distributions of principal of, and interest on, the offered certificates.
Participants and indirect participants with whom certificate owners have
accounts with respect to certificates are similarly required to make book-entry
transfers and receive and transmit distributions on behalf of their respective
certificate owners. Accordingly, although certificate owners will not possess
certificates, the rules provide a mechanism by which certificate owners will
receive distributions and will be able to transfer their interest.
Certificate owners will not receive or be entitled to receive
certificates representing their respective interests in the offered
certificates, except under the limited circumstances described below. Unless and
until definitive certificates are issued, certificate owners who are not
participants may transfer ownership of certificates only through participants
and indirect participants by instructing the participants and indirect
participants to transfer certificates, by book-entry transfer, through DTC for
the account of the purchasers of the offered certificates, which account is
maintained with their respective participants. Under the rules and in accordance
with DTC's normal procedures, transfers of ownership of 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 certificate 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. These credits or any
transactions in the securities settled during processing will be reported to the
relevant Euroclear or Clearstream, Luxembourg participants on the applicable
business day. Cash received in Clearstream, Luxembourg or Euroclear as a result
of sales of securities by or through a Clearstream, Luxembourg participant or
Euroclear participant to a DTC participant will be received with value on the
DTC settlement date but will be available in the relevant Clearstream,
S-53
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 offered certificates, see "Global Clearance, Settlement and Tax
Documentation Procedures--Certain U.S. Federal Income Tax Documentation
Requirements" in Annex A to this prospectus supplement.
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 DTC rules on behalf of the relevant European
international clearing system by the relevant depositary; however, cross market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in the 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.
Clearstream Banking, societe anonyme, Luxembourg, formerly Cedelbank,
has advised that it is incorporated under the laws of the Grand Duchy of
Luxembourg as a professional depositary. Clearstream, Luxembourg holds
securities for its participating organizations. Clearstream, Luxembourg
facilitates the clearance and settlement of securities transactions between
Clearstream, Luxembourg participants through electronic book-entry changes in
accounts of Clearstream, Luxembourg participants, eliminating the need for
physical movement of certificates. Clearstream, Luxembourg provides to
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
depositary, Clearstream, Luxembourg is subject to regulation by the Luxembourg
Commission for the Supervision of the Financial Sector. Clearstream, Luxembourg
participants are recognized financial institutions around the world, including
the underwriter, 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
S-54
relationship with a Clearstream, Luxembourg participant, either directly or
indirectly.
Distributions, to the extent received by the relevant depositary for
Clearstream, Luxembourg, with respect to the offered certificates held
beneficially through Clearstream, Luxembourg will be credited to cash accounts
of Clearstream, Luxembourg participants in accordance with its rules and
procedures.
Euroclear has advised that it was created in 1968 to hold securities
for its participants and to clear and settle transactions between Euroclear
participants through simultaneous electronic book-entry delivery against
payment, eliminating the need for physical movement of certificates and
eliminating any risk from lack of simultaneous transfers of securities and cash.
Euroclear provides various other services, including securities lending and
borrowing and interfaces with domestic markets in several countries. Euroclear
is operated by Euroclear Bank S.A./NV, 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 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 and may include the underwriter. 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 has advised us that it is licensed by the
Belgian Banking and Finance Commission to carry out banking activities on a
global basis. As a Belgian bank, it is regulated and examined by the Belgian
Banking Commission.
Securities clearance accounts and cash accounts with 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 certificates to
specific securities clearance accounts. The Euroclear operator acts under the
Terms and Conditions only on behalf of Euroclear participants and has no record
of or relationship with persons holding through Euroclear participants.
Distributions, to the extent received by the relevant depositary for
Euroclear, with respect to certificates held beneficially through Euroclear will
be credited to the cash accounts of Euroclear Participants in accordance with
the terms and conditions.
Distributions on the book-entry certificates will be made on each
distribution date by the certificate administrator to DTC. DTC will be
responsible for crediting the amount of these payments to the accounts of the
applicable DTC participants in accordance with DTC's normal procedures. Each DTC
participant will be responsible for disbursing these payments to the beneficial
owners of the book-entry certificates that it represents and to each financial
intermediary for which it acts as agent. Each financial intermediary will be
S-55
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 the
payments will be forwarded by the certificate administrator to Cede.
Distributions 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. These
distributions will be subject to tax reporting in accordance with relevant
United States tax laws and regulations. Because DTC can only act on behalf of
financial intermediaries, the ability of a beneficial owner to pledge book-entry
certificates to persons or entities that do not participate in the Depository
system, or otherwise take actions in respect of book-entry certificates, may be
limited due to the lack of physical certificates for the book-entry
certificates. In addition, issuance of the book-entry certificates in book-entry
form may reduce the liquidity of the offered certificates in the secondary
market since some potential investors may be unwilling to purchase certificates
for which they cannot obtain physical certificates.
Monthly and annual reports on the trust will be provided to Cede & Co.,
as nominee of DTC, and may be made available by Cede & Co. to beneficial owners
upon request, in accordance with the rules, regulations and procedures creating
and affecting the depository, and to the financial intermediaries to whose DTC
accounts the book-entry certificates of the beneficial owners are credited.
DTC has advised the certificate administrator that, unless and until
definitive certificates are issued, DTC will take any action permitted to be
taken by the holders of the book-entry certificates under the pooling and
servicing 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 these actions are taken on behalf of financial intermediaries
whose holdings include the 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 pooling and servicing 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 these actions on its behalf through DTC. DTC
may take actions, at the direction of the related participants, with respect to
some certificates which conflict with actions taken with respect to other
certificates.
Definitive certificates will be issued to beneficial owners of the
book-entry certificates, or their nominees, rather than to DTC, only if:
(1) DTC or the representative advises the certificate administrator
in writing that DTC is no longer willing, qualified or able to
discharge properly its responsibilities as nominee and depository
with respect to the book-entry certificates and the servicer or
the trustee is unable to locate a qualified successor, or
S-56
(2) the representative, at its sole option, with the consent of the
trustee, elects to terminate a book-entry system through DTC.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the certificate administrator will be required to notify
all beneficial owners of the occurrence of the event and the availability
through DTC of definitive certificates. Upon surrender by DTC of the global
certificate or certificates representing the book-entry certificates and
instructions for re-registration, the trustee will issue definitive
certificates, and thereafter the trustee will recognize the holders of the
definitive certificates and certificateholders under the pooling and servicing
agreement.
Although DTC, Clearstream, Luxembourg and Euroclear have agreed to the
foregoing procedures in order to facilitate transfers of certificates among
participants of DTC, Clearstream, Luxembourg and Euroclear, they are under no
obligation to perform or continue to perform these procedures and the procedures
may be discontinued at any time.
None of the originator, the seller, the servicer, the trustee or the
certificate administrator will have any responsibility for any aspect of the
records relating to or payments made on account of beneficial ownership
interests of the book-entry certificates held by Cede & Co., as nominee for DTC,
or for maintaining, supervising or reviewing any records relating to beneficial
ownership interests.
THE POOLING AND SERVICING AGREEMENT
The following summary describes some of the terms of the pooling and
servicing agreement. A form of the pooling and servicing agreement has been
filed as an exhibit to the registration statement of which this prospectus
supplement and the attached prospectus form a part. A copy of the pooling and
servicing agreement will be filed with the Securities and Exchange Commission
following the issuance of the certificates. This summary does not purport to be
complete and is subject to, and qualified in its entirety by reference to, all
the provisions of the pooling and servicing agreement. The following summary
supplements, and to the extent inconsistent with the description of the general
terms replaces, the description of the general terms and provisions of the
pooling and servicing agreement set forth under the heading "The Agreements" in
the prospectus.
ASSIGNMENT OF THE LOANS
Immediately prior to the closing date, First Union National Bank owned
the mortgage loans. First Union National Bank at the time of the issuance of the
certificates, will sell and assign the loans to the transferor, who will in turn
transfer them to the depositor, who will transfer them to the trust. Each loan
will be identified in a schedule delivered to the trustee and First Union
National Bank, as custodian.
With respect to each loan, the originator and First Union National Bank
will deliver to the custodian the mortgages, the mortgage notes and the other
loan documents; although so long as First Union National Bank's long-term
unsecured debt is rated at least "A3" by Moody's and "A-" by S&P and no other
assignment event (as defined in the pooling and servicing agreement) shall have
occurred and be continuing, the custodian shall be entitled to maintain
possession of such trustee's loan file as custodian. In the event that the
S-57
long-term unsecured debt rating of First Union National Bank does not satisfy
the above-described standards or another assignment event has occurred and is
continuing, the custodian shall no longer be the custodian for the loans and
will cause, at its expense, within 30 days after the occurrence of an assignment
event, each of the trustee's loan files in its possession pertaining to the
loans to be delivered to the trustee or the trustee's bailee. In such capacity,
the trustee shall be entitled to a fee, payable from the trust in accordance
with the pooling and servicing agreement.
The custodian will review the loan files in its possession relating to
the loans within the period specified in the pooling and servicing agreement and
notify the trustee of any material defect discovered in the review.
Notwithstanding the foregoing, the custodian shall perform the review required
by the Agreement as to the assignments of mortgages and endorsements of the
related mortgage note within 150 days from the closing date. If any document
required to be included in any trustee's loan file does not bear manual
signatures, has not been received or is unrelated to the applicable loan, and
this defect is not cured as provided in the pooling and servicing agreement
following receipt of notification of the defect by the representative from the
certificate administrator, the representative will be required either to
repurchase or to replace the affected loan in the manner set forth in the
prospectus under the caption "The Agreements--Assignment of Primary Assets."
PAYMENTS ON THE LOANS
The agreement requires the servicer to establish and maintain one or
more principal and interest accounts at one or more designated depository
institutions. A designated depository institution is an entity which is an
institution whose deposits are insured by either the Bank Insurance Fund, or any
successor or the Savings Association Insurance Fund, or any successor
administered by the Federal Deposit Insurance Corporation and any successor, the
unsecured and uncollateralized long-term debt obligations of which shall be
rated "AA-" or better by S&P and "A2" or better by Moody's, and in the highest
short-term rating category by S&P and Moody's, and which is either:
o a federal savings association duly organized, validly existing
and in good standing under the federal banking laws,
o an institution duly organized, validly existing and in good
standing under the applicable banking laws of any state,
o a national banking association duly organized, validly existing
and in good standing under the federal banking laws, or
a principal subsidiary of a bank holding company, in each case acting
or designated by the servicer as the depository institution for the principal
and interest account. The principal and interest account may be held with First
Union National Bank and its affiliates, and First Union National Bank may
commingle the cash with its other funds for specified periods, for so long as:
o the servicer remains an affiliate of First Union National Bank,
S-58
o no event of default under the pooling and servicing agreement
shall have occurred and be continuing, and
o First Union National Bank maintains a short-term rating of at
least "A-1" by S&P and "P-1" by Moody's and for five business
days following any reduction, suspension, termination or
withdrawal of either rating.
All funds in the principal and interest account are required to be
held:
o uninvested, up to the limits insured by the Federal Deposit
Insurance Corporation, or
o invested in permitted instruments, which are specified in the
pooling and servicing agreement and will be limited to
investments that meet the criteria of S&P and Moody's as being
consistent with their respective then-current ratings of the
offered certificates.
Any investment earnings on funds held in the principal and interest
account are for the account of the servicer.
The servicer is required to deposit in the applicable principal and
interest account, within 24 hours of receipt:
o all payments received after the cut-off date on account of
interest on the related loans, net of the servicing fee and other
servicing compensation payable to the servicer as permitted by
the pooling and servicing agreement,
o all payments received after the cut-off date on account of
principal on the related loans,
o any amounts paid in connection with the repurchase of a related
loan and the amount of any adjustment for substituted loans, and
o the amount of any losses incurred in connection with investments
in permitted instruments.
No later than each determination date, the servicer will withdraw from
the applicable principal and interest account and remit to the certificate
administrator for deposit in the applicable certificate account, the available
remittance amount for the related distribution date that is net of compensating
interest and monthly advances and certain amounts reimbursable to the trustee,
the custodian and the certificate administrator under the pooling and servicing
agreement.
Not later than the close of business on each determination date, the
servicer also will remit to the certificate administrator for deposit in the
applicable certificate account any monthly advance and/or compensating interest
payments for the upcoming distribution date.
S-59
The servicer is required to pay all reasonable and customary
"out-of-pocket" costs and expenses incurred in the performance of its servicing
obligations, including, but not limited to, the cost of:
o the preservation, restoration and protection of the mortgaged
property or other collateral,
o any enforcement or judicial proceedings, including foreclosures,
and
o the management and liquidation of mortgaged property acquired in
satisfaction of the related mortgage.
Each expenditure will constitute a "servicing advance." The servicer is
obligated to make the servicing advances incurred in the performance of its
servicing obligations. The servicer may recover servicing advances from future
collections on the loans. The servicer is not required to make servicing
advances on any loan which it determines, in good faith, would be nonrecoverable
from amounts received in respect of the related loan.
MONTHLY ADVANCES
The servicer is required to remit to the certificate administrator no
later than each determination date for deposit in the applicable certificate
account scheduled principal and interest (net of the servicing fee) for any
delinquent mortgage loan that is an actuarial loan. The servicer is not required
to make monthly advances which it determines, in good faith, would be
nonrecoverable from amounts received in respect of the related loan.
Monthly advances are reimbursable in the first instance from late
collections of principal, interest, liquidation proceeds, insurance proceeds and
released mortgaged property proceeds collected with respect to the related loan
as to which the monthly advances were made. The servicer's right to
reimbursement for advances in excess of the related amounts is limited to late
collections of principal and interest received on the loans generally; provided,
however, that the servicer's right to reimbursement is subordinate to the rights
of the certificateholders. Monthly advances are intended to provide sufficient
funds for the payment of the interest to the certificateholders at the then
applicable pass-through rates, plus an additional amount, if any, required to
pay the fees and expenses of the transaction parties. The servicer is also not
required to make advances to compensate for reductions in payments due to
bankruptcy proceedings or the application of the Soldiers' and Sailors' Civil
Relief Act of 1940, as amended. Additionally, the servicer is not required to
make advances on simple interest loans.
COMPENSATING INTEREST
The servicer is required to make payments of compensating interest to
the trust in respect to prepaid mortgage loans. For any distribution date,
compensating interest is an amount equal to the interest at the mortgage
interest rate for such mortgage loan on the amount of such principal prepayment
for the number of days commencing on the date on which the principal prepayment
is applied and ending on the last day of the prior calendar month, subject to a
cap of the servicing fee earned in such month. The servicer will not be required
to make payments of compensating interest in excess of the servicing fee. The
S-60
servicer will not cover a prepayment interest shortfall on any mortgage loan
that is subject to the Soldiers' and Sailors' Civil Relief Act of 1940, as
amended.
CALCULATION OF LIBOR
The certificate administrator will determine LIBOR commencing on the
second LIBOR business day preceding each distribution date, or in the case of
the first interest accrual period, two business days prior to the closing date,
which appears on Telerate Page 3750 as of 11:00 a.m., London time, on such LIBOR
determination date. If the rate does not appear on Telerate Page 3750, the rate
for that day will be determined on the basis of the rates at which deposits in
U.S. dollars, having the one month index maturity and in a principal amount of
not less than U.S. $1,000,000, are offered at approximately 11:00 a.m., London
time, on the LIBOR determination date to prime banks in the London interbank
market by the reference banks. The certificate administrator will request the
principal London office of each reference bank to provide a quotation of its
rate. If at least two quotations are provided, the rate for that day will be the
arithmetic mean of the quotations. If fewer than two quotations are provided,
the rate for that day will be the arithmetic mean of the rates quoted by major
banks in New York City, selected by the certificate administrator, at
approximately 11:00 a.m., New York City time, on the LIBOR determination date
for loans in U.S. dollars to leading European banks having the one-month index
maturity and in a principal amount equal to an amount of not less than U.S.
$1,000,000; provided that if the banks selected as aforesaid are not quoting as
mentioned in this sentence, LIBOR in effect for the applicable interest accrual
period will be LIBOR in effect for the previous interest accrual period.
The establishment of LIBOR on each LIBOR determination date by the
certificate administrator and the certificate administrator's calculation of the
rate of interest applicable to the certificates for the related distribution
date shall, in the absence of manifest error, be final and binding. Each rate of
interest may be obtained by telephoning the certificate administrator at (704)
383-9568.
A LIBOR business day is a day which is both a business day and a day on
which dealings in dollar-denominated deposits are transacted in the London
interbank market.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The servicer is entitled to a servicing fee of 0.50% per annum of the
unpaid principal balance of each loan which is secured by a first lien, and
0.75% per annum of the unpaid principal balance of each loan which is secured by
a junior lien, (the weighted average servicing fee is approximately 0.548% per
annum of the unpaid principal balance of the loans as of the cut-off date)
calculated and paid monthly from the interest portion of monthly payments,
liquidation proceeds and other proceeds collected. See "The
Agreements--Servicing and Other Compensation and Payment of Expenses" in the
Prospectus.
S-61
REMOVAL AND RESIGNATION OF SERVICER
The holders of a majority in interest of the aggregate class principal
balance of the certificates, by notice in writing to the servicer, may, pursuant
to the pooling and servicing agreement, remove the servicer upon the occurrence
of any of the following events of default.
(1) (A) the failure by the servicer to make any required
servicing advance, to the extent this failure
materially or adversely affects the interests of the
certificateholders;
(B) the failure by the servicer to make any required
monthly advance;
(C) the failure by the servicer to remit any compensating
interest;
(D) any failure by the servicer to remit to
certificateholders, or to the certificate
administrator for the benefit of the
certificateholders, any payment required to be made
under the terms of the pooling and servicing
agreement which continues unremedied, in the case of
the events described in clauses (1)(A) and (1)(C) for
30 days, after the date upon which written notice of
the failure, requiring the same to be remedied, shall
have been given to the servicer by the trustee or to
the servicer and the trustee by any
certificateholder; or
(2) failure by the servicer or the representative duly to observe
or perform, in any material respect, any other covenants,
obligations or agreements of the servicer or the
representative, as set forth in the pooling and servicing
agreement, which failure continues unremedied for a period of
60 days after the date on which written notice of the failure,
requiring the same to be remedied, shall have been given to
the servicer or the representative, as the case may be, by the
trustee or to the servicer or the representative, as the case
may be, and the trustee by any certificateholder; or
(3) a decree or order of a court or agency or supervisory
authority having jurisdiction for the appointment of a
conservator or receiver or liquidator in any insolvency,
readjustment of debt, marshaling of assets and liabilities or
similar proceedings, or for the winding-up or liquidation of
its affairs, shall have been entered against the servicer and
the decree or order shall have remained in force, undischarged
or unstayed for a period of 60 days; or
(4) the servicer shall consent to the appointment of a conservator
or receiver or liquidator in any insolvency, readjustment of
debt, marshaling of assets and liabilities or similar
proceedings of or relating to the servicer or of or relating
to all or substantially all of the servicer's property; or
(5) the servicer shall admit in writing its inability to pay its
debts as they become due, file a petition to take advantage of
any applicable insolvency or reorganization statute, make an
assignment for the benefit of its creditors, or voluntarily
suspend payment of its obligations.
S-62
The servicer may not assign the pooling and servicing agreement nor
resign from the obligations and duties imposed by the pooling and servicing
agreement on it except by mutual consent of the servicer, the trustee and the
majority certificateholders, or upon the determination that the servicer's
duties under the pooling and servicing agreement are no longer permissible under
applicable law or administrative determination and the incapacity cannot be
cured by the servicer. No resignation shall become effective until a successor
has assumed the servicer's responsibilities and obligations in accordance with
the pooling and servicing agreement.
Upon removal or resignation of the servicer and otherwise in accordance
with the pooling and servicing agreement, the certificate administrator will be
the successor servicer. If, however, the certificate administrator is unable or
unwilling to act as successor servicer, the certificate administrator may
appoint, or petition a court of competent jurisdiction to appoint, any
established mortgage loan servicing institution acceptable to S&P and Moody's
having a net worth of not less than $15,000,000 as the successor servicer in the
assumption of all or any part of the responsibilities, duties or liabilities of
the servicer.
Additionally, at any time prior to the occurrence of an event of
default, the initial holder of the class X certificates may require the servicer
to appoint a sub-servicer for one or more specific loans, or replace HomEq
Servicing Corporation as servicer with an entity named by such certificateholder
that is satisfactory to S&P and Moody's and has been designated at least a
select servicer by S&P. Any successor servicer will be required to assume all of
the rights and obligations of the servicer under the pooling and servicing
agreement and will be entitled to receive the servicing fee and other servicing
compensation as permitted by the pooling and servicing agreement. In the event
of a transfer of more than 50% of the class X certificates by the initial holder
to subsequent class X certificateholders, or the upon occurrence of an event of
default, the holder of the class X certificates will no longer have this right
and any replacement servicer will be appointed as described above.
TERMINATION; PURCHASE OF LOANS
The trust will terminate upon distribution to the certificateholders of
amounts due them following the earlier to occur of
o the final payment or other liquidation of the last loan remaining
in the trust or the disposition of all REO property,
o the optional purchase of the assets of the trust by the servicer,
as described below or
o the occurrence of a "qualified liquidation" of the trust, as
permitted by the REMIC provisions of the code as described below;
provided, however, that in no event will the trust terminate later
than twenty-one years after the death of the last survivor of the
person named in the pooling and servicing agreement.
Subject to provisions in the pooling and servicing agreement concerning
adopting a plan of complete liquidation, on any date on which the aggregate
principal balances of the loans are less than or equal to 10% of the original
principal balance the servicer may, at its option, purchase, on any succeeding
S-63
distribution date, all of the loans and any related REO Properties at a price
equal to the termination price relating to the trust.
Following a final determination by the Internal Revenue Service or by a
court of competent jurisdiction, in either case from which no appeal is taken
within the permitted time for such appeal, or if any appeal is taken, following
a final determination of such appeal from which no further appeal can be taken,
to the effect that the REMIC does not and will no longer qualify as a REMIC
pursuant to Section 860D of the Code, at any time on or after the date which is
30 calendar days following such final determination the majority
certificateholders may direct the trustee on behalf of the trust to adopt a
"plan of complete liquidation" (within the meaning of Section 860F(a)(4)(B)(i)
of the Code) with respect to the related REMIC. Upon receipt of such direction
by the applicable majority certificateholders (as defined in the pooling and
servicing agreement) the certificate administrator will notify the holders of
the class R certificates of such election to liquidate. The holders of a
majority of the percentage interest of the class R certificates then outstanding
may, within 60 days from the date of receipt of the termination notice, at their
option, purchase from the trust all the loans and all property theretofore
acquired by foreclosure, deed in lieu of foreclosure, or otherwise in respect of
any loan then remaining in the REMIC at a purchase price equal to the
termination price of the trust.
If, during a purchase option period, the holders of the class R
certificates have not exercised the option described in the immediately
preceding paragraph, then upon the expiration of the purchase option period in
the event that the majority certificateholders have given the trustee the
direction described above, the trustee is required to sell the applicable loans
and such other property in the related REMIC and distribute the proceeds of the
liquidation of such REMIC, each in accordance with the plan of complete
liquidation, such that, if so directed, the liquidation of such REMIC and the
distribution of the proceeds of the liquidation occur no later than the close of
the 60th day, or such later day as the majority certificateholders shall permit
or direct in writing, after the expiration of the purchase option period.
Following a final determination, the holders of a majority of the
percentage interest of the class R certificates then outstanding may, at their
option and upon delivery to the trustee and certificate administrator of an
opinion of nationally recognized tax counsel selected by the holders of such
class R certificates, which opinion shall be reasonably satisfactory in form and
substance to the majority certificateholders, that the effect of the final
determination is to increase substantially the probability that the gross income
of the related REMIC will be subject to federal taxation, purchase from the
trust all loans and all property theretofore acquired by foreclosure, deed in
lieu of foreclosure, or otherwise in respect of any loan then remaining in the
related REMIC at a purchase price equal to the termination price of the trust.
The foregoing opinion shall be deemed satisfactory unless the majority
certificateholders give the holders of a majority of percentage interests in the
class R certificates notice that such opinion is not satisfactory within thirty
days after receipt of such opinion.
If the trust were to lose its qualification as a REMIC, it might be
taxable as a grantor trust, a partnership, or an association taxable as a
corporation. If the trust is treated as a grantor trust or a partnership, such
trust would not be subject to a separate entity level tax, and it is not
expected that the tax treatment of the investors would be materially different
from the tax treatment if the REMIC election of such trust had not been revoked.
However, if the trust were
S-64
treated as an association taxable as a corporation it would be subject to
Federal income taxes at corporate rates on its net income. Moreover,
distributions on the certificates would probably not be deductible in computing
such trust's taxable income, and all or part of the distributions to the holders
of such certificates would probably be treated as dividend income to the
holders. Such an entity level tax could result in reduced distributions to the
holders of the certificates and such certificateholders could also be liable for
a share of such a tax. Any such corporate level tax would be borne first by the
holders of the class R certificates from amounts otherwise distributable to such
holders. Any remaining corporate level tax would be borne by holders of all
classes of certificates pro rata in proportion to the outstanding principal
balances of such classes.
THE TRUSTEE
Citibank, N.A. will be the trustee under the pooling and servicing
agreement. The trustee is a national banking corporation. The trustee will have
the duties, responsibilities and requirements as set forth in the pooling and
servicing agreement. The trustee and any of its affiliates may hold certificates
in its own name or as pledgees. For the purpose of meeting the legal
requirements of some jurisdictions, the servicer and the trustee acting jointly,
or in some instances, the trustee acting alone, will have the power to appoint
co-trustees or separate trustees of all or any part of the trust. In the event
of an appointment, all rights, powers, duties and obligations conferred or
imposed upon the trustee by the pooling and servicing agreement will be
conferred or imposed upon the trustee and the separate trustee or co-trustee,
jointly, or, in any jurisdiction in which the trustee will be incompetent or
unqualified to perform particular acts, singly upon the separate trustee or
co-trustee, which will exercise and perform these rights, powers, duties and
obligations solely at the direction of the trustee, as applicable.
The trustee's corporate trust office is located, for certificate
transfer purposes, at 111 Wall St., New York, New York 10005, Attn: Corporate
Trust Services - RAFC Asset-Backed Trust 2001-1. Offered certificates may be
surrendered at the corporate trustee office or at any other address as the
trustee may designate from time to time. The originator, the seller, the
depositor, the servicer, the certificate administrator, and their respective
affiliates may have other banking relationships with the trustee and its
affiliates in the ordinary course of their business.
The trustee may resign at any time, in which event the certificate
administrator will be obligated to appoint a successor to the trustee. The
certificate administrator may also remove the trustee if it ceases to be
eligible to continue in that capacity under the pooling and servicing agreement,
becomes legally unable to act or becomes insolvent. In these circumstances, the
certificate administrator will be obligated to appoint a successor trustee. Any
resignation or removal of the trustee and appointment of a successor to the
trustee will not become effective until acceptance of the appointment by the
successor.
THE CERTIFICATE ADMINISTRATOR
First Union National Bank, a national banking association headquartered
in Charlotte, North Carolina, will perform some of the administrative functions
S-65
on behalf of the trust, as set forth in the pooling and servicing agreement. The
certificate administrator will be paid a fee for its services as set forth in
the pooling and servicing agreement.
THE CUSTODIAN
First Union National Bank will be the custodian of the loans. In this
capacity, it will retain the files relating to the loans and will hold the files
in a segregated area maintained initially at the representative's offices
located in Sacramento, California. The custodian will be paid a fee for its
services as set forth in the pooling and servicing agreement. See "Risk
Factors--Our Parent's Insolvency May Result In Others Owning the Trust's Assets"
in this prospectus supplement.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion of certain material federal income tax
consequences of the purchase, ownership and disposition of the certificates is
to be considered only in connection with "Material Federal Income Tax
Consequences" in the accompanying prospectus. The discussion in this prospectus
supplement and in the accompanying prospectus is based upon laws, regulations,
rulings and decisions now in effect, all of which are subject to change. The
discussion below and in the accompanying prospectus does not purport to deal
with all federal tax consequences applicable to all categories of investors,
some of which may be subject to special rules. 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
certificates.
One or more elections will be made to treat certain assets of the trust
as one or more REMICs for federal income tax purposes. Dewey Ballantine LLP, as
special tax counsel, will deliver its opinion that, assuming compliance with the
Pooling and Servicing Agreement, the trust will be treated as one or more REMICs
for federal income tax purposes. Except as discussed below under "The Class A-2
Certificates," each of the offered certificates will be designated as a "regular
interest" in a REMIC. Each of the class R interests will be designated as the
sole "residual interest" in a REMIC. The class R certificate is a "REMIC
Residual Certificate" for purposes of the Prospectus.
Except as discussed below under "The Class A-2 Certificates," the
offered certificates possess certain special tax attributes by virtue of the
REMIC provisions of the Code. See "Material Federal Income Tax
Consequences--REMIC Securities" in the Prospectus.
The offered certificates will be treated as debt instruments for
federal income tax purposes. Beneficial owners of the certificates will be
required to report income on such certificates in accordance with the accrual
method of accounting. It is not anticipated that the certificates will be issued
with original issue discount. See "Material Federal Income Tax Consequences --
Discount and Premium -- Original Issue Discount" in the Prospectus. The
prepayment assumption for calculating original issue discount is 28% CPR. See
"Prepayment and Yield Considerations" herein.
The Class A-2 Certificates
S-66
Holders of the class A-2 certificates will be treated for federal
income tax purposes as owning two separate investments: (i) a REMIC regular
interest, and (ii) the right to receive supplemental interest payments.
Holders of the class A-2 certificates must allocate the purchase price of
their certificates between these two investments based on their relative fair
market values.
For purposes of calculating accruals of original issue discount, if
any, with respect to the class A-2 certificates, the purchase price allocated
to the REMIC regular interest portion of the holder's investment will be the
issue price of the class A-2 certificate.
If, on any distribution date, the pass-through rate for the class A-2
certificates has been reduced by operation of the fixed cap, holders of class
A-2 certificates will be entitled to receive a supplemental interest payment, to
be paid from the cap agreement that is held by the trust. Each supplemental
interest payment will be an amount equal to the excess of the class A-2
certificate current interest calculated at the pass-through rate without regard
to the pool cap, over the amount actually paid to the holders of class A-2
certificates in respect of current interest on such distribution date.
The proper federal income tax treatment of the right to receive
supplemental interest payments is not clear, and special tax counsel cannot make
a reliable estimation of the degree of certainty of treatment among several
possible treatments and unknown other treatments the Internal Revenue Service
may apply. Special tax counsel believes that a likely treatment of the right to
receive supplemental interest payments is as a notional principal contract. The
Trust intends to treat the right to receive supplemental interest payments as a
notional principal contract for federal income tax purposes. Treasury
Regulations under section 446 of the Code relating to notional principal
contracts provide that taxpayers, regardless of their method of accounting,
generally must recognize the ratable daily portion of a periodic payment for the
taxable year to which that portion relates. Assuming treatment as a notional
principal contract, supplemental interest payments will be periodic payments.
Income with respect to periodic payments under a notional principal contract for
a taxable year should constitute ordinary income. The purchase price allocated
to the right to receive the supplemental interest payments will be treated as a
non-periodic payment under these regulations. This non-periodic payment may be
amortized using several methods, including the level payment method described in
these regulations.
Alternative federal income tax characterization of the right to receive
supplemental interest payments is possible, including treatment as indebtedness
or as an interest in a partnership. Foreign holders of the class A-2
certificates may be subject to withholding in respect of supplemental interest
payments in the event that such payments are treated as indebtedness or as an
interest in a partnership. The amount, timing, and character of the income and
deductions for an owner of the right to receive supplemental interest payments
would differ if the right to receive Supplemental Interest were held to
constitute indebtedness or an interest in a partnership, but for most investors
in most circumstances, those differences would not be material. Because the
Trust will treat the right to receive supplemental interest payments as a
notional principal contract, the Trustee will not attempt to satisfy the tax
reporting requirements that would apply under these alternative
characterizations of the right to receive supplemental interest payments.
Investors that are foreign persons should consult their own tax advisors in
S-67
determining the federal, state, local and other tax consequences to them of the
purchase, ownership and disposition of the class A-2 certificates.
STATE TAX CONSIDERATIONS
Potential certificateholders should consider the state and local income
tax consequences of the purchase, ownership and disposition of the certificates.
State and local income tax laws may differ substantially from the corresponding
federal laws and this discussion does not purport to describe any aspect to the
income tax laws of any state or locality. Therefore, potential
certificateholders should consult their own tax advisors with respect to the
various state and local tax consequences of an investment in the certificates.
ERISA CONSIDERATIONS
The Employment Retirement Income Security Act of 1974, as amended,
imposes certain requirements on employee benefit plans and collective investment
funds and separate accounts in which such plans or arrangements are invested to
which it applies and on those persons who are fiduciaries with respect to such
benefit plans. Certain employee benefit plans, such as governmental plans (as
defined in Section 3(32) of ERISA) and certain church plans (as defined in
Section 3(33) of ERISA), are not subject to ERISA. In accordance with ERISA's
general fiduciary standards, before investing in an offered certificate a
benefit plan fiduciary should determine whether such an investment is permitted
under the governing benefit plan instruments and is appropriate for the benefit
plan in view of its overall investment policy and the composition and
diversification of its portfolio.
In addition, benefit plans subject to ERISA, individual retirement
accounts and certain types of Keogh plans not subject to ERISA but subject to
Section 4975 of the Code and entities in which such plans or accounts are
invested are prohibited from engaging in a broad range of transactions involving
Plan assets and persons having certain specified relationships to a Plan
("parties in interest" and "disqualified persons"). Such transactions are
treated as "prohibited transactions" under Sections 406 and 407 of ERISA and
excise taxes are imposed upon such persons by Section 4975 of the code. The
originator, the certificate administrator, the underwriters, the trustee, the
custodian, and the servicer and certain of their affiliates might be considered
"parties in interest" or "disqualified persons" with respect to a plan. If so,
the acquisition, or holding or transfer of offered certificates by or on behalf
of such plan could be considered to give rise to a "prohibited transaction"
within the meaning of ERISA and the code unless an exemption is available.
Furthermore, if an investing plan's assets were deemed to include an interest in
the loans and any other assets of the trust and not merely an interest in the
related offered certificates, transactions occurring in the servicing of the
loans might constitute prohibited transactions unless an administrative
exemption applies. One exemption which may be applicable to the acquisition and
holding of the offered certificates or to the servicing of the loans is noted
below.
The Department of Labor has issued a regulation (29 C.F.R. Section
2510.3-101) concerning the definition of what constitutes the assets of a plan,
which provides that, as a general rule, the underlying assets and properties of
corporations, partnerships, trusts and certain other entities in which a plan
makes an "equity" investment will be deemed for purposes of ERISA to be assets
S-68
of the investing plan unless certain exceptions apply. Thus, a plan fiduciary
considering an investment in offered certificates should also consider whether
such an investment might constitute or give rise to a prohibited transaction
under ERISA or the code.
The DOL has granted administrative exemptions to a number of
underwriters and their affiliates, including Wachovia Corporation, the ultimate
parent of First Union Securities, Inc. (Prohibited Transaction Exemption 96-22,
as amended by PTE 97-34 and as recently further amended by PTE 2000-58), from
certain of the prohibited transaction rules of ERISA with respect to the initial
purchase, the holding and the subsequent resale in the secondary market by plans
of pass-through certificates representing a beneficial undivided ownership
interest in the assets of a trust that consist of certain receivables, loans and
other obligations such as the loans, that meet the conditions and requirements
of the exemption, which may be applicable to the offered certificates if
Wachovia Corporation or any of its affiliates (including First Union Securities,
Inc.) is either the sole underwriter or the manager or co-manager of the
underwriting syndicate, or a selling or placement agent. The conditions which
must be satisfied for the exemption to apply to the purchase, holding and
transfer of the offered certificates which are backed by fully-secured loans are
the following:
(1) The acquisition of the offered certificates by a plan is on
terms (including the price for the offered certificates) that
are at least as favorable to the plan as they would be in an
arm's length transaction with an unrelated party.
(2) The offered certificates acquired by the plan have received a
rating at the time of such acquisition that is in one of the
four highest generic rating categories from any of Moody's or
S&P and the investment pool consists only of assets of the
type enumerated in the exemption, and which have been included
in other investment pools; certificates evidencing interests
in such other investment pools have been rated in one of the
four highest generic rating categories by an authorized rating
agency for at least one year prior to a plan's acquisition of
certificates; and certificates evidencing interests in such
other investment pools have been purchased by investors other
than plans for at least one year prior to a plan's acquisition
of the offered certificates.
(3) The sum of all payments made to the underwriters in connection
with the distribution of the offered certificates represents
not more than reasonable compensation for distributing the
offered certificates. The sum of all payments made to and
retained by the originator and the seller pursuant to the sale
of the loans to the trust represents not more than the fair
market value of such loans. The sum of all payments made to
and retained by the servicer or any other servicer represents
not more than reasonable compensation for such services under
the pooling and servicing agreement and reimbursement of the
servicer's reasonable expenses in connection therewith.
(4) The trustee must not be an affiliate of any member of the
restricted group as defined below.
S-69
In addition, it is a condition that the plan investing in the
underwritten certificates is an "accredited investor" as defined in Rule
501(a)(1) of Regulation D under the Securities Act. Any plan investor purchasing
underwritten certificates will be deemed to have represented, by virtue of such
purchase, that it is an accredited investor.
No exemption is provided from the restrictions of ERISA for the
acquisition or holding of an offered certificate on behalf of an "excluded plan"
by any person who is a fiduciary with respect to the assets of such excluded
plan. For purposes of the exemption, an excluded plan is a plan sponsored by any
member of the restricted group, which consists of the depositor, the
underwriters, the trustee, the servicer, any other servicers, any obligor with
respect to loans included in the trust constituting more than 5% of the
aggregate unamortized principal balance of the assets in such trust and any
affiliate of such parties. In addition, the exemption provides relief from
certain self-dealing/conflict of interest prohibited transactions that may occur
when a plan fiduciary causes a plan to acquire underwritten certificates and the
fiduciary (or its affiliate) is an obligor on any loan held in the trust
provided that, among other requirements:
(1) such fiduciary (or its affiliate) is an obligor with respect to 5%
or less of the fair market value of the loans contained in the
trust;
(2) the Plan's investment in the offered certificates does not exceed
25% of all of the underwritten certificates of such class
outstanding at the time of the plan's acquisition and after the
plan's acquisition of such underwritten certificates, no more than
25% of the assets over which the fiduciary has investment authority
are invested in securities of a trust containing assets which are
sold or serviced by the same entity and
(3) in the case of initial issuance (but not secondary market
transactions), at least 50% of each class of certificates, and at
least 50% of the aggregate interests in the trust, are acquired by
persons independent of the restricted group.
It is expected that the exemption should apply to the acquisition and
holding of the offered certificates by plans and that the conditions of the
exemption other than those within the control of the investors should be met.
However, as the rating requirement applies at the time of acquisition of an
underwritten certificate by a plan at both initial offering and in secondary
market transactions, a plan investor purchasing a class B-1 certificate must
satisfy itself that the rating of such certificates at the date of acquisition
is at least "BBB-".
Any plan that acquires a class A-2 certificate will have acquired, for
purposes of ERISA, two separate investments: (i) the class A-2 certificate
exclusive of any interest in the interest rate cap agreements and related
supplement interest payments, and (ii) a separate interest relating solely to
the interest rate cap agreements and related supplemental interest payments (the
"cap agreement interest"). The exemption does not apply to the acquisition,
holding or resale of the cap agreement interest. Accordingly, the acquisition of
the cap agreement interest could result in a prohibited transaction unless
another administrative exemption to ERISA's prohibited transaction rules is
applicable. One or more alternative exemptions may be available with respect to
certain prohibited transaction rules of ERISA that might apply in connection
with the initial purchase, holding and resale of the cap agreement interest,
including, but not limited to: (i) Prohibited Transaction Class Exemption
S-70
("PTCE") 91-38, regarding investments by bank collective investment funds; (ii)
PTCE 90-1, regarding investments by insurance company pooled separate accounts;
(iii) PTCE 84-14, regarding transactions negotiated by qualified professional
asset managers; (iv) PTCE 96-23, regarding transactions negotiated by in-house
asset managers or (v) PTCE 75-1, Part II, regarding principal transactions by
broker-dealers. It is believed that the conditions of the PTCE 75-1, Part II
will be met with respect to the acquisition of the cap agreement interest by a
plan, so long as the underwriter is not a fiduciary with respect to the plan
(and is not a party in interest with respect to the plan by reason of being a
participating employer or affiliate thereof). Before purchasing class A-2
certificates based on an administrative exemption (or exemptions), a fiduciary
of a plan should determine whether the conditions of such exemption (or
exemptions) would be met and whether the scope of the relief provided by such
exemption (or exemptions) would cover all acts that might be construed as
prohibited transactions.
Before purchasing an offered certificate in reliance on the exemption,
a fiduciary of a plan should confirm that all applicable requirements would be
satisfied. Any plan fiduciary considering the purchase of an offered certificate
should consult with its counsel with respect to the potential applicability of
ERISA and the code to such investment. Moreover, each plan fiduciary should
determine whether, under the general fiduciary standards of investment prudence
and diversification, an investment in the underwritten 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. Special caution
ought to be exercised before a plan purchases an offered certificate in such
circumstances. See "ERISA Considerations" in the prospectus.
LEGAL INVESTMENT
There may be restrictions on the ability of particular investors,
including depository institutions, either to purchase the offered certificates
or to purchase offered certificates representing more than a specified
percentage of the investor's assets. In addition, the offered certificates will
not be mortgage related securities for purposes of the Secondary Mortgage Market
Enhancement Act of 1984. Investors should consult their own legal advisors in
determining whether and to what extent the offered certificates constitute legal
investments for the investors.
UNDERWRITING
Subject to the terms and conditions set forth in the underwriting
agreement for the sale of the underwritten certificates, dated December 19,
2001, the depositor, on behalf of the originator, has agreed to sell and the
underwriters have agreed to purchase the principal amount of each class of
underwritten certificates set forth below its name.
FIRST UNION LOOP CAPITAL UTENDAHL CAPITAL
SECURITIES, INC. MARKETS LLP PARTNERS, L.P. TOTAL
--------- ---------------- ------------- ---------------- ------------
Class A-1 $53,351,000 -- -- $53,351,000
Class A-2 77,000,000 4,000,000 4,000,000 85,000,000
Class B-1 35,567,000 -- -- 35,567,000
Total $165,918,000 $4,000,000 $4,000,000 $173,918,000
========== ========== ============
S-71
The depositor has been advised by the underwriters that they propose
initially to offer the underwritten certificates to the public from time to time
in negotiated transactions or otherwise, at varying prices to be determined at
the time of sale. This prospectus supplement and the prospectus may be used by
them in connection with offers and sales related to market-making transactions.
They may act as principal or agent in the transactions.
First Union Securities, Inc. is an indirect, wholly-owned subsidiary of
Wachovia Corporation. Wachovia Corporation conducts its investment banking,
institutional, and capital markets businesses through its various bank,
broker-dealer and nonbank subsidiaries under the trade name of Wachovia
Securities. Any references to Wachovia Securities, however, do not include
Wachovia Securities, Inc., member NASD/SIPC, a separate broker-dealer subsidiary
of Wachovia Corporation and sister affiliate of First Union Securities, Inc.
The depositor has agreed to indemnify the underwriters against specific
liabilities, including liabilities under the Securities Act of 1933, as amended.
The underwriters may provide investment banking and other services for
the depositor for which it will receive additional compensation.
The class A-3, class M-1, and class M-2 certificates will be
transferred to First Union National Bank on the closing date. Wachovia
Securities has agreed to solicit offers for the purchase of these securities on
a best efforts basis at prices to be determined at the time of sale.
The depositor, the originator, and First Union National Bank are
affiliates of Wachovia Securities. Wachovia Securities or agents and their
associates may be customers of, including borrowers from, engage in transactions
with, and/or perform services for the depositor, its affiliates and the trustee
in the ordinary course of business.
S-72
RATINGS
It is a condition to their issuance that the offered certificates be
rated by Standard and Poor's Rating Service, a division of The McGraw-Hill
Companies, Inc. ("S&P") and Moody's Investors Service, Inc. ("Moody's") as
follows:
CLASS S&P Moody's
- ----- --- -------
Class A-1................................. A-1+ P-1
Class A-2.................................. AAA Aaa
Class A-3.................................. AAA Aaa
Class M-1.................................. AA Aa2
Class M-2.................................. A A2
Class B-1.................................. BBB Baa2
A security rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time. No person
is obligated to maintain the rating on any class of the offered certificates. In
general, the ratings of the offered certificates address credit risk and do not
address the likelihood or the rate of principal prepayments. The ratings of the
offered certificates by S&P and Moody's do not reflect the likelihood of payment
of any supplemental interest.
LEGAL MATTERS
Some of the legal matters relating to the originator and the seller
will be passed upon by Bruce Hurwitz, Esq., counsel to the originator and the
seller. Some legal matters relating to the validity of the issuance of the
certificates will be passed upon for the underwriters by Dewey Ballantine LLP,
New York, New York. Dewey Ballantine LLP also will render opinions relating to
the material federal income tax consequences associated with the purchase,
ownership and disposition of the certificates.
S-73
ANNEX A
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION
PROCEDURES
Except in certain limited circumstances, the globally offered
certificates will be available only in book-entry form. Investors in the global
securities may hold such global securities through any of The Depository Trust
Company, Clearstream, Luxembourg or Euroclear. The global securities will be
tradable as home market instruments in both the European and U.S. domestic
markets. Initial settlement and all secondary trades will settle in same-day
funds.
Secondary market trading between investors holding global securities
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 Eurobond practice (i.e., seven calendar day
settlement).
Secondary market trading between investors holding global securities
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations and prior asset-backed securities 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 European depositaries of
Clearstream, Luxembourg and Euroclear (in such capacity) and as DTC
participants.
Non-U.S. holders (as described below) of global securities will be
subject to U.S. withholding taxes unless such holders meet certain requirements
and deliver appropriate U.S. tax documents to the securities clearing
organizations or their participants.
INITIAL SETTLEMENT
All global securities will be held in book-entry form by DTC in the
name of Cede & Co. as nominee of DTC. Investors' interests in the global
securities will be represented through financial institutions acting on their
behalf as direct and indirect participants in DTC. As a result, Clearstream,
Luxembourg and Euroclear will hold positions on behalf of their participants
through their respective European depositaries, which in turn will hold such
positions in accounts as DTC participants.
Investors electing to hold their global securities through DTC will
follow DTC settlement practice. Investor securities custody accounts will be
credited with their holdings against payment in same-day funds on the settlement
date.
Investors electing to hold their global securities through Clearstream,
Luxembourg or Euroclear accounts will follow the settlement procedures
applicable to conventional Eurobonds, except that there will be no temporary
global security and no "lock-up" or restricted period. global securities will be
credited to the securities custody accounts on the settlement date against
payment in same-day funds.
S-74
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
asset-backed Securities 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 eurobonds in same-day funds.
Trading Between DTC Seller And Clearstream, Luxembourg Or Euroclear
Participants. When Global Securities 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,
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 European
depositary, as the case may be, to receive the global securities against
payment. Payment will include interest accrued on the global securities from and
including the last coupon payment date to and excluding the settlement date, on
the basis of the actual number of days in that accrual period and a year assumed
to consist of 360 days. For transactions settling on the 31st of the month,
payment will include interest accrued to and excluding the first day of the
following month. Payment will then be made by the respective depositary of the
DTC participant's account against delivery of the global securities. After
settlement has been completed, the global securities will be credited to the
respective clearing system and by the clearing system, in accordance with its
usual procedures, to the Clearstream, 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
securities will accrue from, the value date (which would be the preceding day
when settlement occurred in New York.) If settlement is not completed on the
intended value date (i.e., the trade fails), the Clearstream, Luxembourg, or
Euroclear cash debt will be valued instead as of the actual settlement date.
Clearstream, Luxembourg 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 securities are credited
to their accounts one day later.
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
S-75
participants or Euroclear participants purchasing global securities would incur
overdraft charges for one day, assuming they cleared the overdraft when the
global securities were credited to their accounts. However, interest on the
global securities would accrue from the value date. Therefore, in many cases the
investment income on the global securities earned during that one-day period may
substantially reduce or offset the amount of such overdraft charges, although
this result will depend on each Clearstream, 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 securities
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 securities are to be transferred by the
respective clearing system, through the respective depositary, to a DTC
participant. The seller will send instructions to Clearstream, 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 depositary, as appropriate,
to deliver the global securities to the DTC participant's account against
payment. Payment will include interest accrued on the Global Securities from and
including the last coupon payment date to and excluding the settlement date, on
the basis of the actual number of days in that accrual period and a year assumed
to consist of 360 days. For transactions settling on the 31st of the month,
payment will include interest accrued to and excluding the first day of the
following month. The payment will then be reflected in the account of the
Clearstream, Luxembourg participant or Euroclear participant the following day,
and receipt of the cash proceeds in the Clearstream, Luxembourg participant's or
Euroclear participant's account would be back-valued to the value date (which
would be the preceding day, when settlement occurred in New York). 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 securities from DTC participants for delivery to
Clearstream, Luxembourg participants or Euroclear participants should note that
these trades would automatically fail on the sale side unless affirmative action
were taken. At least three techniques should be readily available to eliminate
this potential problem:
(A) borrowing through Clearstream, Luxembourg or Euroclear for one
day (until the purchase side of the day trade is reflected in
their Clearstream, Luxembourg or
S-76
Euroclear accounts) in accordance with the clearing system's
customary procedures;
(B) borrowing the global securities in the U.S. from a DTC
participant no later than one day prior to settlement, which
would give the global securities sufficient time to be
reflected in their Clearstream, 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 participant or
Euroclear participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of global securities holding securities through
Clearstream, Luxembourg or Euroclear (or through DTC if the holder has an
address outside the U.S. ) will be subject to the 30% (or in some cases 31%)
U.S. withholding tax that generally applies to payments of interest on
registered debt issued by U.S. persons, unless (1) each clearing system, bank or
other financial institution that holds customers' securities in the ordinary
course of its trade or business in the chain of intermediaries between the
beneficial owner and the U.S. entity required to withhold tax complies with
applicable certification requirements and (2) the beneficial owner takes one of
the following steps to obtain an exemption or reduced tax rate:
Exemption for non-U.S. persons (Form W-8 BEN). Beneficial owners of
global securities that are non-U.S. persons can obtain a complete exemption from
the withholding tax by filing a signed Form W-8 BEN. If the information shown on
Form W-8 BEN changes, a new Form W-8 BEN must be filed within 30 days of the
change.
Exemption for non-U.S. persons with effectively connected income (Form
W-8ECI). A non-U.S. person, including a non-U.S. corporation or bank with a U.S.
branch, for which the interest income is effectively connected with its conduct
of a trade or business in the United States, can obtain an exemption from the
withholding tax by filing Form W-8ECI.
Exemption or reduced rate for non-U.S. persons resident in treaty
countries (Form W-8 BEN). Non-U.S. persons that are beneficial owners residing
in a country that has a tax treaty with the United States can obtain an
exemption or reduced tax rate (depending on the treaty terms) by filing Form W-8
BEN.
Exemption for U.S. persons (Form W-9). U.S. persons can obtain a
complete exemption from the withholding tax by filing Form W-9.
U.S. Federal Income Tax Reporting Procedure. The global securities
holder files by submitting the appropriate form to the person through whom he
holds (e.g., the clearing agency, in the case of persons holding directly on the
books of the clearing agency). Forms W-8 BEN and W-8ECI are generally effective
for three calendar years.
S-77
U.S. Person. As used in this prospectus supplement the term "U.S.
person" means a beneficial owner of an offered certificate that is for United
States federal income tax purposes
o a citizen or resident of the United States,
o a corporation or partnership created or organized in or under the
laws of the United States or of any state thereof or the District
of Columbia,
o an estate the income of which is subject to United States federal
income taxation regardless of its source, or
o a trust if a court within the United States is able to exercise
primary supervision of the administration of the trust and one or
more United States persons have the authority to control all
substantial decisions of the trust.
As used in this prospectus supplement, the term "non-U.S. person" means
a beneficial owner of an offered certificate that is not a U.S. person.
This summary does not deal with all aspects of U.S. federal income tax
withholding that may be relevant to foreign holders of the global securities or
with the application of the extensive withholding regulations that are generally
effective with respect to payments made after December 31, 2000 which have
detailed rules regarding the determination of beneficial ownership. Investors
are advised to consult their own tax advisors for specific tax advice concerning
their holding and disposing of the global securities.
S-78
ANNEX B
NOTIONAL AMOUNT SCHEDULE FOR CAP AGREEMENT
Distribution Date Notional Amount Distribution Date Notional Amount
---------------------- ------------------- --------------------- -------------------
Initial Notional Amount $85,000,000.00 February 26, 2007 $21,923,245.30
January 25, 2002 85,000,000.00 March 26, 2007 21,515,845.30
February 25, 2002 85,000,000.00 April 25, 2007 21,115,464.25
March 25, 2002 84,922,537.71 May 25, 2007 20,721,984.67
April 25, 2002 83,021,973.73 June 25, 2007 20,335,291.00
May 28, 2002 81,153,467.52 July 25, 2007 19,955,269.59
June 25, 2002 79,316,487.06 August 27, 2007 19,581,808.69
July 25, 2002 77,510,509.07 September 25, 2007 19,214,798.39
August 26, 2002 75,735,018.92 October 25, 2007 18,854,130.58
September 25, 2002 73,989,510.45 November 26, 2007 18,499,698.98
October 25, 2002 72,273,485.85 December 26, 2007 18,151,399.03
November 25, 2002 70,586,455.51 January 25, 2008 17,809,127.92
December 26, 2002 68,927,937.91 February 25, 2008 17,472,784.55
January 27, 2003 67,297,459.46 March 25, 2008 17,142,269.47
February 25, 2003 65,694,554.36 April 25, 2008 16,817,484.89
March 25, 2003 64,118,764.53 May 27, 2008 16,498,334.65
April 25, 2003 62,569,639.42 June 25, 2008 16,184,724.16
May 27, 2003 61,046,735.91 July 25, 2008 15,876,560.42
June 25, 2003 59,549,618.19 August 25, 2008 15,573,751.95
July 25, 2003 58,077,857.65 September 25, 2008 15,276,208.79
August 25, 2003 56,631,032.75 October 27, 2008 14,983,842.49
September 25, 2003 55,208,728.87 November 25, 2008 14,696,566.04
October 27, 2003 53,810,538.28 December 26, 2008 14,414,293.88
November 25, 2003 52,436,059.94 January 26, 2009 14,136,941.88
December 26, 2003 51,084,899.45 February 25, 2009 13,864,427.29
January 26, 2004 49,756,668.89 March 25, 2009 13,596,668.73
February 25, 2004 48,450,986.78 April 27, 2009 13,333,586.18
March 25, 2004 47,167,477.89 May 26, 2009 13,075,100.95
April 26, 2004 45,905,773.21 June 25, 2009 12,821,135.63
May 25, 2004 44,665,509.82 July 27, 2009 12,571,614.13
June 25, 2004 43,446,330.79 August 25, 2009 12,326,461.59
July 26, 2004 42,247,885.07 September 25, 2009 12,085,604.41
August 25, 2004 41,069,827.40 October 26, 2009 11,848,970.19
September 27, 2004 39,911,818.25 November 25, 2009 11,622,813.47
October 25, 2004 38,773,523.66 December 28, 2009 11,400,590.91
November 26, 2004 37,654,615.20 January 25, 2010 11,182,236.40
December 27, 2004 36,554,769.87 February 25, 2010 10,967,684.92
January 25, 2005 35,473,669.99 March 25, 2010 10,756,872.53
February 25, 2005 34,413,462.98 April 26, 2010 10,549,736.35
March 25, 2005 33,532,777.35 May 25, 2010 10,346,214.53
April 25, 2005 32,926,516.92 June 25, 2010 10,146,246.26
May 25, 2005 32,330,596.59 July 26, 2010 9,949,771.74
June 27, 2005 31,744,843.99 August 25, 2010 9,756,732.14
July 25, 2005 31,169,089.57 September 27, 2010 9,567,069.62
August 25, 2005 30,603,166.59 October 25, 2010 9,380,727.32
September 26, 2005 30,046,911.07 November 26, 2010 9,197,649.28
October 25, 2005 29,500,161.72 December 27, 2010 9,017,780.50
November 25, 2005 28,962,759.93 January 25, 2011 8,841,066.88
December 27, 2005 28,434,549.71 February 25, 2011 8,667,455.23
January 25, 2006 27,915,377.64 March 25, 2011 8,496,893.23
February 27, 2006 27,405,092.84 April 25, 2011 8,329,329.42
March 27, 2006 26,903,546.93 May 25, 2011 8,164,713.22
April 25, 2006 26,410,593.96 June 27, 2011 8,002,994.87
May 25, 2006 25,926,090.43 July 25, 2011 7,844,125.45
June 26, 2006 25,449,895.16 August 25, 2011 7,688,056.83
July 25, 2006 24,981,869.35 September 26, 2011 7,534,741.70
August 25, 2006 24,521,876.48 October 25, 2011 7,384,133.53
September 25, 2006 24,069,782.27 November 25, 2011 7,236,186.56
October 25, 2006 23,625,454.68 December 27, 2011 7,090,855.79
November 27, 2006 23,188,763.86 January 25, 2012 6,948,096.97
December 26, 2006 22,759,582.07 February 27, 2012 6,807,866.60
January 25, 2007 22,337,783.73 March 26, 2012 0
S-79
PROSPECTUS
- --------------------------------------------------------------------------------
RESIDENTIAL ASSET FUNDING CORPORATION Asset-Backed Securities Sponsor
Issuable in Series
- --------------------------------------------------------------------------------
--------------------------------------
YOU SHOULD READ THE SECTION ENTITLED THE SECURITIES
"RISK FACTORS" STARTING ON PAGE 3 OF
THIS PROSPECTUS AND CONSIDER THESE o will be issued from time to time in series,
FACTORS BEFORE MAKING A DECISION TO
INVEST IN THE SECURITIES. o will consist of either asset-backed
certificates or asset-backed notes,
o will be issued by a trust or other special
Retain this prospectus for future purpose entity established by the sponsor,
reference. This prospectus may not
be used to consummate sales of o will be backed by one or more pools of mortgage
securities unless accompanied by the loans or manufactured housing contracts held
prospectus supplement relating to by the issuer, and
the offering of the securities.
o may have one or more forms of credit
enhancement, such as insurance policies or
reserve funds.
- --------------------------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE
SECURITIES COMMISSION HAS APPROVED OF OR DISAPPROVED OF THESE
SECURITIES OR PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
FIRST UNION SECURITIES, INC.
The date of this prospectus is October 30, 2001
TABLE OF CONTENTS
SUMMARY OF PROSPECTUS.............................................................................................1
RISK FACTORS......................................................................................................3
THE SPONSOR.......................................................................................................6
USE OF PROCEEDS...................................................................................................6
DESCRIPTION OF THE SECURITIES.....................................................................................6
PAYMENTS OF INTEREST...........................................................................................7
PAYMENTS OF PRINCIPAL..........................................................................................7
FINAL SCHEDULED DISTRIBUTION DATE..............................................................................7
OPTIONAL REDEMPTION, PURCHASE OR TERMINATION...................................................................8
MANDATORY TERMINATION; AUCTION SALE............................................................................8
DEFEASANCE.....................................................................................................8
WEIGHTED AVERAGE LIFE OF THE SECURITIES........................................................................8
FORM OF SECURITIES.............................................................................................9
THE TRUST FUNDS..................................................................................................12
THE MORTGAGE LOANS............................................................................................13
THE CONTRACTS.................................................................................................16
PRIVATE SECURITIES............................................................................................17
ACCOUNTS......................................................................................................19
COLLECTION AND DISTRIBUTION ACCOUNTS..........................................................................19
PRE-FUNDING ACCOUNT...........................................................................................19
CREDIT ENHANCEMENT...............................................................................................20
SUBORDINATE SECURITIES........................................................................................20
INSURANCE.....................................................................................................20
RESERVE FUNDS.................................................................................................21
MINIMUM PRINCIPAL PAYMENT AGREEMENT...........................................................................22
DEPOSIT AGREEMENT.............................................................................................22
DERIVATIVE CONTRACTS..........................................................................................22
SERVICING........................................................................................................22
COLLECTION PROCEDURES; ESCROW ACCOUNTS........................................................................22
DEPOSITS TO AND WITHDRAWALS FROM THE COLLECTION ACCOUNT.......................................................23
ADVANCES AND LIMITATIONS THEREON..............................................................................24
MAINTENANCE OF INSURANCE POLICIES AND OTHER SERVICING PROCEDURES..............................................24
REALIZATION UPON DEFAULTED MORTGAGE LOANS.....................................................................26
ENFORCEMENT OF DUE-ON-SALE CLAUSES............................................................................26
SERVICING COMPENSATION AND PAYMENT OF EXPENSES................................................................26
EVIDENCE AS TO COMPLIANCE.....................................................................................27
MATTERS REGARDING THE SERVICER................................................................................27
THE AGREEMENTS...................................................................................................28
ASSIGNMENT OF PRIMARY ASSETS..................................................................................29
ii
REPORTS TO HOLDERS............................................................................................30
EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT...............................................................31
THE TRUSTEE...................................................................................................33
DUTIES OF THE TRUSTEE.........................................................................................33
RESIGNATION OF TRUSTEE........................................................................................33
AMENDMENT OF AGREEMENT........................................................................................34
VOTING RIGHTS.................................................................................................34
LIST OF HOLDERS...............................................................................................34
REMIC ADMINISTRATOR...........................................................................................34
TERMINATION...................................................................................................34
LEGAL ASPECTS OF LOANS...........................................................................................34
MORTGAGE LOANS................................................................................................35
CONTRACTS.....................................................................................................41
SECURITY INTERESTS IN THE MANUFACTURED HOMES..................................................................41
ENFORCEMENT OF SECURITY INTERESTS IN MANUFACTURED HOMES.......................................................43
CONSUMER PROTECTION LAWS......................................................................................43
TRANSFERS OF MANUFACTURED HOMES; ENFORCEABILITY OF "DUE-ON-SALE" CLAUSES......................................44
APPLICABILITY OF USURY LAWS...................................................................................44
FORMALDEHYDE LITIGATION WITH RESPECT TO CONTRACTS.............................................................44
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940...............................................................45
MATERIAL FEDERAL INCOME TAX CONSEQUENCES.........................................................................45
GRANTOR TRUST SECURITIES......................................................................................46
REMIC SECURITIES..............................................................................................47
DEBT SECURITIES...............................................................................................54
PARTNERSHIP INTERESTS.........................................................................................55
FASIT SECURITIES..............................................................................................57
DISCOUNT AND PREMIUM..........................................................................................59
BACKUP WITHHOLDING............................................................................................62
FOREIGN INVESTORS.............................................................................................63
STATE TAX CONSIDERATIONS.........................................................................................64
ERISA CONSIDERATIONS.............................................................................................64
CERTIFICATES..................................................................................................65
NOTES.........................................................................................................67
CONSULTATION WITH COUNSEL.....................................................................................67
LEGAL INVESTMENT.................................................................................................68
AVAILABLE INFORMATION............................................................................................68
INCORPORATION OF DOCUMENTS BY REFERENCE..........................................................................68
PLAN OF DISTRIBUTION.............................................................................................69
LEGAL MATTERS....................................................................................................69
FINANCIAL INFORMATION............................................................................................69
iii
- --------------------------------------------------------------------------------
SUMMARY OF PROSPECTUS
This summary highlights selected 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 your series of securities, read
carefully this entire prospectus and the accompanying prospectus
supplement.
THE SPONSOR
Residential Asset Funding Corporation will act as the sponsor of the
issuers, meaning that it will establish the issuers and cause them to issue the
securities. The principal executive address of the sponsor are located at 301
South College Street, Charlotte, North Carolina 28202-6001, telephone no. (714)
373 -6611.
SECURITIES OFFERED
Each class of securities will consist of one or more classes of ownership
securities or debt securities. Ownership securities represent beneficial
ownership interests in the assets held by the issuer. Ownership securities will
be issued in the form of certificates. Debt securities represent indebtedness
secured by the assets of the issuer. Debt securities will be issued in the form
of notes.
Each series of securities will be issued in one or more classes, one or
more of which may be classes of:
o fixed-rate securities,
o adjustable-rate securities,
o compound-interest or accrual securities,
o planned-amortization-class securities,
o principal-only securities,
o interest-only securities,
o participating securities,
o senior securities, or
o subordinated securities.
The interest rate, principal balance, notional balance, minimum
denomination and form of each class of securities will be described in the
accompanying prospectus supplement. The securities will be available in either
fully registered or book-entry form, as described in the accompanying prospectus
supplement.
THE LOANS
Each issuer will hold one or more pools of loans, which may include:
o mortgage loans or manufactured housing contracts secured by one-to-four
family residential properties and/or manufactured homes,
o mortgage loans secured by security interests in shares issued by
private, non-profit cooperative housing corporations,
o mortgage loans secured by junior liens on the mortgaged properties,
o mortgage loans with loan-to-value ratios in excess of the appraised
value of the mortgaged property,
o home improvement retail installment contracts,
o revolving home equity lines of credit, and
o private securities backed by mortgage loans or contracts.
The sponsor will direct the issuer to acquire the loans from affiliated
originators, unaffiliated originators or warehouse trusts created by the sponsor
or an affiliate to finance the origination of loans.
- --------------------------------------------------------------------------------
1
- --------------------------------------------------------------------------------
DISTRIBUTIONS ON THE SECURITIES
Owners of securities will be entitled to receive payments in the manner
described in the accompanying prospectus supplement, which will specify:
o whether distributions will be made monthly, quarterly, semi-annually or
at other intervals and dates,
o the amount allocable to payments of principal and interest on any
distribution date, and
o whether distributions will be made on a pro rata, random lot, or other
basis.
CREDIT ENHANCEMENT
A series of securities, or classes within a series, may have the benefit of
one or more types of credit enhancement, including:
o the use of excess interest to cover losses and to create
over-collateralization,
o the subordination of distributions on the lower classes to the
distributions on more senior classes,
o the allocation of losses on the underlying loans to the lower classes,
and
o the use of cross support, reserve funds, financial guarantee insurance
policies, guarantees and letters of credit.
The protection against losses afforded by any credit enhancement will be
limited in the manner described in the accompanying prospectus supplement.
REDEMPTION OR REPURCHASE OF SECURITIES
One or more classes of securities may be redeemed or repurchased in whole
or in part at the times described in the prospectus supplement and at a price at
least equal to the amount necessary to pay all principal and interest on the
redeemed classes.
LEGAL INVESTMENT
The accompanying prospectus supplement will state whether or not the
securities will constitute "mortgage related securities" under the Secondary
Mortgage Market Enhancement Act of 1984.
ERISA LIMITATIONS
Employee benefit plans should carefully review with their own legal
advisors whether the purchase or holding of the securities could give rise to a
transaction prohibited or otherwise impermissible under ERISA or the Internal
Revenue Code.
FEDERAL INCOME TAX CONSEQUENCES
Each class of securities offered by this prospectus and the accompanying
prospectus supplement will constitute one of the following for federal income
tax purposes:
o interests in a trust treated as a grantor trust,
o "regular interests" or "residual interests" in a trust treated as one
or more "real estate mortgage investment conduits",
o debt issued by the issuer,
o interests in an issuer which is treated as a partnership, or
o "regular interests", "high-yield interests" or "ownership interests" in
a trust treated as one or more "financial asset securitization
investment trusts".
RATINGS
The securities offered by this prospectus and the accompanying prospectus
supplement will be rated at the time of issuance in one of the four highest
rating categories by at least one statistical rating organization.
- --------------------------------------------------------------------------------
2
RISK FACTORS
You should consider the following risk factors prior to any purchase of
any class of securities. You should also consider the information under the
caption "Risk Factors" in the accompanying prospectus supplement.
YOUR INVESTMENT IN ANY SECURITY MAY BE AN ILLIQUID INVESTMENT; YOU SHOULD BE
PREPARED TO HOLD YOUR SECURITY TO MATURITY.
A secondary market for these securities is unlikely to develop. If it
does develop, it may not provide you with sufficient liquidity of
investment or continue for the life of these securities. The
underwriters may establish a secondary market in the securities,
although no underwriter will be obligated to do so. We neither expect
to list the securities on any securities exchange nor to have the
securities quoted in the automated quotation system of a registered
securities association.
Issuance of the securities in book-entry form may also reduce the
liquidity in the secondary trading market, since some investors may be
unwilling to purchase securities for which they cannot obtain
definitive physical securities.
THE ASSETS OF THE TRUST FUND WILL BE LIMITED AND, IF THE ASSETS BECOME
INSUFFICIENT TO SERVICE THE SECURITIES, LOSSES MAY RESULT.
The securities will be payable solely from the assets of the trust
fund. Neither the sponsor nor any other person will be obligated to
make payments to the security holders, except to the extent of any
credit enhancement as specifically provided in the prospectus
supplement. Consequently, security holders must rely solely upon
payments from the trust fund for the payment of principal and interest
on the securities.
AS A RESULT OF PREPAYMENT ON THE LOANS OR EARLY REDEMPTION OF THE SECURITIES,
YOU COULD BE FULLY PAID SIGNIFICANTLY EARLIER THAN WOULD OTHERWISE BE THE CASE,
WHICH MAY ADVERSELY AFFECT THE YIELD TO MATURITY ON YOUR SECURITIES.
The yield to maturity of the securities may be adversely affected by a
higher or lower than anticipated rate of prepayments on the loans. The
yield to maturity on interest-only securities purchased at premiums or
discounts to par will be extremely sensitive to the rate of prepayments
on the loans.
The underlying loans may be prepaid in full or in part at any time,
although prepayment may require the borrower to pay of a prepayment
penalty or premium. These penalties will generally not be property of
the issuer, and will not be available to fund distributions owing to
you. We cannot predict the rate of prepayments of the loans, which is
influenced by a wide variety of economic, social and other factors,
including prevailing mortgage market interest rates, the availability
of alternative financing, local and regional economic conditions and
homeowner mobility. Therefore, we can give no assurance as to the level
of prepayments that a trust fund will experience.
Prepayments may result from mandatory prepayments relating to unused
monies held in pre-funding accounts, voluntary early payments by
borrowers, including payments in connection with refinancings, sales of
mortgaged properties subject to "due-on-sale" provisions and
liquidations due to default, as well as the receipt of proceeds from
insurance policies. In addition, repurchases or purchases from the
issuer of loans or the payment of substitution adjustments will have
the same effect on the securities as a prepayment of the loans.
3
One or more classes of securities of any series may be subject to
optional or mandatory redemption or auction sale in whole or in part,
on or after a specified date, or on or after the time when the
aggregate outstanding principal amount of the underlying loans or the
securities is less than a specified amount. You will bear the risk of
reinvesting unscheduled distributions resulting from redemption.
Any of the foregoing principal prepayments may adversely affect the
yield to maturity of the prepaid securities. Since prevailing interest
rates are subject to fluctuation, there can be no assurance that you
will be able to reinvest these prepayments at a yield equaling or
exceeding the yield on your securities.
CREDIT ENHANCEMENT, EVEN IF PROVIDED, WILL IN ANY EVENT BE LIMITED IN BOTH
AMOUNT AND SCOPE OF COVERAGE, AND MAY NOT BE SUFFICIENT TO COVER ALL LOSSES OR
RISKS ON YOUR INVESTMENT.
Credit enhancement may be provided in limited amounts to cover some,
but not all, types of losses on the underlying loans and, in most
cases, will reduce over time in accordance with a schedule or formula.
Furthermore, credit enhancement may provide only very limited coverage
as to some types of losses, and may provide no coverage as to other
types of losses. Generally, credit enhancement does not directly or
indirectly guarantee to the investors any specified rate of
prepayments, which is one of the principal risks of your investment.
The amount and types of coverage, the identification of any entity
providing the coverage, the terms of any subordination and any other
information will be described in the accompanying prospectus
supplement.
PROPERTY VALUES MAY DECLINE, LEADING TO HIGHER LOSSES ON THE LOANS.
An investment in the securities, which are backed by residential real
estate loans, may be affected by a decline in real estate values. A
decline could be caused by a general decline in the real estate market,
the borrower's failure to maintain the property or a natural disaster,
among other things. If property values were to decline, the rates of
delinquencies and foreclosures may rise, thereby increasing the
likelihood of loss. If these losses are not covered by any credit
enhancement, you will bear all risk of these losses and will have to
look primarily to the value of the mortgaged properties for recovery of
the outstanding principal and unpaid interest on the defaulted loans.
FORECLOSURE OF MORTGAGED PROPERTIES INVOLVES DELAYS AND EXPENSE AND COULD CAUSE
LOSSES ON THE LOANS.
Even if the mortgaged properties provide adequate security for the
loans, substantial delays could be encountered in connection with the
foreclosure of defaulted loans, and corresponding delays in the receipt
of the foreclosure proceeds could occur. Foreclosures are regulated by
state statutes, rules and judicial decisions and are subject to many of
the delays and expenses of other lawsuits, sometimes requiring several
years to complete. The servicer will be entitled to reimburse itself
for any expenses it has paid in attempting to recover amounts due on
the liquidated loans, including payments to prior lienholders, accrued
fees of the servicer, legal fees and costs of legal action, real estate
taxes, and maintenance and preservation expenses, which will reduce the
amount of the net recovery by the trust.
4
ENVIRONMENTAL CONDITIONS ON THE MORTGAGED PROPERTY MAY GIVE RISE TO LIABILITY
FOR THE ISSUER.
Real property pledged as security to a lender may be subject to
environmental risks which could cause losses on your securities. Under
the laws of some states, contamination of a mortgaged property may give
rise to a lien on the mortgaged property to assure the costs of
clean-up. In several states, this type of lien has priority over the
lien of an existing mortgage or owner's interest against the property.
In addition, under the laws of some states and under CERCLA, a lender
may be liable, as an "owner" or "operator," for costs of addressing
releases or threatened releases of hazardous substances that require
remedy at a property, if agents or employees of the lender have become
sufficiently involved in the operations of the borrower, regardless of
whether or not the environmental damage or threat was caused by a prior
owner. A lender also will increase its risk of environmental liability
upon the foreclosure of the mortgaged property, since the lender may
then become the legal owner of the property.
STATE AND FEDERAL CREDIT PROTECTION LAWS MAY LIMIT COLLECTION OF PRINCIPAL AND
INTEREST ON THE LOANS.
Residential mortgage lending is highly regulated at both the federal
and state levels and violations of these laws, policies and principles
may limit the ability of the servicer to collect all or part of the
amounts due on the loans, may entitle the borrower to a refund of
amounts previously paid and, in addition, could subject the issuer, as
the owner of the loan, to damages and administrative enforcement. The
occurrence of any of the foregoing could cause losses on your
securities.
THE SOLDIERS' AND SAILORS' CIVIL RELIEF ACT MAY LIMIT THE ABILITY TO COLLECT ON
THE LOANS.
The terms of the Soldiers' and Sailors' Civil Relief Act of 1940, or
similar state legislation, benefit mortgagors who enter military
service after the origination of his or her loan, including a mortgagor
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.
These mortgagors may not be charged interest, including fees and
charges, above an annual rate of 6% during the period of the
mortgagor's active duty status, unless a court orders otherwise upon
application of the lender. The implementation of the Soldiers' and
Sailors' Civil Relief Act could have an adverse effect, for an
indeterminate period of time, on the ability of the servicer to collect
full amounts of interest on these loans.
In addition, the Soldiers' and Sailors' Civil Relief Act imposes
limitations that would impair the ability of the servicer to foreclose
on loans during the mortgagor's period of active duty status. Thus, in
the event that these loans go into default, there may be delays and
losses occasioned by the inability to realize upon the mortgaged
property in a timely fashion.
RATINGS ARE NOT RECOMMENDATIONS; THE RATINGS ASSIGNED TO YOUR SECURITIES MAY BE
LOWERED OR WITHDRAWN.
Each series of securities will be rated in one of the four highest
rating categories by the rating agency. Any rating would be based on,
among other things, the adequacy of the value of the assets and any
credit enhancement. A rating is not a recommendation to purchase, hold
or sell securities, because as it does not address market price or
suitability for a particular investor.
The ratings assigned to the securities will be based on, among other
things, the adequacy of the value of the trust fund and any credit
enhancement. Any rating which is assigned may not remain in effect for
any given period of time or may be lowered or withdrawn
5
entirely by the rating agencies if, in their judgment, circumstances in
the future so warrant. Ratings may also be lowered or withdrawn because
of an adverse change in the financial or other condition of a provider
of credit enhancement or a change in the rating of a credit enhancement
provider's long term debt.
ERISA MAY RESTRICT THE ACQUISITION, OWNERSHIP AND DISPOSITION OF SECURITIES.
Generally, ERISA applies to investments made by benefit plans and
transactions involving the assets of benefit plans. Due to the
complexity of regulations that govern benefit plans, prospective
investors that are subject to ERISA are urged to consult their own
counsel regarding consequences under ERISA of acquisition, ownership
and disposition of securities.
THE SPONSOR
The sponsor, Residential Asset Funding Corporation, was incorporated in
the State of North Carolina. in December 1997, and is a wholly-owned subsidiary
of First Union National Bank, a national banking association with its
headquarters in Charlotte, North Carolina. The sponsor's principal executive
offices are located at One First Union Center, 301 S. College Street, Charlotte,
North Carolina 28288. Its telephone number is (704) 590-6161.
USE OF PROCEEDS
The net proceeds from the sale of each series of securities will be
applied to one or more of the following purposes: to acquire the primary assets,
to repay indebtedness which has been incurred to obtain funds to acquire the
primary assets, to establish any reserve funds described in the prospectus
supplement and to pay costs of structuring and issuing the securities, including
the costs of obtaining credit enhancement, if any. The acquisition of the
primary assets for a series may be effected by an exchange of securities with
the seller of the primary assets. The seller may agree to reimburse the sponsor
for fees and expenses of the sponsor incurred in connection with the offering of
the securities.
DESCRIPTION OF THE SECURITIES
The sponsor may offer from time to time the securities, which may be
asset-backed notes or certificates, in one or more series.
The certificates of a series will evidence undivided interests in
assets deposited into a trust fund. The notes of a series will represent
indebtedness secured by the trust fund. A series may consist of both notes and
certificates.
Each series of securities will consist of one or more classes of
securities, one or more of which may be compound interest securities, variable
interest securities, pac securities, zero coupon securities, principal only
securities, interest only securities or participating securities. A series may
also include one or more classes of subordinate securities.
If a series includes multiple classes, the amount, percentage and
timing of distributions of principal, interest or both to each class may vary
and one or more classes' right to distributions of principal, interest or both
may be subordinated to other classes. The primary assets and other assets
comprising the trust fund may be divided into one or more groups and one or more
classes may evidence beneficial ownership of or be secured by the corresponding
group.
6
The trustee, or a paying agent on its behalf, will make payments of
principal of and interest on the securities. Interest on and principal of the
securities of a series will be payable on each distribution date at the times,
at the rates, in the amounts and in the order of priority described in the
prospectus supplement. Payments will be made by check mailed to holders of
record at their addresses appearing on the security register. Payments may be
made, however, by wire transfer, at the expense of the holder requesting payment
by wire transfer, in circumstances described in the prospectus supplement. Final
payments of principal in retirement of each security will be made only upon
presentation and surrender of the security at the office of the trustee
specified in the prospectus supplement. The trustee will mail notice of the
final payment on a security to the holder of the security before the
distribution date on which the trustee expects to make the final principal
payment.
PAYMENTS OF INTEREST
The interest-bearing securities of each class will bear interest from
the date and at the rate per annum specified, or calculated in the method
described in, the prospectus supplement. The rate of interest on securities of a
series may be variable or may change with changes in the annual percentage rates
of the loans and/or as prepayments occur on the loans. Principal-only securities
may not be entitled to receive any interest distributions or may be entitled to
receive only nominal interest distributions.
Interest payable on the securities on a distribution date will include
all interest accrued during the period specified in the prospectus supplement.
In the event interest accrues during the calendar month preceding a distribution
date, the effective yield to holders will be reduced from the yield that would
otherwise be obtainable if interest payable on the securities were to accrue
through the day immediately preceding the distribution date.
PAYMENTS OF PRINCIPAL
On each distribution date for a series, principal payments will be made
to the holders of the securities of the series on which principal is then
payable, as described in the prospectus supplement. Principal payments will be
allocated among the classes of a series in the manner, at the times and in the
priority described in the prospectus supplement.
The rate of principal payments of each class may depend principally
upon the rate of payment, including prepayments, on the primary assets. A rate
of prepayment lower or higher than anticipated will affect the yield on the
securities of a series in the manner described under "--Weighted Average Life of
the Securities." Under limited circumstances, a series of securities may be
subject to termination or redemption. See " --Optional Redemption, Purchase or
Termination" below.
FINAL SCHEDULED DISTRIBUTION DATE
The final scheduled distribution date on each class of securities is
the date no later than which the principal balance is expected to be reduced to
zero, calculated on the basis of the assumptions described in the prospectus
supplement. The final scheduled distribution date will be specified in the
prospectus supplement. Since payments on the primary assets will be used to make
distributions in reduction of the outstanding principal amount of the
securities, it is likely that the actual final distribution date of any class
will occur earlier, and may occur substantially earlier, than its final
scheduled distribution date.
Furthermore, as a result of delinquencies, defaults and liquidations of
the primary assets in the trust fund, the actual final distribution date of any
certificate may occur later than its final scheduled distribution date. No
assurance can be given as to the actual prepayment experience of a series. See
"--Weighted Average Life of the Securities" below.
7
OPTIONAL REDEMPTION, PURCHASE OR TERMINATION
One or more classes of securities of any series may be subject to
optional redemption or repurchase, in whole or in part, on any distribution date
by the seller, servicer or credit enhancer or an affiliate thereof. Redemption
or repurchase may occur on or after a specified date, or on or after the time as
the aggregate outstanding principal amount of the securities or primary assets,
is less than a percentage not to exceed 20% of the initial aggregate principal
balance of the securities or primary assets. The redemption, purchase or
repurchase price may not be less than an amount necessary to pay all principal
and interest on the securities outstanding. If we have made a REMIC election,
the trustee shall receive a satisfactory opinion of counsel that the optional
redemption, purchase or termination will be conducted so as to constitute a
"qualified liquidation" under section 860F of the Internal Revenue Code. The
risk of reinvesting unscheduled distributions resulting form prepayments of the
securities will be borne by the holders. Neither the trust nor the holders will
have any continuing liability under an optional redemption or repurchase.
MANDATORY TERMINATION; AUCTION SALE
The trustee, the servicer or the seller may be required to effect early
retirement of a series of securities by auction sale. Within a period following
the failure of the holder of the optional termination right to exercise its
right, the required party shall solicit bids for the purchase of all primary
assets remaining in the trust. In the event that satisfactory bids are received,
the net sale proceeds will be distributed to holders in the same order of
priority as collections on the loans. A satisfactory bid will not be less than
an amount necessary to pay all principal and interest on the notes. If
satisfactory bids are not received, the required party shall decline to sell the
loans and shall not be under any obligation to solicit any further bids or
otherwise negotiate any further sale of the loans. The sale and consequent
termination of the trust must constitute a "qualified liquidation" of each
REMIC.
DEFEASANCE
The indenture may provide that a trust fund may be discharged through
defeasance. In a defeasance, a party will deposit with the trustee money and/or
direct obligations of or obligations guaranteed by the United States of America
which will provide money in an amount sufficient to pay each installment of
interest and, on the final scheduled distribution date, principal on the notes.
In the event of any defeasance and discharge of notes, note holders would be
able to look only to the deposited money and/or direct obligations for payment
of principal and interest, if any, on their notes until maturity.
WEIGHTED AVERAGE LIFE OF THE SECURITIES
"Weighted average life" refers to the average amount of time that will
elapse from the date of issue of a security until each dollar of principal of
the security will be repaid to the investor. The weighted average life of the
securities of a class will be influenced by the rate at which the amount
financed under primary assets included in the trust fund for a series is paid.
Repayment may be in the form of scheduled amortization or prepayments.
Prepayments on loans and other receivables can be measured relative to
a prepayment standard or model. The prospectus supplement will describe the
prepayment standard or model, if any, used and may contain tables setting forth
the projected weighted average life of each class of securities and the
percentage of the original principal amount of each class of securities that
would be outstanding on specified distribution dates based on the assumptions
stated in the prospectus supplement, including assumptions that prepayments on
the mortgage loans or underlying loans relating to the private securities, as
applicable, included in the trust fund are made at rates corresponding to
various percentages of the prepayment standard or model specified in the
prospectus supplement.
8
There is, however, no assurance that prepayment of the loans will
conform to any level of any prepayment standard or model specified in the
prospectus supplement. The rate of principal prepayments on pools of loans may
be influenced by a variety of factors, including job related factors such as
transfers, layoffs or promotions and personal factors such as divorce,
disability or prolonged illness. Economic conditions, either generally or within
a particular geographic area or industry, also may affect the rate of principal
prepayments. Demographic and social factors may influence the rate of principal
prepayments in that some borrowers have greater financial flexibility to move or
refinance than do other borrowers. The deductibility of mortgage interest
payments, servicing decisions and other factors also affect the rate of
principal prepayments. As a result, there can be no assurance as to the rate or
timing of principal prepayments of the mortgage loans or underlying loans either
from time to time or over the lives of the loans.
The rate of prepayments of conventional housing loans and other
receivables has fluctuated significantly in recent years. In general, however,
if prevailing interest rates fall significantly below the interest rates on the
loans, the loans are likely to prepay at rates higher than if prevailing
interest rates remain at or above the interest rates borne by the loans. In this
regard, it should be noted that the loans may have different interest rates. In
addition, the weighted average life of the securities may be affected by the
varying maturities of the loans. If any loans have actual terms-to-stated
maturity of less than those assumed in calculating the final scheduled
distribution date of the securities, one or more classes of the series may be
fully paid prior to their respective final scheduled distribution date, even in
the absence of prepayments.
FORM OF SECURITIES
The securities in each series will either be issued as physical
certificates or in book-entry form. Physical certificates in fully registered
form will be transferable and exchangeable at the corporate trust office of the
registrar of the securities named in the prospectus supplement. No service
charge will be made for any registration of exchange or transfer of securities,
but the trustee may require payment of a sum sufficient to cover any tax or
other government charge.
Securities issued in book-entry form may be held either through the
Depository Trust Company (in the United States) or Clearstream, Luxembourg or
Euroclear (in Europe) if the investors are participants of such systems, or
indirectly through participants in such systems. Securities issued in book-entry
form will be registered in the name of Cede & Co., the nominee of DTC. 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
the provisions of section 17A of the Securities Exchange Act of 1934. DTC was
created to hold securities for its participating organizations and facilitate
the clearance and settlement of securities transactions between participants
through electronic book-entry changes in their accounts, thereby eliminating the
need for physical movement of certificates. Participants include securities
brokers and dealers, banks, trust companies and clearing corporations. Indirect
access to the DTC system also is available to brokers, dealers, banks and trust
companies that clear through or maintain a custodial relationship with a
participant, either directly or indirectly.
Under a book-entry format, holders that are not participants or
indirect participants but desire to purchase, sell or otherwise transfer
ownership of the securities registered in the name of Cede & Co., as nominee of
DTC, may do so only through participants and indirect participants. In addition,
the holders will receive all distributions of principal of and interest on the
securities from the trustee through DTC
9
and its participants. Under a book-entry format, holders will receive payments
after each distribution date because, while payments are required to be
forwarded to Cede & Co., as nominee for DTC, on each distribution date, DTC will
forward payments to its participants, which thereafter will be required to
forward payments to indirect participants or holders. Unless and until physical
securities are issued, it is anticipated that the only holder will be Cede &
Co., as nominee of DTC, and that the beneficial holders of securities will not
be recognized by the trustee as holders under the agreements. The beneficial
holders will only be permitted to exercise the rights of holders under the
agreements indirectly through DTC and its participants who in turn will exercise
their rights through DTC.
DTC is required to make book-entry transfers of securities among
participants and is required to receive and transmit payments of principal of
and interest on the securities. Participants and indirect participants with
which holders have securities accounts similarly are required to make book-entry
transfers and receive and transmit payments on behalf of their respective
holders. Accordingly, although holders will not process securities, the rules
provide a mechanism by which holders will receive distributions and will be able
to transfer their interests.
Unless and until physical certificates are issued, holders who are not
participants may transfer ownership of securities only through participants by
instructing participants to transfer securities, by book-entry transfer, through
DTC for the account of the purchasers of securities, which account is maintained
with their respective participants. 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 holders.
Cross-market transfers between DTC, on the one hand, and, directly or
indirectly through Euroclear or Clearstream, or their respective participants,
on the other, will be effected in DTC in accordance with DTC rules on behalf of
Euroclear or Clearstream, Luxembourg, as the case may be, by its respective
depositary; however, these cross-market transactions will require delivery of
instructions to Euroclear or Clearstream, Luxembourg, as the case may be, by the
counterparty in the system in accordance with its rules and procedures and
within its established deadlines (Brussels time). Euroclear or Clearstream,
Luxembourg, as the case may be, will, if the transaction meets its settlement
requirements, deliver instructions to DTC 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 immediately
available funds settlement applicable to DTC. Clearstream, Luxembourg
participants and Euroclear participants may not deliver instructions directly to
DTC.
Because of time zone differences, the securities account of a Euroclear
or Clearstream, Luxembourg participant purchasing an interest in a security from
a DTC participant will be credited during the securities settlement processing
day (which must be a business day for Euroclear and Clearstream, Luxembourg)
immediately following the DTC settlement date and the credit of any transaction
in interests in a security settled during the processing day will be reported to
the relevant Euroclear or Clearstream, Luxembourg participant on that day. Cash
received by Euroclear or Clearstream, Luxembourg as a result of sales of
securities by or through a Euroclear or Clearstream, Luxembourg participant to a
DTC participant will be received with value on the DTC settlement date but will
be available in the relevant Euroclear or Clearstream, Luxembourg cash account
only as of the business day following settlement in DTC.
Because DTC can only act on behalf of participants, who in turn act on
behalf of indirect participants and banks, the ability of a holder to pledge
securities to persons or entities that do not participate in the DTC system, or
otherwise act as the owner of the securities may be limited due to the lack of a
physical certificate.
10
DTC in general advises that it will take any action permitted to be
taken by a holder under an agreement only at the direction of one or more
participants to whose account with DTC the securities are credited.
Additionally, DTC in general advises that it will take actions on behalf of
specified percentages of the holders only at the direction of participants whose
holdings include current principal amounts of outstanding securities that
satisfy the specified percentages. DTC may take conflicting actions with respect
to other current principal amounts of outstanding securities to the extent that
actions are taken on behalf of participants whose holdings include current
principal amounts of outstanding securities.
Clearstream, Luxembourg (formerly known as Cedelbank, societe anonyme
or Cedel) is incorporated under the laws of Luxembourg and is a global
securities settlement clearing house. Clearstream holds securities for its
participating organizations and facilitates the clearance and settlement of
securities transactions between Clearstream,m 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
28 currencies, including United States dollars. Clearstream, Luxembourg provides
to its 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. Clearstream, Luxembourg is regulated as a
bank by the Luxembourg Monetary Institute. Clearstream, Luxembourg participants
are recognized financial institutions around the workd, 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 participants of
the Euroclear system and to clear and settle transactions between Euroclear
participants through simultaneous electronic book-entry delivery against
payment, thereby eliminating the need of physical movement of certificates and
any risk from lack of simultaneous transfers of securities and cash.
Transactions may now be settled in any of 27 currencies, including United States
dollars. The Euroclear system includes various other services, including
securities lending and borrowing and interfaces with domestic markets in several
countries. Euroclear is operated by Morgan Guaranty Trust Company of New York,
Brussels, Belgium Office, under contract with Euroclear Clearance System, 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 maintained with the Euroclear
operator, not the Cooperative. The Cooperative established policy for the
Euroclear system on behalf of Euroclear participants. Euroclear participants
include banks (including central banks), securities brokers and dealers, and
other professional financial intermediaries. Indirect access to the Euroclear
system 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 that is a member 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 the Euroclear system, withdrawal of
securities and cash from the Euroclear system, and receipts of payments with
respect to securities in the Euroclear system. All securities in the Euroclear
system are held on a fungible basis without attribution of specific 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.
11
Any securities initially registered as physical certificates in the
name of Cede & Co., as nominee of DTC, will be issued in fully registered,
certificated form to holders 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 the
agreements and the prospectus supplement, DTC will be required to notify all
participants of the availability through DTC of physical certificates. Upon
surrender by DTC of the securities representing the securities and instruction
for re-registration, the trustee will take the securities in the form of
physical certificates, and thereafter the trustee will recognize the holders of
physical certificates as holders. Thereafter, payments of principal of and
interest on the securities will be made by the trustee directly to holders. The
final distribution of any security, whether physical certificates or securities
registered in the name of Cede & Co., however, will be made only upon
presentation and surrender of the securities on the final distribution date at
the office or agency specified in the notice of final payment to holders.
THE TRUST FUNDS
Each trust fund will include assets originated or acquired by the
seller or sellers specified in the prospectus supplement composed of:
o primary assets, which may include one or more pools of (1) mortgage
loans that are secured by mortgages or deeds of trust on residential
properties, (2) manufactured housing conditional sale contracts and
installment agreements that are secured by manufactured homes, and
(3) securities backed or secured by loans,
o all monies due on the loans net, if and as provided in the
prospectus supplement, of amounts payable to the servicer of the
loans,
o funds on deposit in any pre-funding and capitalized interest
accounts,
o reserve funds, letters of credit, surety bonds, insurance policies
or other forms of credit support,
o any mortgaged property acquired by foreclosure or deed in lieu of
foreclosure or repossession,
o any manufactured home acquired by repossession and
o any amount on deposit in the collection account or distribution
account.
The mortgage loans will be secured by mortgages and deeds of trust or
other similar security instruments creating a lien on a mortgaged property,
which may be subordinated to one or more senior liens on the mortgaged property.
The contracts will be secured by security interests taken in the manufactured
homes.
A maximum of 5%, by initial principal balance, of the aggregate primary
assets that are included in a trust fund at the closing date will deviate from
the characteristics that are described in the prospectus supplement.
The securities will be non-recourse obligations secured by the trust
fund. Holders of a series of notes may only proceed against the collateral
securing the notes in the case of a default and may not proceed against any
assets of the sponsor or the trust fund not pledged to secure the notes.
12
The primary assets for a series will be acquired by the trust fund from
the seller, or may be acquired in the open market or in privately negotiated
transactions. Loans relating to a series will be serviced by the servicer, which
may be the seller, specified in the prospectus supplement, under a servicing
agreement between the trust fund and servicer.
"Agreement" means, as to a series of certificates, the pooling and
servicing agreement or trust agreement, and as to a series of notes, the
indenture and the servicing agreement, as the context requires.
A trust fund relating to a series of securities may be a business trust
formed under the laws of the state specified in the prospectus supplement.
Prior to the initial offering of a series of securities, the trust fund
will have no assets or liabilities. We do not expect any trust fund to engage in
any activities other than acquiring, managing and holding the trust assets and
the proceeds thereof, issuing securities and making distributions thereon. No
trust fund will have any significant source of capital other than its assets and
any credit enhancement.
Primary assets included in the trust fund for a series may consist of
any combination of mortgage loans, contracts and private securities. Some of the
loans may be delinquent, although the loans that are delinquent as of the
cut-off date will not exceed 20% of the initial aggregate principal balance of
the primary assets for that series. The following is a brief description of the
loans we expect to be include as trust property.
THE MORTGAGE LOANS
Mortgage Loans. The primary assets for a series may consist, in whole
or in part, of mortgage loans secured by mortgages on one- to four-family
residential housing, including condominium units and cooperative dwellings which
may be subordinated to other mortgages on the same mortgaged property. The
mortgage loans may have fixed interest rates or adjustable interest rates and
may provide for other payment characteristics as described below and in the
prospectus supplement.
The mortgage loans may be either "closed-end" loans, which do not
permit the borrower to obtain the proceeds of future advances, or "open-end"
loans structured as lines of credit, which permit the borrower, subject to a
maximum dollar amount, to obtain more than one advance of proceeds. The mortgage
loans will be secured by first, second or more junior liens on fee simple or
leasehold interests in one- to four-family residential properties. The principal
and interest on the mortgage loans included in the trust for a series of
securities will be payable either on the first day of each month or on different
scheduled days throughout each month, and the interest will be calculated either
on a simple interest, actuarial method or "Rule of 78s" method. When a full
principal prepayment is paid on a mortgage loan during a month, the mortgagor is
generally charged interest only on the days of the month actually elapsed up to
the date of prepayment, at a daily interest rate that is applied to the
principal amount of the mortgage loan so prepaid.
Payment Terms. The payment terms of the mortgage loans to be included
in a trust for a series will be described in the prospectus supplement and may
include any of the following features of combinations thereof or other features
described in the prospectus supplement:
o 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 specified circumstances and is followed by an
adjustable rate, a rate that otherwise varies from time to time, or
a rate that is convertible from and adjustable rate to a fixed rate.
Changes to an adjustable rate may be subject to periodic
limitations, maximum rates, minimum rates
13
or a combination of limitations. Accrued interest may be deferred
and added to the principal of a mortgage loan for periods and under
circumstances specified in the prospectus supplement. Mortgage loans
may provide for the payment of interest at a rate lower than the
specified loan rate for a period of time of for the life of the
mortgage loan, and the amount of any difference may be contributed
from funds supplied by the seller of the mortgaged property or
another source.
o Principal may be payable on a level debt service basis to fully
amortize the mortgage 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. Payment of all or a
substantial portion of the principal may be due on maturity.
Principal may include interest that has been deferred and added to
the principal balance of the mortgage loan.
o Monthly payments of principal and interest may be fixed for the life
of the mortgage loan, may increase over a specified period of time
or may change from period to period. Mortgage 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.
o Prepayments of principal may be subject to a prepayment fee, which
may be fixed for the life of the mortgage loan or may decline over
time, and may be prohibited for the life of the mortgage loan or for
specified periods. Some mortgage loans may permit prepayments after
expiration of the applicable lockout period and may require the
payment of a prepayment fee in connection with any subsequent
prepayment. Other mortgage loans may permit prepayments without
payment of a fee unless the prepayment occurs during specified time
periods. The mortgage loans may include "due on sale" clauses which
permit the mortgagee to demand payment of the entire mortgage loan
in connection with the sale or transfer of the mortgaged property.
Other mortgage loans may be assumable by persons meeting the then
applicable underwriting standards of the seller.
Amortization of the Mortgage Loans. The mortgage loans will provide for
payments that are allocated to principal and interest according to either the
actuarial method, the simple interest method or the "Rule of 78s" method. The
prospectus supplement will state whether any of the mortgage loans will provide
for deferred interest or negative amortization.
An actuarial mortgage loan provides for payments in level monthly
installments except, in the case of a balloon loan, the final payment,
consisting of interest equal to one-twelfth of the applicable loan rate times
the unpaid principal balance, with the remainder of the payment applied to
principal.
A simple interest mortgage loan provides for the amortization of the
amount financed under the mortgage loan over a series of equal monthly payments
except, in the case of a balloon loan, the final payment. Each monthly payment
consists of an installment of interest which is calculated on the basis of the
outstanding principal balance of the mortgage loan being multiplied by the
stated loan rate and further multiplied by a fraction, the numerator of which is
the number of days in the period elapsed since the preceding payment of interest
was made and the denominator of which is the number of days in the annual period
for which interest accrues on the mortgage loan. As payments are received under
a simple interest mortgage loan, the amount received is applied first to
interest accrued to the date of payment and the balance is applied to reduce the
unpaid principal balance. Accordingly, if a borrower pays a fixed monthly
installment on a simple interest mortgage loan before its scheduled due date,
the portion of the payment allocable to interest for the period since the
preceding payment was made will be less than it
14
would have been had the payment been made as scheduled, and the portion of the
payment applied to reduce the unpaid principal balance will be correspondingly
greater. However, the next succeeding payment will result in an allocation of a
greater amount to interest if the payment is made on its scheduled due date.
Conversely, if a borrower pays a fixed monthly installment after its
scheduled due date, the portion of the payment allocable to interest for the
period since the preceding payment was made will be greater than it would have
been had the payment been made as scheduled, and the remaining portion, if any,
of the payment applied to reduce the unpaid principal balance will be
correspondingly less. If each scheduled payment under a simple interest mortgage
loan is made on or prior to its scheduled due date, the principal balance of the
mortgage loan will amortize in the manner described in the preceding paragraph.
However, if the borrower consistently makes scheduled payments after the
scheduled due date, the mortgage loan will amortize more slowly than scheduled.
If a simple interest mortgage loan is prepaid, the borrower is required to pay
interest only to the date of prepayment.
Some mortgage loans may be insured under the Federal Housing Authority
Title I credit insurance program created under sections 1 and 2(a) of the
National Housing Act of 1934. Under the Title I program, the Federal Housing
Authority is authorized and empowered to insure qualified lending institutions
against losses on eligible loans. The Title I program operates as a coinsurance
program in which the Federal Housing Authority insures up to 90% of specified
losses incurred on an individual insured loan, including the unpaid principal
balance of the loan, but only to the extent of the insurance coverage available
in the lender's Federal Housing Authority insurance coverage reserve account.
The owner of the loan bears the uninsured loss on each loan.
The mortgaged properties will include single family property, which is
one-to four-family residential housing, including condominium units and
cooperative dwellings. The mortgaged properties may consist of detached
individual dwellings, individual condominiums, townhouses, duplexes, row houses,
individual units in planned unit developments and other attached dwelling units.
Each single family property will be located on land owned in fee simple by the
borrower or on land leased by the borrower for a term at least equal to the term
of the mortgage. Attached dwellings may include owner-occupied structures where
each borrower owns the land upon which the unit is built, with the remaining
adjacent land owned in common or dwelling units subject to a proprietary lease
or occupancy agreement in a cooperatively owned apartment building.
The prospectus supplement will specify whether or not mortgages on
cooperative dwellings consist of a lien on the shares issued by the cooperative
dwelling and the proprietary lease or occupancy agreement relating to the
cooperative dwelling.
The aggregate principal balance of mortgage loans secured by mortgaged
properties that are owner-occupied will be disclosed in the prospectus
supplement. The sole basis for a representation that a given percentage of the
mortgage loans are secured by single family property that is owner-occupied will
be either (1) the making of a representation by the mortgagor at origination of
the mortgage loan either that the underlying mortgaged property will be used by
the mortgagor for a period of at least six months every year or that the
mortgagor intends to use the mortgaged property as a primary residence, or (2) a
finding that the address of the underlying mortgaged property is the mortgagor's
mailing address as reflected in the servicer's records. To the extent specified
in the prospectus supplement, the mortgaged properties may include non-owner
occupied investment properties and vacation and second homes.
The initial combined loan-to-value ratio of a mortgage loan is computed
in the manner described in the prospectus supplement, taking into account the
amounts of any senior loans.
15
Additional Information. The selection criteria for the mortgage loans,
including loan-to-value ratios, original terms to maturity and delinquency
information, will be specified in the prospectus supplement.
The trust fund may include mortgage loans that do not amortize their
entire principal balance by their stated maturity in accordance with their terms
and require a balloon payment of the remaining principal balance at maturity.
The trust fund may include mortgage loans that do not have a specified stated
maturity.
The prospectus supplement for a series for which the primary assets
include mortgage loans will specify, to the extent relevant and to the extent
the information is reasonably available to the sponsor and the sponsor
reasonably believes the information to be reliable:
o the aggregate unpaid principal balance;
o the range and weighted average loan rate, and, in the case of
adjustable rate loans, the range and weighted average of the current
loan rates and the lifetime rate caps, if any;
o the range and average outstanding principal balance;
o the weighted average original and remaining term-to-stated maturity
and the range of original and remaining terms-to-stated maturity, if
applicable;
o the range and weighted average of combined loan-to-value ratios or
loan-to-value ratios;
o the percentage of mortgage loans that accrue interest at adjustable
or fixed interest rates;
o the geographic distribution of the mortgaged properties;
o the percentage of mortgage loans that are secured by single family
mortgaged properties, shares relating to cooperative dwellings,
condominium units, investment property and vacation or second homes;
o the lien priority;
o year of origination; and
o the delinquency status, including the duration and history of
delinquencies and the percentage of delinquent mortgage loans.
The prospectus supplement will also specify any other limitations on
the types or characteristics of mortgage loans for a series.
THE CONTRACTS
Contracts. Each pool of contracts in a trust fund will consist of
conventional manufactured housing installment sales contracts and installment
loan agreements originated by a manufactured housing dealer in the ordinary
course of business and purchased by the seller. Each contract will be secured by
manufactured homes, each of which will be located in any of the fifty states or
the District of Columbia. The contracts will be fully amortizing and will bear
interest at a fixed or adjustable annual percentage rate. The seller of the
contracts may retain a portion of the interest payments, called a "fixed
retained yield." If the seller retains a fixed retained yield, the trust will be
entitled to payments on the contracts after payment of the fixed retained yield.
16
Manufactured homes, unlike site-built homes, generally depreciate in
value. Consequently, at any time after origination it is possible, especially in
the case of contracts with high loan-to-value ratios at origination, that the
market value of a manufactured home may be lower than the principal amount
outstanding under the contract.
Additional Information. The prospectus supplement for a series for
which the primary assets include contracts will specify, to the extent relevant
and to the extent the information is reasonably available to the sponsor and the
sponsor reasonably believes the information to be reliable:
o the initial aggregate principal balance;
o the range of original terms to maturity;
o the weighted average remaining term to stated maturity;
o the earliest and latest origination dates;
o the range of contract rates and net contract rates;
o the weighted average net contract rate;
o the geographic distribution of manufactured homes;
o the percentage of any contracts which are secured by manufactured
homes which have become permanently affixed to real estate;
o the percentage of the contracts representing the refinancing of
existing indebtedness;
o the range of loan-to-value ratios and
o the highest outstanding principal balance at origination of any
contract.
The contracts in a trust fund will generally have monthly payments due
on the first of each month and will be fully-amortizing contracts. Contracts may
have due dates which occur on a date other than the first of each month. The
contract pools may include adjustable rate contracts that provide for payment
adjustments to be made less frequently than adjustments in the contract rates.
Each adjustment in the contract rate which is not made at the time of a
corresponding adjustment in payments, and which adjusted amount of interest is
not paid currently on a voluntary basis by the obligor, will result in a change
in the rate of amortization of the contract. Moreover, payment adjustments on
the contracts may be subject to limitations, as specified in the prospectus
supplement, which may also affect the rate of amortization on the contract. As a
result, the amount of interest accrued in any month may equal or exceed the
scheduled monthly payment on the contract. In any such month, no principal would
be payable on the contract, and if the accrued interest exceeded the scheduled
monthly payment, the excess interest due would become "deferred interest that is
added to the principal balance of the contract. Deferred interest will bear
interest at the contract rate until paid. If the limitations prevent the
payments from being sufficient to amortize fully the contract by its stated
maturity date, a lump sum payment equal to the remaining unpaid principal
balance will be due on the stated maturity date.
PRIVATE SECURITIES
Primary assets for a series may consist, in whole or in part, of
"private securities" which include pass-through certificates representing
beneficial interests in underlying loans of the type that would otherwise be
eligible to be loans or collateralized obligations secured by underlying loans.
Private securities may have previously been offered to the public and not
purchased as part of the original distribution or may be acquired in a private
transaction. Although individual underlying loans may be insured or guaranteed
by the United States or an agency or instrumentality thereof, they need not be,
and private securities themselves will not be so insured or guaranteed.
17
Private securities will have been issued under a pooling and servicing
agreement, a trust agreement or similar agreement. The seller/servicer of the
underlying loans will have entered into the underlying agreement with the
underlying trustee. The underlying trustee or its agent, or a custodian, will
possess the underlying loans. Underlying loans will be serviced by a servicer
directly or by one or more sub-servicers who may be subject to the supervision
of the underlying servicer.
The sponsor of the private securities will be a financial institution
or other entity engaged generally in the business of 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 loans to trusts, and selling beneficial
interests in trusts. The underlying sponsor may be an affiliate of the sponsor.
The obligations of the underlying sponsor will generally be limited to
representations and warranties as to the assets conveyed by it to the trust.
Additionally, although the underlying loans may be guaranteed by an agency or
instrumentality of the United States, the private securities themselves will not
be so guaranteed.
Distributions of principal and interest will be made on the private
securities on the dates specified in the prospectus supplement. The private
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 securities by the underlying trustee or the underlying
servicer. The underlying sponsor or the underlying servicer may have the right
to repurchase the underlying loans after a specified date or under other
circumstances specified in the prospectus supplement.
The underlying loans may be fixed rate, level payment, fully amortizing
loans or adjustable rate loans or loans having balloon or other irregular
payment features. Underlying loans will be secured by mortgages on mortgaged
properties.
Credit Support Relating to Private Securities. Credit support in the
form of reserve funds, subordination of other private securities issued under
the underlying agreement, guarantees, letters of credit, cash collateral
accounts, insurance policies or other types of credit support may be provided
with respect to the underlying loans or with respect to the private securities
themselves. The type, characteristics and amount of credit support will be a
function of characteristics of the underlying loans and other factors and will
have been established for the private securities on the basis of requirements of
the rating agency that rated the private securities.
Additional Information. The prospectus supplement for a series for
which the primary assets include private securities will specify, to the extent
relevant and to the extent the information is reasonably available to the
sponsor and the sponsor reasonably believes the information to be reliable:
o the aggregate approximate principal amount and type;
o the maximum original term-to-stated maturity;
o the weighted average term-to-stated maturity;
o the pass-through or certificate rate or ranges thereof;
o the underlying sponsor, the underlying servicer and the underlying
trustee;
o characteristics of credit support relating to the underlying loans
or to the private securities;
o the terms on which underlying loans may, or are required to, be
purchased prior to their stated maturity or the stated maturity of
the private securities;
o the terms on which underlying loans may be substituted for those
originally underlying the private securities;
18
and, as to the underlying loans, the following:
o the payment features, including whether the underlying loans are
fixed rate or adjustable rate and whether they provide for fixed
level payments or other payment features;
o the approximate aggregate principal balance, if known, of the
underlying loans insured or guaranteed by a governmental entity;
o the servicing fee or range of servicing fees;
o the minimum and maximum stated maturities at origination;
o the lien priority; and
o the delinquency status and year of origination.
ACCOUNTS
Each trust fund will include one or more accounts. Each account will
either be an account maintained at a depository institution, the long-term
unsecured debt obligations of which are satisfactory to each rating agency or an
account the deposits in which are insured to the maximum extent available by the
Federal Deposit Insurance Corporation or which are secured in a manner meeting
requirements established by each rating agency.
The trustee may invest the funds in the accounts in eligible
investments maturing, with exceptions, not later than the day preceding the date
funds are due to be distributed. Eligible investments include, among other
investments, obligations of the United States and agencies thereof, federal
funds, certificates of deposit, commercial paper, demand and time deposits and
banker's acceptances, repurchase agreements of United States government
securities and guaranteed investment contracts, in each case, acceptable to the
rating agencies rating the securities.
COLLECTION AND DISTRIBUTION ACCOUNTS
A separate collection account will be established in the name of the
trustee for receipt of all amounts received from the primary assets. Amounts on
deposit in the collection account and amounts available from any credit
enhancement will be deposited in a distribution account, which will also be
established in the name of the trustee, for distribution to the holders.
PRE-FUNDING ACCOUNT
A trust fund may include a "pre-funding account." On the closing date,
the "pre-funded amount," which is a portion of the proceeds of the sale of the
securities of a series, will be deposited in the pre-funding account and may be
used to acquire additional primary assets during a specified "pre-funding
period." If any pre-funded amount remains on deposit in the pre-funding account
at the end of the pre-funding period, it will be applied in the manner specified
in the prospectus supplement to prepay the notes and/or the certificates of the
applicable series.
19
If a pre-funding account is established:
o the pre-funding period will not exceed 1 year from the closing date,
o the additional primary assets to be acquired during the pre-funding
period will be subject to the same representations and warranties
and satisfy the same eligibility requirements as the primary assets
included in the trust fund on the closing date, subject to the
exceptions stated in the prospectus supplement,
o the pre-funding amount will not exceed 50% of the principal amount
of the securities issued and
o prior to the investment of the pre-funded amount in additional
primary assets, the pre-funded amount will be invested in one or
more eligible investments.
If a pre-funding account is established, a "capitalized interest
account" may be established and maintained with the trustee. On the closing
date, funds will be deposited in the capitalized interest account and used to
fund any shortfall in the interest accrued on the securities and fees or
expenses during the pre-funding period. Any amounts on deposit in the
capitalized interest account at the end of the pre-funding period that are not
necessary to fund any shortfall will be distributed to the person specified in
the prospectus supplement.
If a trust fund includes a pre-funding account and the principal
balance of additional primary assets delivered to the trust fund during the
pre-funding period is less than the original pre-funded amount, the
securityholders will receive a prepayment of principal to the extent described
in the prospectus supplement. Any principal prepayment may adversely affect the
yield to maturity of the applicable securities. Since prevailing interest rates
are subject to fluctuation, there can be no assurance that investors will be
able to reinvest a prepayment at yields equaling or exceeding the yields on the
securities. It is possible that the yield on any reinvestment will be lower, and
may be significantly lower, than the yield on the securities.
CREDIT ENHANCEMENT
The sponsor may obtain credit enhancement, which may include an
irrevocable letter of credit, surety bond or insurance policy, issue subordinate
securities or obtain any other form of credit enhancement or combination thereof
in favor of the trustee on behalf of the holders of a series or designated
classes of a series from an institution or by other means. The credit
enhancement will support the payment of principal and interest on the
securities, and may be applied for other purposes to the extent and under the
conditions described in the prospectus supplement. Credit enhancement for a
series may include one or more of the following forms, or another form specified
in the prospectus supplement. Credit enhancement may be structured so as to
protect against losses relating to more than one trust fund.
SUBORDINATE SECURITIES
Credit enhancement for a series may consist of one or more classes of
subordinate securities. The rights of holders of subordinate securities to
receive distributions on any distribution date will be subordinate in right and
priority to the rights of holders of senior securities of the series.
INSURANCE
Credit enhancement for a series may consist of special hazard insurance
policies, bankruptcy bonds and other types of insurance relating to the primary
assets.
20
Pool Insurance Policy. The pool insurance policy will cover, subject to
the limitations described in a prospectus supplement, losses resulting from
defaults, but will not cover the portion of the principal balance of any loan
that is required to be covered by any primary mortgage insurance policy.
Special Hazard Insurance Policy. A special hazard insurance policy
typically provides that, where there has been damage to mortgaged property
securing a defaulted or foreclosed mortgage loan or the manufactured home
underlying a contract, title to which has been acquired by the insured, and to
the extent the damage is not covered by the standard hazard insurance policy or
any flood insurance policy, or in connection with partial loss resulting from
the application of the coinsurance clause in a standard hazard insurance policy,
the special hazard insurer will pay the lesser of (1) the cost of repair or
replacement of the mortgaged property or manufactured home or (2) upon transfer
of the mortgaged property or manufactured home to the special hazard insurer,
the unpaid principal balance of the loan at the time of foreclosure, plus
accrued interest to the date of claim settlement and expenses incurred by the
servicer. If the unpaid principal balance plus accrued interest and expenses is
paid by the special hazard insurer, the amount of further coverage under the
special hazard insurance policy will be correspondingly reduced, less any net
proceeds from the sale of the mortgaged property or manufactured home. Any
amount paid as the cost of repair of a mortgaged property or manufactured home
will reduce coverage by the amount paid. Special hazard insurance policies
typically do not cover losses occasioned by war, civil insurrection,
governmental actions, errors in design, faulty workmanship or materials, except
under specified circumstances, nuclear reaction, if the mortgaged property is in
a federally designated flood area, flood, chemical contamination and related
other risks.
Restoration of the mortgaged property or replacement of the
manufactured home with the proceeds described under (1) above is expected to
satisfy the condition under any pool insurance policy that the mortgaged
property be restored or manufactured home replaced before a claim under the pool
insurance policy may be validly presented with respect to the defaulted loan.
The payment described under (2) above will render unnecessary presentation of a
claim for the loan under any pool insurance policy. Therefore, so long as a pool
insurance policy remains in effect, the payment by the special hazard insurer of
the cost of repair or of the unpaid principal balance of the loan plus accrued
interest and expenses will not affect the total insurance proceeds paid to
security holders, but will affect the relative amounts of coverage remaining
under the special hazard insurance policy and pool insurance policy.
Bankruptcy Bond. In the event of a bankruptcy of a borrower, the
bankruptcy court may establish the value of the mortgaged property or
manufactured home at an amount less than the then-outstanding principal balance
of the loan. The amount of the secured debt could be reduced to the assigned
value, and the holder of the loan thus would become an unsecured creditor to the
extent the outstanding principal balance of the loan exceeds the assigned value.
In addition, other modifications of the terms of a loan can result from a
bankruptcy proceeding. See "Legal Aspects of the Loans." The sponsor may obtain
a bankruptcy bond or similar insurance contract covering losses resulting from
proceedings with respect to borrowers under the federal bankruptcy code. The
bankruptcy bond will cover losses resulting from a reduction by a bankruptcy
court of scheduled payments of principal and interest on a loan or a reduction
by a bankruptcy court of the principal amount of a loan and will cover unpaid
interest on the amount of the principal reduction from the date of the filing of
a bankruptcy petition.
RESERVE FUNDS
The sponsor may deposit into one or more funds to be established with
the trustee as part of the trust fund or for the benefit of any credit enhancer,
cash, a letter or letters of credit, cash collateral accounts, eligible
investments, or other instruments meeting the criteria of the rating agency
rating any series. In the alternative or in addition to an initial deposit, a
reserve fund may be funded over time through application of all or a portion of
the excess cash flow from the primary assets, to the extent described in the
prospectus supplement.
21
Amounts withdrawn from any reserve fund will be applied by the trustee
to make payments on the securities of a series, to pay expenses, to reimburse
any credit enhancer or for any other purpose.
The trustee will invest amounts deposited in a reserve fund in eligible
investments.
MINIMUM PRINCIPAL PAYMENT AGREEMENT
The sponsor may enter into a minimum principal payment agreement with
an entity specified in the prospectus supplement. The entity would provide
payments on the securities of a series in the event that aggregate scheduled
principal payments and/or prepayments on the primary assets are not sufficient
to make payments on the securities.
DEPOSIT AGREEMENT
The sponsor and the trustee for a series may enter into a deposit
agreement with the entity specified in the prospectus supplement. The purpose of
a deposit agreement is to accumulate available cash for investment so that it,
together with income thereon, can be applied to future distributions on one or
more classes of securities.
DERIVATIVE CONTRACTS
A trust may hold an interest rate swap contract, an interest rate cap
agreement or similar contract providing limited protection against interest rate
risks. These derivative contracts may provide the trust with additional amounts
which will be available to pay interest on the securities, to build up
overcollateralization, or both.
SERVICING
The following summaries describe material provisions in the servicing
agreements common to each series of securities. The summaries do not purport to
be complete and are subject to and qualified by reference to the provisions of
the servicing agreements and the prospectus supplements. Where particular
provisions or terms used in the servicing agreements are referred to, the actual
provisions are incorporated by reference as part of the summaries.
COLLECTION PROCEDURES; ESCROW ACCOUNTS
The servicer will make reasonable efforts to collect all payments
required to be made under the loans and will, consistent with the terms of the
servicing agreement and any credit enhancement, follow the collection procedures
that it follows with respect to comparable loans held in its own portfolio. The
servicer may, in its discretion, waive any assumption fee, late payment charge,
or other charge on a loan and to the extent provided in the servicing agreement
arrange with an obligor a schedule for the liquidation of delinquencies by
extending the dates on which the scheduled payments are due on the loan.
The servicer, to the extent permitted by law and required by the
underlying loan documents, will establish and maintain escrow or impound
accounts with respect to loans in which payments by obligors to pay taxes,
assessments, mortgage and hazard insurance premiums, and other comparable items
will be deposited. Withdrawals from the escrow accounts are to be made to effect
timely payment of taxes, assessments and mortgage and hazard insurance, to
refund to obligors amounts determined to be
22
overages, to pay interest to obligors on balances in the escrow account to the
extent required by law, to repair or otherwise protect the mortgaged property or
manufactured home and to clear and terminate the escrow account. The servicer
will be responsible for the administration of the escrow accounts and generally
will make advances to the escrow accounts when a deficiency exists.
DEPOSITS TO AND WITHDRAWALS FROM THE COLLECTION ACCOUNT
The funds held in the collection account may be invested, pending
remittance to the trustee, in eligible investments. The servicer will be
entitled to receive as additional compensation any interest or other income
earned on funds in the collection account.
The servicer will deposit into the collection account on the business
day following the closing date any amounts representing scheduled payments due
after the cut-off date but received by the servicer on or before the closing
date. Thereafter, the servicer will, within two business days after receipt, the
deposit into the collection account the following:
o All payments on account of principal, including prepayments, on the
primary assets;
o All payments on account of interest on the primary assets after
deducting, if permitted by the servicing agreement, the servicing
fee;
o All amounts received by the servicer in connection with the
liquidation of primary assets or property acquired in respect
thereof, whether through foreclosure sale, repossession or
otherwise, including payments in connection with the primary assets
received from the obligor, other than liquidation proceeds, which
are amounts required to be paid or refunded to the obligor under the
terms of the applicable loan documents or otherwise under law,
exclusive of, if permitted by the servicing agreement, the servicing
fee;
o All proceeds under any title insurance, hazard insurance or other
insurance policy covering any primary asset, other than proceeds to
be applied to the restoration or repair of the mortgaged property or
manufactured home or released to the obligor;
o All amounts from any reserve fund;
o All advances made by the servicer; and
o All repurchase prices of any primary assets repurchased by the
sponsor, the servicer or the seller.
The servicer may be permitted, from time to time, to make withdrawals
from the collection account for each series for the following purposes:
o to reimburse itself for advances made by it; the servicer's right to
reimburse itself is limited to amounts received from particular
loans, including, for this purpose, liquidation proceeds and amounts
representing proceeds of insurance policies covering the mortgaged
property or manufactured home, which represent late recoveries of
scheduled payments respecting which any advance was made;
o to the extent provided in the servicing agreement, to reimburse
itself for any advances that the servicer determines in good faith
it will be unable to recover from late recoveries or proceeds from
the particular loan;
o to reimburse itself from liquidation proceeds for liquidation
expenses and for amounts expended by it in good faith in connection
with the restoration of damaged
23
mortgaged property or manufactured home and, in the event deposited
in the collection account and not previously withheld, and to the
extent that liquidation proceeds after reimbursement exceed the
outstanding principal balance of the loan, together with accrued and
unpaid interest thereon to the due date for the loan next succeeding
the date of its receipt of liquidation proceeds, to pay to itself
out of the excess the amount of any unpaid servicing fee and any
assumption fees, late payment charges, or other charges on the loan;
o in the event it has elected not to pay itself the servicing fee out
of the interest component of any scheduled payment, late payment or
other recovery with respect to a particular loan prior to the
deposit of the scheduled payment, late payment or recovery into the
collection account, to pay to itself the servicing fee, as adjusted
under the servicing agreement, from any scheduled payment, late
payment or other recovery, to the extent permitted by the servicing
agreement;
o to reimburse itself for expenses incurred by and recoverable by or
reimbursable to it;
o to pay to the applicable person with respect to each "REO property,"
a primary asset or mortgaged property acquired through or in lieu of
foreclosure acquired in respect thereof that has been repurchased or
removed from the trust fund by the sponsor, the servicer or the
seller, all amounts received thereon and not distributed as of the
date on which the repurchase price was determined;
o to make payments to the trustee for deposit into the distribution
account, if any, or for remittance to the holders in the amounts and
in the manner provided for in the servicing agreement; and
o to clear and terminate the collection account.
In addition, the servicer may withdraw at any time from the collection
account any amount inadvertently deposited in the collection account.
ADVANCES AND LIMITATIONS THEREON
The prospectus supplement will describe the circumstances, if any,
under which the servicer will make advances with respect to delinquent payments
on loans. The servicer will be obligated to make advances, and the obligation
may be limited in amount, or may not be activated until a portion of a specified
reserve fund is depleted. Advances are intended to provide liquidity and, except
to the extent specified in the prospectus supplement, not to guarantee or insure
against losses. Accordingly, any funds advanced are recoverable by the servicer
out of amounts received on particular loans which represent late recoveries of
principal or interest, proceeds of insurance policies or liquidation proceeds
respecting which any advance was made. If an advance is made and subsequently
determined to be nonrecoverable from late collections, proceeds of insurance
policies, or liquidation proceeds from the loan, the servicer may be entitled to
reimbursement from other funds in the collection account or distribution
account, as the case may be, or from a specified reserve fund as applicable, to
the extent specified in the prospectus supplement.
MAINTENANCE OF INSURANCE POLICIES AND OTHER SERVICING PROCEDURES
Standard Hazard Insurance; Flood Insurance. The prospectus supplement
will specify the extent to which the servicer will be required to maintain or to
cause the obligor on each loan to maintain a standard hazard insurance policy
providing coverage of the standard form of fire insurance with extended coverage
for other hazards as is customary in the state in which the mortgaged property
or manufactured home is located. The standard hazard insurance policies will
provide for coverage at least equal to the
24
applicable state standard form of fire insurance policy with extended coverage
for property of the type securing the loans. In general, the standard form of
fire and extended coverage policy will cover physical damage to or destruction
of, the mortgaged property or manufactured home caused by fire, lightning,
explosion, smoke, windstorm, hail, riot, strike and civil commotion, subject to
the conditions and exclusions particularized in each policy. Because the
standard hazard insurance policies relating to the loans will be underwritten by
different hazard insurers and will cover mortgaged properties and manufactured
homes located in various states, the policies will not contain identical terms
and conditions. The basic terms, however, generally will be determined by state
law and generally will be similar. Most policies typically will not cover any
physical damage resulting from war, revolution, governmental actions, floods and
other water-related causes, earth movement, including earthquakes, landslides
and mudflows, nuclear reaction, wet or dry rot, vermin, rodents, insects or
domestic animals, theft and, in some cases, vandalism. The foregoing list is
merely indicative of common kinds of uninsured risks and is not intended to be
all-inclusive. Uninsured risks not covered by a special hazard insurance policy
or other form of credit enhancement will adversely affect distributions to
holders. When a mortgaged property securing a mortgage loan is located in a
flood area identified by the Department of Housing and Urban Development under
the Flood Disaster Protection Act of 1973, the servicer will be required to
cause flood insurance to be maintained with respect to the mortgaged property,
to the extent available.
The standard hazard insurance policies covering mortgaged properties
securing mortgage loans or manufactured home securing a contract typically will
contain a "coinsurance" clause which, in effect, will require the insured at all
times to carry hazard insurance of a specified percentage, generally 80% to 90%,
of the full replacement value of the mortgaged property or manufactured home,
including the improvements on any mortgaged property or manufactured home, in
order to recover the full amount of any partial loss. If the insured's coverage
falls below this specified percentage, the clause will provide that the hazard
insurer's liability in the event of partial loss will not exceed the greater of
(1) the actual cash value, which is the replacement cost less physical
depreciation, of the mortgaged property or manufactured home, including the
improvements, if any, damaged or destroyed or (2) the proportion of the loss,
without deduction for depreciation, as the amount of insurance carried bears to
the specified percentage of the full replacement cost of the mortgaged property
or manufactured home and improvements. Since the amount of hazard insurance to
be maintained on the improvements securing the mortgage loans and manufactured
homes declines as the principal balances owing thereon decrease, and since the
value of the mortgaged properties or manufactured home will fluctuate in value
over time, the effect of this requirement in the event of partial loss may be
that hazard insurance proceeds will be insufficient to restore fully the damage
to the affected mortgaged property or manufactured home.
Generally, coverage will be in an amount at least equal to the greater
of (1) the amount necessary to avoid the enforcement of any co-insurance clause
contained in the policy or (2) the outstanding principal balance of the loan.
The servicer may also maintain on REO property that secured a defaulted mortgage
loan and that has been acquired upon foreclosure, deed in lieu of foreclosure,
or repossession, a standard hazard insurance policy in an amount that is at
least equal to the maximum insurable value of the REO property. No earthquake or
other additional insurance will be required of any obligor or will be maintained
on REO property, other than under any applicable laws and regulations as shall
at any time be in force and shall require additional insurance.
In the event that the servicer obtains and maintains a blanket policy
insuring against hazard losses on all of the loans, written by an insurer then
acceptable to each rating agency which assigns a rating to the series, it will
conclusively be deemed to have satisfied its obligations to cause to be
maintained a standard hazard insurance policy for each loan or REO property.
This blanket policy may contain a deductible clause, in which case the servicer
will be required, in the event that there has been a loss that would have been
covered by the policy absent the deductible clause, to deposit in the collection
account the amount not otherwise payable under the blanket policy because of the
application of the deductible clause.
25
REALIZATION UPON DEFAULTED MORTGAGE LOANS
The servicer will use its reasonable best efforts to foreclose upon,
repossess or otherwise comparably convert the ownership of the mortgaged
properties or the manufactured homes as come into and continue in default and as
to which no satisfactory arrangements can be made for collection of delinquent
payments. In connection with a foreclosure, repossession or other conversion,
the servicer will follow the practices and procedures that it deems necessary or
advisable and as are normal and usual in its servicing activities with respect
to comparable loans serviced by it. However, the servicer will not be required
to expend its own funds in connection with any foreclosure or repossession or
towards the restoration of the mortgaged property or manufactured home unless it
determines that (1) the restoration, repossession or foreclosure will increase
the liquidation proceeds available to the holders after reimbursement to itself
for its expenses and (2) its expenses will be recoverable either through
liquidation proceeds or the proceeds of insurance. In the case of a trust fund
for which a REMIC election has been made, the servicer will be required to
liquidate any mortgaged property acquired through foreclosure within two years
after the acquisition of the mortgaged property. While the holder of a mortgaged
property acquired through foreclosure can often maximize its recovery by
providing financing to a new purchaser, the trust fund, if applicable, will have
no ability to do so and neither the servicer nor the sponsor will be required to
do so.
The servicer may arrange with the obligor on a defaulted loan a
modification of the loan. Modifications may only be entered into if they meet
the underwriting policies and procedures employed by the servicer in servicing
receivables for its own account and meet the other conditions in the servicing
agreement.
ENFORCEMENT OF DUE-ON-SALE CLAUSES
When any mortgaged property is about to be conveyed by the obligor, the
servicer may, to the extent it has knowledge of the prospective conveyance and
prior to the time of the consummation of the conveyance, exercise its rights to
accelerate the maturity of the mortgage loan under the applicable "due-on-sale"
clause, if any, unless it reasonably believes that the clause is not enforceable
under applicable law or if the enforcement of the clause would result in loss of
coverage under any primary mortgage insurance policy. In that event, the
servicer is authorized to accept from or enter into an assumption agreement with
the person to whom the mortgaged property has been or is about to be conveyed,
under which the assuming person becomes liable under the mortgage loan and under
which the original obligor is released from liability and the assuming person is
substituted as the obligor and becomes liable under the mortgage loan. Any fee
collected in connection with an assumption will be retained by the servicer as
additional servicing compensation. The terms of a mortgage loan may not be
changed in connection with an assumption.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
The servicer will be entitled to a periodic servicing fee as servicing
compensation in an amount to be determined as specified in the prospectus
supplement. The servicing fee may be fixed or variable, as specified in the
prospectus supplement. In addition, the servicer will be entitled to servicing
compensation in the form of assumption fees, late payment charges and similar
items, or excess proceeds following disposition of mortgaged property in
connection with defaulted mortgage loans or manufactured homes in connection
with a defaulted contract, as will be further specified in the prospectus
supplement.
26
The servicer may pay expenses incurred in connection with the servicing
of the mortgage loans, including, without limitation, the payment of the fees
and expenses of the trustee and independent accountants, payment of insurance
policy premiums and the cost of credit support, if any, and payment of expenses
incurred in preparation of reports to holders.
When an obligor makes a principal prepayment in full between due dates
on the loan, the obligor will generally be required to pay interest on the
amount prepaid only to the date of prepayment. If and to the extent provided in
the prospectus supplement in order that one or more classes of the holders of a
series will not be adversely affected by any resulting shortfall in interest,
the amount of the servicing fee may be reduced to the extent necessary to
include in the servicer's remittance to the trustee for deposit into the
distribution account an amount equal to one month's interest on the loan, less
the servicing fee. If the aggregate amount of shortfalls in a month exceeds the
servicing fee for a month, a shortfall to holders may occur.
The servicer will be entitled to reimbursement for expenses incurred by
it in connection with the liquidation of defaulted loans. The holders will
suffer no loss by reason of reimbursement of expenses if expenses are covered
under insurance policies or from excess liquidation proceeds. If claims are
either not made or paid under the applicable insurance policies or if coverage
thereunder has been exhausted, the holders will suffer a loss to the extent that
liquidation proceeds, after reimbursement of the servicer's expenses, are less
than the outstanding principal balance of and unpaid interest on the loan which
would be distributable to holders. In addition, the servicer will be entitled to
reimbursement of expenditures incurred by it in connection with the restoration
of property securing a defaulted loan, prior to the rights of the holders to
receive any proceeds of insurance policies, liquidation proceeds or amounts
derived from other credit enhancement. The servicer is generally also entitled
to reimbursement from the collection account for advances.
The prospectus supplement will describe the priority of the servicer's
right, which is typically senior in priority, to receive funds from the
collection account for a series, whether as the servicing fee or other
compensation, or for the reimbursement of advances, expenses or otherwise, with
respect to the rights of the holders.
EVIDENCE AS TO COMPLIANCE
Each year, a firm of independent public accountants will furnish a
statement to the trustee to the effect that it has examined documents and
records relating to the servicing of the loans by the servicer and that, on the
basis of its examination, it is of the opinion that the servicing has been
conducted in compliance with the servicing agreement, except for any exceptions
that it believes to be immaterial and any other exceptions identified in the
statement.
The servicer for each series will also provide to the trustee an annual
statement to the effect that the servicer has fulfilled its obligations under
the servicing agreement throughout the preceding calendar year.
MATTERS REGARDING THE SERVICER
The servicer for each series will be identified in the prospectus
supplement. The servicer may be an affiliate of the sponsor and may have other
business relationships with the sponsor and its affiliates.
If an event of default occurs under a servicing agreement, the servicer
may be replaced by the trustee or a successor servicer. These events of default
and the rights of the trustee upon a default under the servicing agreement will
be substantially similar to those described under "The Agreements-- Events of
Default; Rights Upon Events of Default-- Servicing Agreement."
27
The servicing agreement will specify the circumstances under which the
servicer may assign its rights and delegate its duties and obligations
thereunder for each series, which generally will require that the successor
servicer accepting the assignment or delegation:
o services similar loans in the ordinary course of its business;
o is reasonably satisfactory to the trustee;
o has a net worth of not less than a minimum amount;
o would not cause the securities to be qualified, downgraded or
withdrawn and
o executes and delivers to the trustee an agreement under which it
assumes the obligations to act as servicer.
No assignment will become effective until the trustee or a successor
servicer has assumed the servicer's obligations and duties under the servicing
agreement. To the extent that the servicer transfers its obligations to a
wholly-owned subsidiary or affiliate, the subsidiary or affiliate need not
satisfy the above criteria. However, the assigning servicer will remain liable
for the servicing obligations under the servicing agreement. Any entity into
which the servicer is merged or consolidated or any successor corporation
resulting from any merger, conversion or consolidation will succeed to the
servicer's obligations under the servicing agreement provided that the successor
or surviving entity meets the above requirements for a successor servicer.
The servicer, and its directors, officers, employees and agents, will
not be responsible for any action taken or for failing to take any action in
good faith under the servicing agreement, or for errors in judgment. However,
neither the servicer nor its directors, officers, employees and agents will be
protected against any breach of warranty or representations or the failure to
perform its obligations in compliance with the specified standard of care, or
liability which would otherwise be imposed by reason of willful misfeasance, bad
faith or negligence in the performance of their duties or by reason of reckless
disregard of their obligations and duties. Each servicing agreement will further
provide that the servicer and any director, officer, employee or agent of the
servicer is entitled to indemnification from the trust fund and will be held
harmless against any loss, liability or expense incurred in connection with any
legal action relating to the servicing agreement or the securities, other than
any loss, liability or expense incurred by reason of willful misfeasance, bad
faith or negligence in the performance of duties thereunder or by reason of
reckless disregard of obligations and duties thereunder. In addition, the
servicer is not under any obligation to appear in, prosecute or defend any legal
action which is not incidental to its servicing responsibilities under the
servicing agreement which, in its opinion, may involve it in any expense or
liability. The servicer may, in its discretion, undertake any action which it
may deem necessary or desirable with respect to the servicing agreement and the
rights and duties of the parties thereto and the interests of the holders
thereunder. In that event, the servicer may be entitled to be reimbursed for the
legal expenses and costs of the action out of the collection account.
THE AGREEMENTS
The following summaries describe the material provisions of the
agreements. The summaries do not purport to be complete and are subject to, and
qualified in their entirety by reference to, the provisions of the agreements.
Where particular provisions or terms used in the agreements are referred to, the
provisions or terms are as specified in the agreements.
28
ASSIGNMENT OF PRIMARY ASSETS
At the time of issuance of the securities of a series, the seller will
transfer, convey and assign to the trust fund all right, title and interest of
the seller in the primary assets and other property to be transferred to the
trust fund for a series. The assignment will include all principal and interest
due on or with respect to the primary assets after the cut-off date specified in
the prospectus supplement, except for any interests in the trust fund retained
by the seller, the sponsor or its affiliate. The trustee will, concurrently with
the assignment, execute and deliver the securities.
Assignment of Mortgage Loans. The seller will, as to each mortgage
loan, deliver or cause to be delivered to the trustee, or, as specified in the
prospectus supplement a custodian on behalf of the trustee, the mortgage note
endorsed without recourse to the order of the trustee or in blank, the original
mortgage with evidence of recording indicated thereon, except for any mortgage
not returned from the public recording office, in which case a copy of the
mortgage will be delivered, together with a certificate that the original
mortgage was delivered to the recording office, and an assignment of the
mortgage in recordable form. The trustee or the custodian will hold these
documents in trust for the benefit of these holders.
The seller will cause assignments to the trustee of the mortgages to be
recorded in the appropriate public office for real property records, except in
states where, in the opinion of counsel acceptable to the trustee, recording is
not required. If the seller does not cause assignments to be recorded, the
agreement may require the seller to repurchase from the trustee the affected
mortgage loans, at the price described below with respect to repurchases by
reason of defective documentation. The enforcement of the repurchase obligation
constitutes the sole remedy available to the holders or the trustee for the
failure of a mortgage to be recorded.
Assignment of Contracts. The seller will transfer physical possession
of the contracts to the trustee or a designated custodian or may retain
possession of the contracts as custodian for the trustee. In addition, the
seller will make an appropriate filing of a financing statement in the
appropriate states to give notice of the trustee's ownership of the contracts.
Unless otherwise specified in the prospectus supplement, the contracts will not
be stamped or marked otherwise to reflect their assignment from the sponsor to
the trustee. Therefore, if through negligence, fraud or otherwise, a subsequent
purchaser were able to take physical possession of the contracts without notice
of assignment, the trustee's interest in contracts could be defeated.
Assignment of Private Securities. The sponsor will cause private
securities to be registered in the name of the trustee or its nominee or
correspondent. The trustee, or its nominee or correspondent, will have
possession of any certificated private securities. See "The Trust Funds--Private
Securities."
Each loan will be identified in a schedule appearing as an exhibit to
the agreements. The schedule will specify with respect to each loan: the
original principal amount and unpaid principal balance as of the cut-off date;
the current interest rate; the current scheduled payment of principal and
interest; the maturity date, if any; if the loan is an adjustable rate loan, the
lifetime rate cap, if any, and the current index.
Repurchase and Substitution of Non-Conforming Primary Assets. If any
document required to be in the file relating to the primary assets is found by
the trustee within a specified period to be defective in any material respect
and the seller does not cure the defect within a specified period, the seller
will repurchase the affected primary asset.
29
The seller may, rather than repurchase the primary asset as described
above, remove the primary asset from the trust fund and substitute in its place
one or more other qualifying substitute primary assets. However, (1) with
respect to a trust fund for which no REMIC election is made, the substitution
must be effected within 120 days of the date of initial issuance of the
securities and (2) with respect to a trust fund for which a REMIC election is
made, after a specified time period, the trustee must have received a
satisfactory opinion of counsel that the substitution will not cause the trust
fund to lose its status as a REMIC or otherwise subject the trust fund to a
prohibited transaction tax.
Any substitute primary asset will have, on the date of substitution,
(1) an outstanding principal balance, after deduction of all scheduled payments
due in the month of substitution, not in excess of the outstanding principal
balance of the deleted primary asset, (2) an interest rate not less than the
interest rate of the deleted primary asset, (3) a remaining term-to-stated
maturity not greater than that of the deleted primary asset, and will comply
with all of the representations and warranties in the applicable agreement as of
the date of substitution.
The above-described cure, repurchase or substitution obligations
constitute the sole remedies available to the holders or the trustee for a
material defect in a document for a primary asset.
The seller will make representations and warranties with respect to
primary assets for a series. If the seller cannot cure a breach of the
representations and warranties in all material respects within the specified
time period after notification by the trustee of the breach, and if the breach
is of a nature that materially and adversely affects the value of the primary
asset, the seller is obligated to repurchase the affected primary asset or, if
provided in the prospectus supplement, provide a substitute primary asset,
subject to the same conditions and limitations on purchases and substitutions as
described above.
No security holder, solely by virtue of the holder's status as a
holder, will have any right under the applicable agreement for a series to
institute any proceeding with respect to that agreement, unless the holder
previously has given to the trustee for the series written notice of default and
unless the majority holders have made written request upon the trustee to
institute a proceeding and have offered to the trustee reasonable indemnity, and
the trustee has failed to do so within a specified period.
REPORTS TO HOLDERS
The trustee or other entity specified in the prospectus supplement will
prepare and forward to each holder on each distribution date, or as soon
thereafter as is practicable, a statement setting forth, to the extent
applicable to any series, among other things:
o the amount of principal distributed to the security holders and the
outstanding principal balance of the securities following the
distribution;
o the amount of interest distributed to the security holders and the
current interest on the securities;
o the amounts of (a) any overdue accrued interest included in the
distribution, (b) any remaining overdue accrued interest with
respect to the securities or (c) any current shortfall in amounts to
be distributed as accrued interest to security holders;
o the amounts of (a) any overdue payments of scheduled principal
included in the distribution, (b) any remaining overdue principal
amounts with respect to the securities, (c) any current shortfall in
receipt of scheduled principal payments on the primary assets or (d)
any realized losses or liquidation proceeds to be allocated as
reductions in the outstanding principal balances of the securities;
30
o the amount received from credit enhancement, and the remaining
amount available under any credit enhancement;
o the amount of any payment delinquencies on the primary assets; and
o the book value of any primary assets or mortgaged properties
acquired through or in lieu of foreclosure acquired by the trust
fund.
In addition, within a reasonable period of time after the end of each
calendar year, the trustee will furnish to each holder of record at any time
during the calendar year the information specified in the agreements to enable
holders to prepare their tax returns. Information in the distribution date and
annual statements provided to the holders will not have been examined and
reported upon by an independent public accountant. However, the servicer will
provide to the trustee a report by independent public accountants with respect
to the servicing of the mortgage loans. See "Servicing --Evidence as to
Compliance."
A series of securities or one or more classes of the series may be
issued in book-entry form. In that event, owners of beneficial interests in the
securities will not be considered holders and will not receive the reports
directly from the trustee. The trustee will forward reports only to the entity
or its nominee which is the registered holder of the global certificate which
evidences the book-entry securities. Beneficial owners will receive reports from
the participants and indirect participants of the applicable book-entry system
in accordance with their practices and procedures.
EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT
Servicing Agreement. Events of default under each servicing agreement
generally include:
o any failure by the servicer to deposit any required amounts in the
collection account, which failure continues unremedied for a
specified period after the giving of written notice of the failure
to the servicer,
o any failure by the servicer duly to observe or perform in any
material respect any other of its covenants or agreements in the
applicable servicing agreement which continues unremedied for the
number of days specified in the prospectus supplement after the
giving of written notice of the failure to the servicer by the
trustee, or to the servicer and the trustee by the holders of the
series evidencing not less than a specified percentage of the
aggregate voting rights of the securities for that series, and
o events of insolvency, readjustment of debt, marshalling of assets
and liabilities or similar proceedings and actions by the servicer
indicating its insolvency, reorganization or inability to pay its
obligations.
The servicing agreement will specify the circumstances under which the
trustee of the holders of securities may remove the servicer upon the occurrence
and continuance of an event of default thereunder relating to the servicing of
loans, other than its right to recovery of other expenses and amounts advanced
under the terms of the servicing agreement which rights the servicer will retain
under all circumstances, whereupon the trustee will succeed to all the
responsibilities, duties and liabilities of the servicer under the servicing
agreement and will be entitled to reasonable servicing compensation not to
exceed the applicable servicing fee, together with other servicing compensation
in the form of assumption fees, late payment charges or otherwise as provided in
the servicing agreement.
In the event that the trustee is unwilling or unable so to act, it may
select, or petition a court of competent jurisdiction to appoint, a finance
institution, bank or loan servicing institution with a net worth specified in
the prospectus supplement to act as successor servicer under the provisions of
the applicable servicing agreement. The successor servicer would be entitled to
reasonable servicing compensation in an amount not to exceed the servicing fee
and the other servicing compensation.
31
During the continuance of any event of default of a servicer, the
trustee will have the right to protect and enforce the rights of the holders,
and the majority holders may direct the time, method and place of conducting any
proceeding for exercising any trust power. However, the trustee will not be
under any obligation to pursue any remedy or to exercise any trusts or powers
unless the holders have offered the trustee reasonable security or indemnity
against the cost, expenses and liabilities which may be incurred by the trustee.
The trustee may decline to follow any direction if the trustee determines that
the action or proceeding so directed may not lawfully be taken or would involve
it in personal liability or be unjustly prejudicial to the nonassenting holders.
Indenture. Events of default under the indenture for each series of
notes may include:
o a default in the payment of any principal or interest on any note,
which continues for a specified period of time;
o failure to perform any other covenant of the issuer in the indenture
which continues for a specified period of time after notice is
given;
o any representation or warranty made by the issuer in the indenture
having been incorrect in a material respect as of the time made, and
the breach is not cured within a specified period of time after
notice is given; or
o events of bankruptcy, insolvency, receivership or liquidation of the
issuer.
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 outstanding notes may declare the notes to be due and payable
immediately. The declaration may, under some circumstances, be rescinded and
annulled by the majority holders.
If, following an event of default with respect to any series of notes,
the notes have been declared due and payable, the trustee may, in its
discretion, notwithstanding the acceleration, elect to maintain possession of
the collateral and to continue to apply distributions as if there had been no
acceleration if the collateral continues to provide sufficient funds for the
payment of principal and interest on the notes as they would have otherwise
become due. In addition, the trustee may not sell or otherwise liquidate the
collateral following an event of default other than a default in the payment of
any principal or interest on any note of the series for a specified period,
unless the all of the holders consent to the sale, the proceeds of the sale are
sufficient to pay in full the principal and interest due on the notes or the
trustee determines that the collateral would not be sufficient on an ongoing
basis to make all payments on the notes as those payments would have become due,
and the trustee obtains the consent of the holders of a specified amount of the
notes.
In the event that the trustee liquidates the collateral in connection
with an event of default involving a payment default, the trustee will have a
prior lien on the proceeds of any liquidation for unpaid fees and expenses. As a
result, upon the occurrence of an event of default, the amount available for
distribution to the holders may be less than would otherwise be the case.
If the principal of the notes of a series is declared due and payable,
the holders of any notes issued at a discount from par may be entitled to
receive no more than an amount equal to the unpaid principal amount thereof less
the amount of the discount which is unamortized.
32
If an event of default shall occur and be continuing, the trustee will
not be obligated to exercise any rights or powers under the indenture at the
request of the holders, unless the holders provide security satisfactory to the
trustee against the expenses and liabilities which might be incurred by it. The
majority holders shall have the right to direct the time, method and place of
conducting any proceeding for any remedy or exercising any power conferred on
the trustee with respect to the notes. The majority holders may waive the
default, except a default in the payment of principal or interest or a default
caused by a breach of a covenant or provision of the indenture that cannot be
modified without the waiver or consent of all the affected note holders.
THE TRUSTEE
The prospectus supplement will identify the trustee for the series. The
trustee may have normal banking relationships with the sponsor or the servicer.
In addition, for the purpose of meeting the legal requirements of local
jurisdictions, the trustee will have the power to appoint co-trustees or
separate trustees of all or any part of the trust fund relating to a series of
securities. In the event of an appointment, all rights, powers, duties and
obligations conferred or imposed upon the trustee will be conferred or imposed
upon the trustee and each separate trustee or co-trustee jointly, or, in any
jurisdiction in which the trustee shall be incompetent or unqualified to perform
as trustee, singly upon the separate trustee or co-trustee who will exercise and
perform solely at the direction of the trustee. The trustee may also appoint
agents to perform any of the responsibilities of the trustee, which agents will
have any or all of the rights, powers, duties and obligations of the trustee
conferred on them by appointment; although the trustee will continue to be
responsible for its duties and obligations under the agreement.
DUTIES OF THE TRUSTEE
The trustee will not make any representations as to the validity or
sufficiency of the agreements, the securities or of any primary asset or
documents. If no event of default as defined in the agreement has occurred, the
trustee is required to perform only those duties specifically required of it
under the agreement. Upon receipt of the various certificates, statements,
reports or other instruments furnished to it, the trustee is required to examine
them to determine whether they are in the form required by the agreements.
However, the trustee will not be responsible for the accuracy or content of any
of the documents furnished to it by the holders or the servicer under the
agreement.
The trustee may be held liable for its negligent action or failure to
act, or for its misconduct. The trustee will not be liable, however, with
respect to any action taken, suffered or omitted to be taken by it in good faith
in accordance with the direction of the holders in an event of default. The
trustee is not required to expend its own funds or incur any financial liability
in the performance of its duties, or in the exercise of any of its rights or
powers, if repayment of those funds or adequate indemnity against risk is not
reasonably assured to it.
RESIGNATION OF TRUSTEE
The trustee may, upon written notice to the sponsor, resign at any
time, in which event the sponsor will be obligated to use its best efforts to
appoint a successor trustee. If no successor trustee has been appointed and has
accepted the appointment within 30 days after the giving of a notice of
resignation, the resigning trustee may petition any court of competent
jurisdiction for appointment of a successor trustee. The trustee may also be
removed at any time (1) if the trustee ceases to be eligible to continue as a
trustee under the agreement, (2) if the trustee becomes insolvent or (3) by the
majority holders. Any resignation or removal of the trustee and appointment of a
successor trustee will not become effective until acceptance of the appointment
by the successor trustee.
33
AMENDMENT OF AGREEMENT
Each agreement may be amended by the parties to the agreement, without
notice to or consent of the holders, to correct any ambiguity or any defective
provisions, to supplement any provision, or to comply with any requirements
imposed by the Internal Revenue Code. Any amendment will not adversely affect in
any material respect the interests of any holders.
Each agreement may also be amended by the parties with the consent of a
specified percentage of the holders, for the purpose of adding, changing or
eliminating any provision of the agreement. No amendment may reduce or delay the
payments on any security without the consent of the holder of the security.
VOTING RIGHTS
The prospectus supplement will state the method of determining
allocation of voting rights with respect to a series.
LIST OF HOLDERS
No agreement will provide for the holding of any annual or other
meeting of holders.
REMIC ADMINISTRATOR
For any series with respect to which a REMIC election is made,
preparation of reports and other administrative duties with respect to the trust
fund may be performed by a REMIC administrator, who may be an affiliate of the
sponsor.
TERMINATION
Pooling and Servicing Agreement; Trust Agreement. The pooling and
servicing agreement or trust agreement for a series will terminate upon the
distribution to holders of all amounts payable to them after the final payment
or liquidation of the primary assets and the disposition of all foreclosure
property or the sale by the trustee of the primary assets. For a description of
the ways in which securities may be retired early, see "Description of the
Securities--Optional Redemption, Purchase or Termination" and "--Mandatory
Termination; Auction Sale."
For each series, the servicer or the trustee, as applicable, will give
written notice of termination of the agreement to each holder, and the final
distribution will be made only upon surrender and cancellation of the securities
at an office or agency specified in the notice of termination.
Indenture. The indenture will be discharged with respect to a series of
notes upon the delivery to the trustee for cancellation of all the notes or,
with limitations, upon deposit with the trustee of funds sufficient for the
payment in full of all of the notes of the series. See "Description of the
Securities--Defeasance."
LEGAL ASPECTS OF LOANS
The following discussion contains summaries of legal aspects of loans,
which are general in nature. Because these legal aspects are to a degree
governed by state law, the summaries do not purport to be complete, reflect the
laws of any particular state, nor encompass the laws of all states in which the
properties securing the mortgage loans are situated.
34
MORTGAGE LOANS
The mortgage loans will be represented by a note and an accompanying
mortgage. The borrower is personally liable to repay the indebtedness evidenced
by the mortgage loan under the note. The mortgage creates a lien on the related
mortgaged property to secure the indebtedness.
Enforcement of the Note. Under the note, the borrower is personally
liable to repay the indebtedness evidenced by the mortgage loan. In some states,
the lender on a note secured by a lien on real property has the option of
bringing a personal action against the borrower on the debt without first
exhausting the security; however, in some of these states the lender, following
judgment on a personal action, may be deemed to have elected a remedy and may be
precluded from exercising remedies with respect to the related property
security. Consequently, the practical effect of the election requirement, in
those states permitting the election, is that lenders will usually proceed
against the property first rather than bringing a personal action against the
borrower on the note.
Some states have imposed statutory prohibitions that limit the remedies
of a beneficiary under a deed of trust or a mortgagee under a mortgage. In some
states, including California, statutes limit the right of the beneficiary or
mortgagee to obtain a deficiency judgment against the borrower following
foreclosure. A deficiency judgment is a personal judgment against the former
borrower equal in most cases to the difference between the amount due to the
lender and the net amount realized upon the public sales of the real property.
In the case of a mortgage loan secured by a property owned by a trust where the
mortgage note is executed on behalf of the trust, a deficiency judgment against
the trust following foreclosure or sale under a deed of trust, even if
obtainable under applicable law, may be of little value to the mortgagee or
beneficiary if there are no trust assets against which a deficiency judgment may
be executed. Other statutes require the beneficiary or mortgagee to exhaust the
security afforded under a deed of trust or mortgage by foreclosure in an attempt
to satisfy the full debt before bringing a personal action against the borrower.
Finally, in other states, statutory provisions limit any deficiency judgment
against the former borrower following a foreclosure to the excess of the
outstanding debt over the fair value of the property at the time of the public
sale. The purpose of these statutes is generally to prevent a beneficiary or
mortgagee from obtaining a large deficiency judgment against the former borrower
as a result of low or no bids at the judicial sale.
In addition to laws limiting or prohibiting deficiency judgments,
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 collateral
or enforce a deficiency judgment. For example, with respect to federal
bankruptcy law, a court with federal bankruptcy jurisdiction may permit a debtor
through his or her Chapter 11 or Chapter 13 rehabilitative plan to cure a
monetary default on a loan on a debtor's residence by paying arrearages within a
reasonable time period and reinstating the original loan payment schedule even
though the lender accelerated the loan and final judgment of foreclosure had
been entered in state court, provided no sale of the residence had yet occurred,
prior to the filing of the debtor's petition. Some courts with federal
bankruptcy jurisdiction have approved plans, based on the particular facts of
the reorganization case, that effected the curing of a loan default by paying
arrearages over a number of years.
Court with federal bankruptcy jurisdiction also have indicated that the
terms of a loan secured by property of the debtor may be modified. These courts
have allowed modifications that include reducing the amount of each monthly
payment, changing the rate of interest, altering the repayment schedule,
forgiving all or a portion of the debt and reducing the lender's security
interest to the value of the residence, thus leaving the lender a general
unsecured creditor for the difference between the value of the residence and the
outstanding balance of the loan.
35
Some states have imposed general equitable principles upon judicial
foreclosure. These equitable principles are generally designed to relieve the
borrower from the legal effect of the borrower's default under the related 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 for the borrower's default and the likelihood
that the borrower will be able to reinstate the loan. In some cases, lender have
been required to reinstate loans or recast payment schedules in order to
accommodate borrowers who are suffering from temporary financial disabilities.
In other cases, courts have limited the right of the lender to foreclose if the
default under the loan is not monetary, such as the borrower failing to
adequately maintain the property or the borrower executing a second deed of
trust affecting the property.
Tax liens arising under the Internal Revenue Code may provide priority
over the lien of a mortgage or deed of trust. In addition, substantive
requirements are imposed upon mortgage lenders in connection with the
origination and the servicing of loans by numerous federal and some state
consumer protection laws. These laws include, by example, the federal
Truth-in-Lending Act, Real Estate Settlement Procedures Act, Equal Credit
Opportunity Act, Fair Credit Billing Act, Fair Credit Reporting Act and related
statutes and state laws, such as the California Fair Debt Collection Practices
Act. These laws and regulations impose specific statutory liabilities upon
lenders who originate loans and fail to comply with the provisions of the law.
In some cases, this liability may affect assignees of the loans.
Security Interests -- Real Estate Mortgages. The mortgage loans for a
series will be secured by either mortgages or deeds of trust or deeds to secure
debt depending upon the prevailing practice in the state in which the mortgaged
property subject to a mortgage loan is located. The filing of a mortgage, deed
of trust or deed to secure debt creates a lien or title interest upon the real
property covered by the instrument and represents the security for the repayment
of an obligation that is customarily evidenced by a promissory note. It is not
prior to the lien for real estate taxes and assessments or other charges imposed
under governmental police powers and may also be subject to other liens under
the laws of the jurisdiction in which the mortgaged property is located.
Priority with respect to the instruments depends on their terms, the knowledge
of the parties to the mortgage and generally on the order of recording with the
applicable state, county or municipal office. There are two parties to a
mortgage, the mortgagor, who is the borrower/property owner or the land trustee,
and the mortgagee, who is the lender. Under the mortgage instrument, the
mortgagor delivers to the mortgagee a note or bond and the mortgage. In the case
of a land trust, there are three parties because title to the mortgaged property
is held by a land trustee under a land trust agreement of which the
borrower/property owner is the beneficiary; at origination of a mortgage loan,
the borrower executes a separate undertaking to make payments on the mortgage
note. A deed of trust transaction normally has three parties: The trustor, who
is the borrower/property owner; the beneficiary, who is the lender; and the
trustee, a third-party grantee. Under a deed of trust, the trustor grants the
mortgaged property, irrevocably until the debt is paid, in trust, generally with
a power of sale, to the trustee to secure payment of the obligation. The
mortgagee's authority under a mortgage and the trustee's authority under a deed
of trust are governed by the law of the state in which the real property is
located, the express provisions of the mortgage or deed of trust, and, in some
cases, in deed of trust transactions, the directions of the beneficiary.
Foreclosure on Mortgages. Foreclosure of a mortgage is generally
accomplished by judicial action. Generally, the action is initiated by the
service of legal pleadings upon all parties having an interest of record in the
real property. Delays in completion of the foreclosure occasionally may result
from difficulties in locating necessary parties defendant. When the mortgagee's
right to foreclosure is contested, the legal proceedings necessary to resolve
the issue can be time-consuming and expensive. After the completion of a
judicial foreclosure proceeding, the court may issue a judgment of foreclosure
and appoint a receiver or other officer to conduct the sale of the mortgaged
property. In some states, mortgages may also be foreclosed by advertisement,
under a power of sale provided in the mortgage. Foreclosure of a mortgage by
advertisement is essentially similar to foreclosure of a deed of trust by
nonjudicial power of sale.
36
Foreclosure of a deed of trust is generally accomplished by a
nonjudicial trustee's sale under a specific provision in the deed of trust which
authorizes the trustee to sell the mortgaged property upon any default by the
borrower under the terms of the note or deed of trust. In some states,
foreclosure also may be accomplished by judicial action in the manner provided
for foreclosure of mortgages. In some states, the trustee must record a notice
of default and send a copy to the borrower-trustor and to any person who has
recorded a request for a copy of a notice of default and notice of sale. In
addition, the trustee in some states must provide notice to any other individual
having an interest in the real property, including any junior lienholders. If
the deed of trust is not reinstated within any applicable cure period, a notice
of sale must be posted in a public place and, in most states, published for a
specified period of time in one or more newspapers. In addition, some state laws
require that a copy of the notice of sale be posted on the mortgaged property
and sent to all parties having an interest of record in the mortgaged property.
The trustor, borrower, or any person having a junior encumbrance on the real
estate, may, during a reinstatement period, cure the default by paying the
entire amount in arrears plus the costs and expenses incurred in enforcing the
obligation. Generally, state law controls the amount of foreclosure expenses and
costs, including attorney's fees, which may be recovered by a lender. If the
deed of trust is not reinstated, a notice of sale must be posted in a public
place and, in most states, published for a specified period of time in one or
more newspapers. In addition, some state laws require that a copy of the notice
of sale be posted on the mortgaged property, recorded and sent to all parties
having an interest in the real property.
An action to foreclose a mortgage is an action to recover the mortgage
debt by enforcing the mortgagee's rights under the mortgage. It is regulated by
statutes and rules and subject throughout to the court's equitable powers.
Generally, a mortgagor is bound by the terms of the related mortgage note and
the mortgage as made and cannot be relieved from his default if the mortgagee
has exercised his rights in a commercially reasonable manner. However, since a
foreclosure action historically was equitable in nature, the court may exercise
equitable powers to relieve a mortgagor of a default and deny the mortgagee
foreclosure on proof that either the mortgagor's default was neither willful nor
in bad faith or the mortgagee's action established a waiver, fraud, bad faith,
or oppressive or unconscionable conduct warranting a court of equity to refuse
affirmative relief to the mortgagee. A court of equity may relieve the mortgagor
from an entirely technical default where that default was not willful.
A foreclosure action is subject to most of the delays and expenses of
other lawsuits if defenses or counterclaims are interposed, sometimes requiring
up to several years to complete. Moreover, a non-collusive, regularly conducted
foreclosure sale may be challenged as a fraudulent conveyance, regardless of the
parties' intent, if a court determines that the sale was for less than fair
consideration and the sale occurred while the mortgagor was insolvent and within
one year, or within the state statute of limitations if the trustee in
bankruptcy elects to proceed under state fraudulent conveyance law, of the
filing of bankruptcy. Similarly, a suit against the debtor on the related
mortgage note may take several years and, generally, is a remedy alternative to
foreclosure, the mortgagee being precluded from pursuing both at the same time.
In the case of foreclosure under either a mortgage or a deed of trust,
the sale by the referee or other designated officer or by the trustee is a
public sale. However, because of the difficulty third party purchasers have in
determining the exact status of title and because the physical condition of the
mortgaged property may have deteriorated during the foreclosure proceedings, it
is uncommon for a third party to purchase the mortgaged property at a
foreclosure sale. Rather, it is common for the lender to purchase the mortgaged
property from the trustee or referee for an amount which may be equal to the
unpaid principal amount of the mortgage note secured by the mortgage or deed of
trust plus accrued and
37
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 that judgment is 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 burdens of ownership, including obtaining hazard
insurance, paying taxes and making repairs at its own expense as are necessary
to render the mortgaged 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 mortgaged property. Depending upon market
conditions, the ultimate proceeds of the sale of the mortgaged property may not
equal the lender's investment in the mortgaged property. Any loss may be reduced
by the receipt of any mortgage guaranty insurance proceeds.
Rights of Redemption. In some states, after sale under a deed of trust
or foreclosure of a mortgage, the trustor or mortgagor and foreclosed junior
lienors are given a statutory period in which to redeem the mortgaged property
from the foreclosure sale. The right of redemption should be distinguished from
the equity of redemption, which is a non-statutory right that must be exercised
prior to the foreclosure sale. In some states, redemption may occur only upon
payment of the entire principal balance of the loan, accrued interest and
expenses of foreclosure. In other states, redemption may be authorized if the
former borrower pays only a portion of the sums due. The effect of a statutory
right of redemption is to diminish the ability of the lender to sell the
foreclosed mortgaged property. The exercise of a right of redemption would
defeat the title of any purchaser at a foreclosure sale, or of any purchaser
from the lender subsequent to foreclosure or sale under a deed of trust.
Consequently the practical effect of a right of redemption is to force the
lender to retain the mortgaged property and pay the expenses of ownership until
the redemption period has run. In some states, there is no right to redeem
mortgaged property after a trustee's sale under a deed of trust.
Junior Mortgages; Rights of Senior Mortgages. The mortgage loans
comprising or underlying the primary assets included in the trust fund for a
series will be secured by mortgages or deeds of trust which may be second or
more junior mortgages to other mortgages held by other lenders or institutional
investors. The rights of the trust fund, and therefore the holders, as mortgagee
under a junior mortgage, are subordinate to those of the mortgagee under the
senior mortgage, including the prior rights of the senior mortgagee to receive
hazard insurance and condemnation proceeds and to cause the mortgaged property
securing the mortgage loan to be sold upon default of the mortgagor, thereby
extinguishing the junior mortgagee's lien unless the junior mortgagee asserts
its subordinate interest in the mortgaged property in foreclosure litigation
and, possibly, satisfies the defaulted senior mortgage. A junior mortgagee may
satisfy a defaulted senior loan in full and, in some states, may cure the
default and bring the senior loan current, in either event adding the amounts
expended to the balance due on the junior loan. In most states, absent a
provision in the mortgage or deed of trust, no notice of default is required to
be given to a junior mortgagee.
The standard form of the mortgage used by most institutional lenders
confers on the mortgagee the right both to receive all proceeds collected under
any hazard insurance policy and all awards made in connection with condemnation
proceedings, and to apply the proceeds and awards to any indebtedness secured by
the mortgage, in any order as the mortgagee may determine. Thus, in the event
improvements on the mortgaged property are damaged or destroyed by fire or other
casualty, or in the event the mortgaged property is taken by condemnation, the
mortgagee or beneficiary under underlying senior mortgages will have the prior
right to collect any insurance proceeds payable under a hazard insurance policy
and any award of damages in connection with the condemnation and to apply the
same to the indebtedness secured by the senior mortgages. Proceeds in excess of
the amount of senior mortgage indebtedness, in most cases, may be applied to the
indebtedness of a junior mortgage.
38
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 mortgaged property and, when due,
all encumbrances, charges and liens on the mortgaged property which appear prior
to the mortgage or deed of trust, to provide and maintain fire insurance on the
mortgaged property, to maintain and repair the mortgaged property and not to
commit or permit any waste thereof, and to appear in and defend any action or
proceeding purporting to affect the mortgaged 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 sometimes given the right to perform the
obligation itself, at its election, with the mortgagor agreeing to reimburse the
mortgagee for any sums expended by the mortgagee on behalf of the mortgagor. All
sums so expended by the mortgagee become part of the indebtedness secured by the
mortgage.
Due-On-Sale Clauses in Mortgage Loans. Due-on-sale clauses permit the
lender to accelerate the maturity of the loan if the borrower sells or
transfers, whether voluntarily or involuntarily, all or part of the real
mortgaged property securing the loan without the lender's prior written consent.
The enforceability of these clauses has been the subject of legislation or
litigation in many states, and in some cases, typically involving single family
residential mortgage transactions, their enforceability has been limited or
denied. In any event, the Garn-St. Germain Depository Institutions Act of 1982
preempts state law that prohibits the enforcement of due-on-sale clauses and
permits lenders to enforce these clauses in accordance with their terms, with
exceptions. As a result, due-on-sale clauses have become generally enforceable
except in those states whose legislatures exercised their authority to regulate
the enforceability of the clauses with respect to loans that were (1) 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 (2) originated by lenders
other than national banks, federal savings institutions and federal credit
unions. The Federal Home Loan Mortgage Corporation 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 in window period loans. Also,
the Garn-St. Germain Act does "encourage" lenders to permit assumption of loans
at the original rate of interest or at some other rate less than the average of
the original rate and the market rate.
In addition, under federal bankruptcy law, due-on-sale clauses may not
be enforceable if resulting from the 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 some states, there are or may be specific
limitations, upon the late charges which a lender may collect from a borrower
for delinquent payments. Some states also limit the amounts that a lender may
collect from a borrower as an additional charge if the loan is prepaid. Late
charges and prepayment fees are typically retained by servicers as additional
servicing compensation.
Equitable Limitations on Remedies. In connection with lenders' attempts
to realize upon their security, courts have invoked general equitable
principles. The equitable principles are generally designed to relieve the
borrower from the legal effect of his defaults under the loan documents.
Examples of judicial remedies that have been fashioned include judicial
requirements that the lender undertake affirmative and expensive actions to
determine the causes of the borrower's default and the likelihood that the
borrower will be able to reinstate the loan. In some cases, courts have
substituted their judgment for the lender's judgment and have required that
lenders reinstate loans or recast payment schedules in order to accommodate
borrowers who are suffering from temporary financial disability. In other cases,
courts have limited the right of a lender to realize upon his security if the
default under the security agreement is
39
not monetary, such as the borrower's failure to adequately maintain the
mortgaged property or the borrower's execution of secondary financing affecting
the mortgaged property. Finally, some courts have been faced with the issue of
whether or not federal or state constitutional provisions reflecting due process
concerns for adequate notice require that borrowers under security agreements
receive notices in addition to the statutorily-prescribed minimums. For the most
part, these cases have upheld the notice provisions as being reasonable or have
found that, in cases involving the sale by a trustee under a deed of trust or by
a mortgagee under a mortgage having a power of sale, there is insufficient state
action to afford constitutional protections to the borrower.
Most conventional single-family loans may be prepaid in full or in part
without penalty. The regulations of the Office of Thrift Supervision prohibit
the imposition of a prepayment penalty or equivalent fee for or in connection
with the acceleration of a loan by exercise of a due-on-sale clause. A mortgagee
to whom a prepayment in full has been tendered may be compelled to give either a
release of the mortgage or an instrument assigning the existing mortgage. The
absence of a restraint on prepayment, particularly with respect to loans having
higher mortgage rates, may increase the likelihood of refinancing or other early
retirements of the loans.
Applicability of Usury Laws. Title V of the Depository Institutions
Deregulation and Monetary Control Act of 1980, enacted in March 1980, provides
that state usury limitations shall not apply to specified types of residential
first loans originated by specified lenders after March 31, 1980. Similar
federal statutes were in effect with respect to loans made during the first
three months of 1980. The Office of Thrift Supervision, as successor to the
Federal Home Loan Bank Board, is authorized to issue rules and regulations and
to publish interpretations governing implementation of Title V. Title V
authorizes any state to reimpose interest rate limits by adopting, before April
1, 1983, a state law, or by certifying that the voters of a state have voted in
favor of any provision, constitutional or otherwise, which expressly rejects an
application of the federal law. Fifteen states adopted such a law prior to the
April 1, 1983 deadline. In addition, even where Title V is not so rejected, any
state is authorized by the law to adopt a provision limiting discount points or
other charges on loans covered by Title V.
Security Interests in Personal Property and Fixtures. A portion of each
mortgaged property may consist of property which is "personal property" or a
"fixture" under local state law. This will most commonly occur when the proceeds
of the related mortgage loan were applied to property improvements, although any
mortgaged property may have some personal property components. A financing
statement generally is not required to be filed to perfect a purchase money
security interest in consumer goods. Those purchase money security interests are
assignable. In general, a purchase money security interest grants to the holder
a security interest that has priority over a conflicting security interest in
the same collateral and the proceeds of the collateral. However, to the extent
that the collateral subject to a purchase money security interest becomes a
fixture, in order for the related purchase money security interest to take
priority over a conflicting interest in the fixture, the holder's interest in
the personal property must generally be perfected by a timely fixture filing. In
general, a security interest does not exist in ordinary building material
incorporated into an improvement on land. Contracts that finance lumber, bricks,
other types of ordinary building material or other goods that are deemed to lose
their characterization, upon incorporation of the materials into the related
property, will not be secured by a purchase money security interest in the
personal property being financed.
Enforcement of Security Interest in Personal Property. So long as the
personal property has not become subject to the real estate law, a creditor can
repossess the property securing a contract by voluntary surrender, by
"self-help" repossession that is peaceful or, in the absence of voluntary
surrender and the ability to repossess without breach of the peace, by judicial
process. The holder of a contract must give the debtor a number of days' notice,
which varies from 10 to 30 days depending on the state, prior to commencement of
any repossession. Most states place restrictions on repossession sales,
including requiring prior notice to the debtor and commercial reasonableness in
effecting the sale. Most states also require that the debtor be given notice of
any sale prior to resale of the unit that the debtor may redeem it at or before
the resale.
40
Under the laws applicable in most states, a creditor is entitled to
obtain a deficiency judgment from a debtor for any deficiency on repossession
and resale of the property securing the debtor's loan. However, some states
impose prohibitions or limitations on deficiency judgments, and in many cases
the defaulting borrower would have no assets with which to pay a judgment.
Other statutory provisions, including federal and state bankruptcy and
insolvency laws and general equitable principles, may limit or delay the ability
of a lender to repossess and resell collateral or enforce a deficiency judgment.
CONTRACTS
As a result of the assignment of the contracts to the trustee, the
trust fund will succeed collectively to all of the rights and will assume the
obligations of the obligee under the contracts. Each contract evidences both the
obligor's obligation to repay the loan, and the grant of a security interest in
the manufactured home. Aspects of both features of the contracts are described
more fully below.
The contracts generally are "chattel paper" as defined in the Uniform
Commercial Code in effect in the states in which the manufactured homes
initially were registered. The Uniform Commercial Code treats the sale of
chattel paper in a manner similar to perfection of a security interest in
chattel paper. The seller will transfer physical possession of the contracts to
the trustee or a designated custodian or may retain possession of the contracts
as custodian for the trustee. In addition, the seller will make an appropriate
filing of a financing statement in the appropriate states to give notice of the
trustee's ownership of the contracts. Unless otherwise specified in the
prospectus supplement, the contracts will not be stamped or marked otherwise to
reflect their assignment from the sponsor to the trustee. Therefore, if through
negligence, fraud or otherwise, a subsequent purchaser were able to take
physical possession of the contracts without notice of the assignment, the
trustee's interest in contracts could be defeated.
SECURITY INTERESTS IN THE MANUFACTURED HOMES
The manufactured homes securing the contracts may be located in all 50
states. Security interests in manufactured homes may be perfected either by
notation of the secured party's lien on the certificate of title or by delivery
of the required documents and payment of a fee to the state motor vehicle
authority, depending on state law. In some non-title states, perfection is
governed by the Uniform Commercial Code. The servicer may effect the notation or
delivery of the required documents and fees, and obtain possession of the
certificate of title, as appropriate under the laws of the state in which any
manufactured home securing a manufactured housing conditional sales contract is
registered. In the event the servicer fails, due to clerical errors, to effect
the notation or delivery, or files the security interest under the wrong law,
the trustee may not have a first priority security interest in the manufactured
home securing a contract. As manufactured homes have become larger and often
have been attached to their sites without any apparent intention to move them,
courts in many states have held that manufactured homes may become subject to
real estate title and recording laws. As a result, a security interest in a
manufactured home could be rendered subordinate to the interests of other
parties claiming an interest in the home under applicable state real estate law.
In order to perfect a security interest in a manufactured home under real estate
laws, the secured party must file either a "fixture filing" under the provisions
of the Uniform Commercial Code or a real estate mortgage under the real estate
laws of the state where the home is located. These filings must be made in the
real estate records office of the county where the home is
41
located. Substantially all of the contracts contain provisions prohibiting the
borrower from permanently attaching the manufactured home to its site. So long
as the borrower does not violate this agreement, a security interest in the
manufactured home will be governed by the certificate of title laws or the
Uniform Commercial Code, and the notation of the security interest on the
certificate of title or the filing of a financing statement will be effective to
maintain the priority of the security interest in the manufactured home. If,
however, a manufactured home is permanently attached to its site, other parties
could obtain an interest in the manufactured home which is prior to the security
interest originally retained by the seller and transferred to the issuer. With
respect to a series of securities and if so described in the prospectus
supplement, the servicer may be required to perfect a security interest in the
manufactured home under applicable real estate laws. The servicer will represent
that at the date of the initial issuance of the related securities it has
obtained a perfected first priority security interest by proper notation or
delivery of the required documents and fees with respect to substantially all of
the manufactured homes securing the contracts.
The sponsor will cause the security interests in the manufactured homes
to be assigned to the trustee on behalf of the holders. Neither the sponsor nor
the trustee will amend the certificates of title to identify the trustee or the
trust fund as the new secured party, and neither the sponsor nor the servicer
will deliver the securities of title to the trustee or note thereon the interest
of the trustee. Accordingly, the servicer, or the seller, continues to be named
as the secured party on the certificate of title relating to the manufactured
homes. In many states, the assignment is an effective conveyance of the security
interest without amendment of any lien noted on the related certificate of title
and the new secured party succeeds to the sponsor's rights as the secured party.
However, in some states there exists a risk that, in the absence of an amendment
to the certificate of title, the assignment of the security interest in the
manufactured home might not be effective or perfected or that, in the absence of
notation or delivery to the trustee, the assignment of the security interest in
the manufactured home might not be effective against creditors of the servicer
(or the seller) or a trustee in bankruptcy of the servicer, or the seller.
In the absence of fraud, forgery or permanent affixation of the
manufactured home to its site by the manufactured home owner, or administrative
error by state recording officials, the notation of the lien of the servicer, or
the seller, on the certificate of title or delivery of the required documents
and fees will be sufficient to protect the holders against the rights of
subsequent purchasers of a manufactured home or subsequent lenders who take a
security interest in the manufactured home. If there are any manufactured homes
as to which the security interest assigned to the trustee is not perfected, that
security interest would be subordinate to, among others, subsequent purchasers
for value of manufactured homes and holders of perfected security interests.
There also exists a risk in not identifying the trustee as the new secured party
on the certificate of title that, through fraud or negligence, the security
interest of the holders could be released.
In the event that the owner of a manufactured home moves it to a state
other than the state in which that manufactured home initially is registered,
under the laws of most states the perfected security interest in the
manufactured home would continue for four months after relocation and thereafter
until the owner re-registers the manufactured home in the state. If the owner
were to relocate a manufactured home to another state and not re-register the
manufactured home in that state, and if steps are not taken to re-perfect the
trustee's security interest in that state, the security interest in the
manufactured home would cease to be perfected. A majority of states generally
require surrender of a certificate of title to re-register a manufactured home;
accordingly, the trustee must surrender possession if it holds the certificate
of title to the manufactured home or, in the case of manufactured homes
registered in states which provide for notation of lien, the servicer would
receive notice of surrender if the security interest in the manufactured home is
noted on the certificate of title. Accordingly, the trustee would have the
opportunity to re-perfect its security interest in the manufactured home in the
state of relocation. In states which do not require a certificate of title for
registration of a manufactured home, re-registration could defeat perfection. In
the
42
ordinary course of servicing the manufactured housing conditional sales
contracts, the servicer takes steps to effect the re-perfection upon receipt of
notice of registration or information from the obligor as to relocation.
Similarly, when an obligor under a manufactured housing conditional sales
contract sells a manufactured home, the trustee, or its custodian, must
surrender possession of the certificate of title or the servicer will receive
notice as a result of its lien noted thereon and accordingly will have an
opportunity to require satisfaction of the related manufactured housing
conditional sales contract before release of the lien. Under the servicing
agreement, the servicer is obligated to take steps as are necessary to maintain
perfection of security interests in the manufactured homes.
Under the laws of most states, liens for repairs performed on a
manufactured home and liens for personal property taxes take priority over a
perfected security interest. The seller will represent that it has no knowledge
of any liens with respect to any manufactured home securing payment on any
contract. However, those liens could arise at any time during the term of a
contract. No notice will be given to the trustee or holders in the event that a
lien arises.
ENFORCEMENT OF SECURITY INTERESTS IN MANUFACTURED HOMES
The servicer on behalf of the trustee, to the extent required by the
related servicing agreement, may take action to enforce the trustee's security
interest with respect to contracts in default by repossession and resale of the
manufactured homes securing the defaulted contracts. So long as the manufactured
home has not become subject to the real estate law, a creditor can repossess a
manufactured home securing a contract by voluntary surrender, by "self-help"
repossession that is peaceful or, in the absence of voluntary surrender and the
ability to repossess without breach of the peace, by judicial process. The
holder of a contract must give the debtor a number of days' notice, which varies
from 10 to 30 days depending on the state, prior to commencement of any
repossession. The Uniform Commercial Code and consumer protection laws in most
states place restrictions on repossession sales, including requiring prior
notice to the debtor and commercial reasonableness in effecting the sale. The
law in most states also requires that the debtor be given notice of any sale
prior to resale of the unit so that the debtor may redeem at or before the
resale. In the event of the repossession and resale of a manufactured home, the
trustee would be entitled to be paid out of the sale proceeds before those
proceeds could be applied to the payment of the claims of unsecured creditors or
the holders of subsequently perfected security interests or, thereafter, to the
debtor.
Under the laws applicable in most states, a creditor is entitled to
obtain a deficiency judgment from a debtor for any deficiency on repossession
and resale of the manufactured home securing that debtor's loan. However, some
states impose prohibitions or limitations on deficiency judgments, and in many
cases the defaulting borrower would have no assets with which to pay a judgment.
Other statutory provisions, including federal and state bankruptcy and
insolvency laws and general equitable principles, may limit or delay the ability
of a lender to repossess and resell collateral or enforce a deficiency judgment.
CONSUMER PROTECTION LAWS
The so-called "holder-in-due-course" rule of the Federal Trade
Commission is intended to defeat the ability of the transferor of a consumer
credit contract which is the seller of goods which gave rise to the transaction,
and related lenders and assignees, to transfer the contract free of notice of
claims by the debtor thereunder. The effect of this rule is to subject the
assignee of contract to all claims and defenses which the debtor could assert
against the seller of goods. Liability under this rule is limited to amounts
paid under a contract; however, the obligor also may be able to asset the rule
to set off remaining amounts due as a defense against a claim brought by the
trustee against the obligor. Numerous other federal and
43
state consumer protection laws impose requirements applicable to the origination
of the contracts, including the Truth in Lending Act, the Federal Trade
Commission Act, the Fair Credit Billing Act, the Fair Credit Reporting Act, the
Equal Credit Opportunity Act, the Fair Debt Collection Practices Act and the
Uniform Consumer Credit Code. In the case of some of these laws, the failure to
comply with their provisions may affect the enforceability of the related
contract.
TRANSFERS OF MANUFACTURED HOMES; ENFORCEABILITY OF "DUE-ON-SALE" CLAUSES
The contracts, in general, prohibit the sale or transfer of the related
manufactured homes without the consent of the servicer and permit the
acceleration of the maturity of the contracts by the servicer upon any sale or
transfer that is not consented to.
In the case of a transfer of a manufactured home after which the
servicer desires to accelerate the maturity of the related contract, the
servicer's ability to do so will depend on the enforceability under state law of
the "due-on-sale" clause. The Garn-St. Germain Depository Institutions Act of
1982 generally preempts state laws prohibiting enforcement of "due-on-sale"
clauses applicable to the manufactured homes, with some exemptions and
conditions. Consequently, in some states the servicer may be prohibited from
enforcing a "due-on-sale" clause in the contracts.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary
Control Act of 1980 provides that, subject to the following conditions, state
usury limitations shall not apply to any loan which is secured by a first lien
on specified kinds of manufactured housing. The contracts would be covered if
they satisfy specified conditions, among other things, governing the terms of
any prepayments, late charges and deferral fees and requiring a 30-day notice
period prior to instituting any action leading to repossession of the related
unit.
Title V authorized any state to reimpose limitations on interest rates
and finance charges by adopting before April 1, 1983 a law or constitutional
provision 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, and state is authorized by the law to adopt a
provision limiting discount points or other charges on loans covered by Title V.
The seller will represent that all of the contracts comply with applicable usury
law.
FORMALDEHYDE LITIGATION WITH RESPECT TO CONTRACTS
A number of lawsuits have been brought in the United States alleging
personal injury from exposure to the chemical formaldehyde, which is preset in
many building materials, including components of manufactured housing such as
plywood flooring and wall paneling. Some of these lawsuits were brought against
manufacturers of manufactured housing, suppliers of component parts, and related
persons in the distribution process. sponsor is aware of a limited number of
cases in which plaintiffs have won judgments in these lawsuits.
The holder of any contract secured by a manufactured home with respect
to which a formaldehyde claim has been successfully asserted may be liable to
the obligor for the amount paid by the obligor on the related contract and may
be unable to collect amounts still due under the contract. The successful
assertion of that claim constitutes a breach of a representation or warranty of
the person specified in the prospectus supplement, and the holders would suffer
a loss only to the extent that (1) the person breached its obligation to
repurchase the contract in the event an obligor is successful in asserting the
claim, and (2) the person, the servicer or the trustee were unsuccessful in
asserting any claim of
44
contribution or subrogation on behalf of the holders against the manufacturer or
other persons who were directly liable to the plaintiff for the damages. Typical
products liability insurance policies held by manufacturers and component
suppliers of manufactured homes may not cover liabilities arising from
formaldehyde in manufactured housing, with the result that recoveries from those
manufacturers, suppliers or other persons may be limited to their corporate
assets without the benefit of insurance.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940
Under the Soldiers' and Sailors' Civil Relief Act of 1940, members of
all branches of the military on active duty, including draftees and reservists
in military service, (1) are entitled to have interest rates reduced and capped
at 6% per annum, on obligations (including mortgage loans) incurred prior to the
commencement of military service for the duration of military service, (2) may
be entitled to a stay of proceedings on any kind of foreclosure or repossession
action in the case of defaults on those obligations entered into prior to
military service for the duration of military service and (3) may have the
maturity of the obligations incurred prior to military service extended, the
payments lowered and the payment schedule readjusted for a period of time after
the completion of military service. However, the benefits of (1), (2), or (3)
above are subject to challenge by creditors and if, in the opinion of the court,
the ability of a person to comply with the obligations is not materially
impaired by military service, the court may apply equitable principles
accordingly. If a borrower's obligation to repay amounts otherwise due on a
mortgage loan included in a trust fund for a series is relieved under the
Soldiers' and Sailors' Civil Relief Act of 1940, none of the trust fund, the
servicer, the sponsor nor the trustee will be required to advance the amounts,
and any loss in respect thereof may reduce the amounts available to be paid to
the holders of the securities of that series.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following is a general discussion of the material anticipated
federal income tax consequences to investors of the purchase, ownership and
disposition of the securities offered hereby. The discussion is based upon laws,
regulations, rulings and decisions now in effect, all of which are subject to
change. The discussion below does not purport to deal with all federal tax
consequences applicable to all categories of investors, some of which may be
subject to special rules. Investors are urged to consult their own tax advisors
in determining the particular federal, state, local and other tax consequences
to them of the purchase, ownership and disposition of the securities. References
in this section to "sections" and the "code" refer to the Internal Revenue Code
of 1986, as amended.
The following discussion addresses securities of five general types:
o securities representing interests in a grantor trust which the
sponsor will covenant not to elect to have treated as a REMIC or a
FASIT;
o securities representing interests in a trust, or a portion thereof,
which the sponsor will covenant to elect to have treated as a REMIC
under sections 860A through 860G;
o securities that are intended to be treated for federal income tax
purposes as indebtedness secured by the underlying loans;
o securities representing interests in a trust that is intended to be
treated as a partnership under the code; and
o securities representing interests in a trust, or portion thereof,
which the Company will covenant to elect to have treated as a FASIT
under sections 860H through 860L.
45
The prospectus supplement for each series of securities will indicate
whether a REMIC or FASIT election (or elections) will be made for the related
trust and, if a REMIC or FASIT election is to be made, will identify all
"regular interests" and "residual interests" in the REMIC or all "regular
interests," "high-yield interests" or the "ownership interest" in the FASIT.
The Taxpayer Relief Act of 1997 adds provisions to the code that
require the recognition of gain upon the "constructive sale of an appreciated
financial position." A constructive sale of an appreciated financial position
occurs if a taxpayer enters into transactions with respect to a financial
instrument that have the effect of substantially eliminating the taxpayer's risk
of loss and opportunity for gain with respect to the financial instrument. These
provisions apply only to classes of securities that do not have a principal
balance.
GRANTOR TRUST SECURITIES
With respect to each series of grantor trust securities, Dewey
Ballantine LLP, special tax counsel to the sponsor, will deliver its opinion to
the sponsor that the related grantor trust will be classified as a grantor trust
and not as a partnership or an association taxable as a corporation. The opinion
shall be attached on Form 8-K to be filed with the Securities and Exchange
Commission within fifteen days after the initial issuance of the securities or
filed with the Securities and Exchange Commission as a post-effective amendment
to the prospectus. Accordingly, each beneficial owner of a grantor trust
security will generally be treated as the owner of an interest in the loans
included in the grantor trust.
For purposes of the following discussion, a grantor trust security
representing an undivided equitable ownership interest in the principal of the
loans constituting the related grantor trust, together with interest thereon at
a pass-through rate, will be referred to as a "grantor trust fractional interest
security." A grantor trust security representing ownership of all or a portion
of the difference between interest paid on the loans constituting the related
grantor trust and interest paid to the beneficial owners of grantor trust
fractional interest securities issued with respect to the grantor trust will be
referred to as a "grantor trust strip security."
Taxation of Beneficial Owners of Grantor Trust Securities
Beneficial owners of grantor trust fractional interest securities
generally will be required to report on their federal income tax returns their
respective shares of the income from the loans (including amounts used to pay
reasonable servicing fees and other expenses but excluding amounts payable to
beneficial owners of any corresponding grantor trust strip securities) and,
subject to the limitations described below, will be entitled to deduct their
shares of any reasonable servicing fees and other expenses. If a beneficial
owner acquires a grantor trust fractional interest security for an amount that
differs from its outstanding principal amount, the amount includible in income
on a grantor trust fractional interest security may differ from the amount of
interest distributable thereon. See "Discount and Premium," below. Individuals
holding a grantor trust fractional interest security directly or through
pass-through entities will be allowed a deduction for reasonable servicing fees
and expenses only to the extent that the aggregate of the beneficial owner's
miscellaneous itemized deductions exceeds 2% of the beneficial owner's adjusted
gross income. Further, beneficial owners (other than corporations) subject to
the alternative minimum tax may not deduct miscellaneous itemized deductions in
determining alternative minimum taxable income.
Beneficial owners of grantor trust strip securities generally will be
required to treat the securities as "stripped coupons" under section 1286.
Accordingly, that beneficial owner will be required to treat the excess of the
total amount of payments on the security over the amount paid for the security
as original issue discount and to include the discount in income as it accrues
over the life of the security. See "--Discount and Premium," below.
46
Grantor trust fractional interest securities may also be subject to the
coupon stripping rules if a class of grantor trust strip securities is issued as
part of the same series of securities. The consequences of the application of
the coupon stripping rules would appear to be that any discount arising upon the
purchase of that security (and perhaps all stated interest thereon) would be
classified as original issue discount and includible in the beneficial owner's
income as it accrues (regardless of the beneficial owner's method of
accounting), as described below under "--Discount and Premium." The coupon
stripping rules will not apply, however, if (i) the pass-through rate is no more
than 100 basis points lower than the gross rate of interest payable on the
underlying loans and (ii) the difference between the outstanding principal
balance on the security and the amount paid for the security is less than 0.25%
of the principal balance times the weighted average remaining maturity of the
security.
Sales of Grantor Trust Securities
Any gain or loss recognized on the sale of a grantor trust security
(equal to the difference between the amount realized on the sale and the
adjusted basis of the grantor trust security) will be capital gain or loss,
except to the extent of accrued and unrecognized market discount, which will be
treated as ordinary income, and in the case of banks and other financial
institutions except as provided under section 582(c). The adjusted basis of a
grantor trust security will generally equal its cost, increased by any income
reported by the seller (including original issue discount and market discount
income) and reduced (but not below zero) by any previously reported losses, any
amortized premium and by any distributions of principal.
Grantor Trust Reporting
The trustee will furnish to each beneficial owner of a grantor trust
fractional interest security with each distribution a statement setting forth
the amount of the distribution allocable to principal on the underlying loans
and to interest thereon at the related interest rate. In addition, within a
reasonable time after the end of each calendar year, based on information
provided by the Master servicer, the trustee will furnish to each beneficial
owner during the year any customary factual information that the Master servicer
deems necessary or desirable to enable beneficial owners of grantor trust
securities to prepare their tax returns and will furnish comparable information
to the Internal Revenue Service (the "IRS") as and when required to do so by
law.
REMIC SECURITIES
If provided in a prospectus supplement, an election will be made to
treat a trust as a REMIC. With respect to each series of securities for which
that election is made, Dewey Ballantine LLP, special tax counsel to the sponsor,
will deliver its opinion to the sponsor that, assuming compliance with the
pooling and servicing agreement, the trust will be treated as a REMIC for
federal income tax purposes. A trust for which a REMIC election is made will be
referred to in this prospectus as a "REMIC trust." The securities of each class
will be designated as "regular interests" in the REMIC trust except that a
separate class will be designated as the "residual interest" in the REMIC trust.
The prospectus supplement for each series of securities will state whether
securities of each class will constitute a REMIC regular security or a REMIC
residual security. The opinion shall be attached on Form 8-K to be filed with
the securities and Exchange Commission within fifteen days after the initial
issuance of the securities or filed with the securities and Exchange Commission
as a post-effective amendment to the prospectus.
47
A REMIC trust will not be subject to federal income tax except with
respect to income from prohibited transactions and in other instances described
below. See "--Taxes on a REMIC Trust." Generally, the total income from the
mortgage loans in a REMIC trust will be taxable to the beneficial owners of the
securities of that series, as described below.
Regulations issued by the Treasury Department on December 23, 1992 (the
"REMIC regulations") provide some guidance regarding the federal income tax
consequences associated with the purchase, ownership and disposition of REMIC
securities. While material provisions of the REMIC regulations are discussed
below, investors should consult their own tax advisors regarding the possible
application of the REMIC regulations in their specific circumstances.
Special Tax Attributes
REMIC regular securities and REMIC residual securities will be "regular
or residual interests in a REMIC" within the meaning of section
7701(a)(19)(C)(xi) and "real estate assets" within the meaning of section
856(c)(5)(A). If at any time during a calendar year less than 95% of the assets
of a REMIC trust consist of "qualified mortgages" (within the meaning of section
860G(a)(3)) then the portion of the REMIC regular securities and REMIC residual
securities that are qualifying assets under those sections during the calendar
year may be limited to the portion of the assets of the REMIC trust that are
qualified mortgages. Similarly, income on the REMIC regular securities and REMIC
residual securities will be treated as "interest on obligations secured by
mortgages on real property" within the meaning of section 856(c)(3)(B) , subject
to the same limitation as described in the preceding sentence. For purposes of
applying this limitation, a REMIC trust should be treated as owning the assets
represented by the qualified mortgages. The assets of the trust fund will
include, in addition to the mortgage loans, payments on the mortgage loans held
pending distribution on the REMIC regular securities and REMIC residual
securities and any reinvestment income thereon. REMIC regular securities and
REMIC residual securities held by a financial institution to which section 585,
586 or 593 applies will be treated as evidences of indebtedness for purposes of
section 582(c)(1). REMIC regular securities will also be qualified mortgages
with respect to other REMICs.
Taxation of Beneficial Owners of REMIC Regular Securities
Except as indicated below in this federal income tax discussion, the
REMIC regular securities will be treated for federal income tax purposes as debt
instruments issued by the REMIC trust on the settlement date and not as
ownership interests in the REMIC trust or its assets. Beneficial owners of REMIC
regular securities that otherwise report income under a cash method of
accounting will be required to report income with respect to those securities
under an accrual method. For additional tax consequences relating to REMIC
regular securities purchased at a discount or with premium, see "--Discount and
Premium," below.
Taxation of Beneficial Owners of REMIC Residual Securities
Daily Portions. Except as indicated below, a beneficial owner of a
REMIC residual security for a REMIC trust generally will be required to report
its daily portion of the taxable income or net loss of the REMIC trust for each
day during a calendar quarter that the beneficial owner owned the REMIC residual
security. For this purpose, the daily portion shall be determined by allocating
to each day in the calendar quarter its ratable portion of the taxable income or
net loss of the REMIC trust for the quarter and by allocating the amount so
allocated among the beneficial owners of residual securities (on that day) in
accordance with their percentage interests on that day. Any amount included in
the gross income or allowed as a loss of any beneficial owner of a residual
security by virtue of this paragraph will be treated as ordinary income or loss.
48
The requirement that each beneficial owner of a REMIC residual security
report its daily portion of the taxable income or net loss of the REMIC trust
will continue until there are no securities of any class outstanding, even
though the beneficial owner of the REMIC residual security may have received
full payment of the stated interest and principal on its REMIC residual
security.
The trustee will provide to beneficial owners of REMIC residual
securities of each series of securities (i) any information as is necessary to
enable them to prepare their federal income tax returns and (ii) any reports
regarding the securities of the series that may be required under the code.
Taxable Income or Net Loss of a REMIC Trust. The taxable income or net
loss of a REMIC trust will be the income from the qualified mortgages it holds
and any reinvestment earnings less deductions allowed to the REMIC trust. The
taxable income or net loss for a given calendar quarter will be determined in
the same manner as for an individual having the calendar year as the taxable
year and using the accrual method of accounting, with modifications. The first
modification is that a deduction will be allowed for accruals of interest
(including any original issue discount, but without regard to the investment
interest limitation in section 163(d) ) on the REMIC regular securities (but not
the REMIC residual securities), even though REMIC regular securities are for
non-tax purposes evidences of beneficial ownership rather than indebtedness of a
REMIC trust. Second, market discount or premium equal to the difference between
the total stated principal balances of the qualified mortgages and the basis to
the REMIC trust generally will be included in income (in the case of discount)
or deductible (in the case of premium) by the REMIC trust as it accrues under a
constant yield method, taking into account the "prepayment assumption" (as
defined in the prospectus supplement, see "--Discount and Premium--Original
Issue Discount," below). The basis to a REMIC trust in the qualified mortgages
is the aggregate of the issue prices of all the REMIC regular securities and
REMIC residual securities in the REMIC trust on the settlement date. If,
however, a substantial amount of a class of REMIC regular securities or REMIC
residual securities has not been sold to the public, then the fair market value
of all the REMIC regular securities or REMIC residual securities in that class
as of the date of the prospectus supplement should be substituted for the issue
price.
Third, no item of income, gain, loss or deduction allocable to a
prohibited transaction (see "--Taxes on a REMIC Trust--Prohibited Transactions"
below) will be taken into account. Fourth, a REMIC trust generally may not
deduct any item that would not be allowed in calculating the taxable income of a
partnership by virtue of section 703(a)(2). Finally, the limitation on
miscellaneous itemized deductions imposed on individuals by section 67 will not
be applied at the REMIC trust level to any servicing and guaranty fees. (See,
however, "--Pass-Through of Servicing and Guaranty Fees to Individuals" below.)
In addition, under the REMIC regulations, any expenses that are incurred in
connection with the formation of a REMIC trust and the issuance of the REMIC
regular securities and REMIC residual securities are not treated as expenses of
the REMIC trust for which a deduction is allowed. If the deductions allowed to a
REMIC trust exceed its gross income for a calendar quarter, the excess will be a
net loss for the REMIC trust for that calendar quarter. The REMIC regulations
also provide that any gain or loss to a REMIC trust from the disposition of any
asset, including a qualified mortgage or "permitted investment" (as defined in
section 860G(a)(5) ) will be treated as ordinary gain or loss.
A beneficial owner of a REMIC residual security may be required to
recognize taxable income without being entitled to receive a corresponding
amount of cash. This could occur, for example, if the qualified mortgages are
considered to be purchased by the REMIC trust at a discount, some or all of the
REMIC regular securities are issued at a discount, and the discount included as
a result of a prepayment on a mortgage loan that is used to pay principal on the
REMIC regular securities exceeds the REMIC trust's deduction for unaccrued
original issue discount relating to the REMIC regular securities. Taxable income
may also be greater in earlier years because interest expense deductions,
expressed as a percentage of the outstanding principal amount of the REMIC
regular securities, may increase over time as the earlier classes of REMIC
regular securities are paid, whereas interest income with respect to any given
mortgage loan expressed as a percentage of the outstanding principal amount of
that mortgage loan, will remain constant over time.
49
Basis Rules and Distributions. A beneficial owner of a REMIC residual
security has an initial basis in its security equal to the amount paid for that
REMIC residual security. That basis is increased by amounts included in the
income of the beneficial owner and decreased by distributions and by any net
loss taken into account with respect to the REMIC residual security. A
distribution on a REMIC residual security to a beneficial owner is not included
in gross income to the extent it does not exceed the beneficial owner's basis in
the REMIC residual security (adjusted as described above) and, to the extent it
exceeds the adjusted basis of the REMIC residual security, shall be treated as
gain from the sale of the REMIC residual security.
A beneficial owner of a REMIC residual security is not allowed to take
into account any net loss for any calendar quarter to the extent that the net
loss exceeds the beneficial owner's adjusted basis in its REMIC residual
security as of the close of the calendar quarter (determined without regard to
the net loss). Any loss disallowed by reason of this limitation may be carried
forward indefinitely to future calendar quarters and, subject to the same
limitation, may be used only to offset income from the REMIC residual security.
Excess Inclusions. Any excess inclusions with respect to a REMIC
residual security are subject to special tax rules. With respect to a beneficial
owner of a REMIC residual security, the excess inclusion for any calendar
quarter is defined as the excess (if any) of the daily portions of taxable
income over the sum of the "daily accruals" for each day during a quarter that
the REMIC residual security was held by the beneficial owner. The daily accruals
are determined by allocating to each day during a calendar quarter its ratable
portion of the product of the "adjusted issue price" of the REMIC residual
security at the beginning of the calendar quarter and 120% of the "federal
long-term rate" in effect on the settlement date, based on quarterly
compounding, and properly adjusted for the length of the quarter. For this
purpose, the adjusted issue price of a REMIC residual security as of the
beginning of any calendar quarter is equal to the issue price of the REMIC
residual security, increased by the amount of daily accruals for all prior
quarters and decreased by any distributions made with respect to the REMIC
residual security before the beginning of that quarter. The issue price of a
REMIC residual security is the initial offering price to the public (excluding
bond houses and brokers) at which a substantial number of the REMIC residual
securities was sold. The federal long-term rate is a blend of current yields on
treasury securities having a maturity of more than nine years, computed and
published monthly by the IRS.
In general, beneficial owners of REMIC residual securities with excess
inclusion income cannot offset that income by losses from other activities. For
beneficial owners that are subject to tax only on unrelated business taxable
income (as defined in section 511 ), an excess inclusion of a beneficial owner
is treated as unrelated business taxable income. With respect to variable
contracts (within the meaning of section 817 ), a life insurance company cannot
adjust its reserve to the extent of any excess inclusion, except as provided in
regulations. The REMIC regulations indicate that if a beneficial owner of a
REMIC residual security is a member of an affiliated group filing a consolidated
income tax return, the taxable income of the affiliated group cannot be less
than the sum of the excess inclusions attributable to all residual interests in
REMICs held by members of the affiliated group. For a discussion of the effect
of excess inclusions on foreign investors that own REMIC residual securities,
see "--Foreign Investors" below.
The Treasury Department also has the authority to issue regulations
that would treat all taxable income of a REMIC trust as excess inclusions if the
REMIC residual security does not have "significant value." Although the Treasury
Department did not exercise this authority in the REMIC regulations, future
regulations may contain this rule. If that rule were adopted, it is unclear how
significant value would be determined for these purposes. If no similar rule is
applicable, excess inclusions should be calculated as discussed above.
50
In the case of any REMIC residual securities that are held by a real
estate investment trust, the aggregate excess inclusions with respect to REMIC
residual securities reduced (but not below zero) by the real estate investment
trust taxable income (within the meaning of section 857(b)(2) , excluding any
net capital gain) will be allocated among the shareholders of that trust in
proportion to the dividends received by the shareholders from the trust, and any
amount so allocated will be treated as an excess inclusion with respect to a
REMIC residual security as if held directly by the shareholder. Similar rules
will apply in the case of regulated investment companies, common trust funds and
cooperatives that hold a REMIC residual security.
Pass-Through of Servicing and Guaranty Fees to Individuals. A
beneficial owner of a REMIC residual security who is an individual will be
required to include in income a share of any servicing and guaranty fees. A
deduction for these fees will be allowed to a beneficial owner only to the
extent that those fees, along with some of the beneficial owner's other
miscellaneous itemized deductions exceed 2% of the beneficial owner's adjusted
gross income. In addition, a beneficial owner of a REMIC residual security may
not be able to deduct any portion of the fees in computing a beneficial owner's
alternative minimum tax liability. A beneficial owner's share of the fees will
generally be determined by (i) allocating the amount of the expenses for each
calendar quarter on a pro rata basis to each day in the calendar quarter, and
(ii) allocating the daily amount among the beneficial owners in proportion to
their respective holdings on that day.
Taxes on a REMIC Trust
Prohibited Transactions. The Code imposes a tax on a REMIC equal to
100% of the net income derived from "prohibited transactions." In general, a
prohibited transaction means the disposition of a qualified mortgage other than
under specified exceptions, the receipt of investment income from a source other
than a mortgage loan or other permitted investments, the receipt of compensation
for services, or the disposition of an asset purchased with the payments on the
qualified mortgages for temporary investment pending distribution on the regular
and residual interests.
Contributions to a REMIC after the Startup Day. The Code imposes a tax
on a REMIC equal to 100% of the value of any property contributed to the REMIC
after the "startup day" (generally the same as the settlement date). Exceptions
are provided for cash contributions to a REMIC (i) during the three month period
beginning on the startup day, (ii) made to a qualified reserve fund by a
beneficial owner of a residual interest, (iii) in the nature of a guarantee,
(iv) made to facilitate a qualified liquidation or clean-up call, and (v) as
otherwise permitted by Treasury Regulations.
Net Income from Foreclosure Property. The Code imposes a tax on a REMIC
equal to the highest corporate rate on "net income from foreclosure property."
The terms "foreclosure property" (which includes property acquired by deed in
lieu of foreclosure) and "net income from foreclosure property" are defined by
reference to the rules applicable to real estate investment trusts. Generally,
foreclosure property would be treated as such for a period of three years, with
a possible extension. Net income from foreclosure property generally means gain
from the sale of foreclosure property that is inventory property and gross
income from foreclosure property other than qualifying rents and other
qualifying income for a real estate investment trust.
51
Sales of REMIC Securities
Except as provided below, if a REMIC regular residual security is sold,
the seller will recognize gain or loss equal to the difference between the
amount realized in the sale and its adjusted basis in the security. The adjusted
basis of a REMIC regular security generally will equal the cost of that security
to the seller, increased by any original issue discount or market discount
included in the seller's gross income with respect to the security and reduced
by distributions on that security previously received by the seller of amounts
included in the stated redemption price at maturity and by any premium that has
reduced the seller's interest income with respect to the security. See
"--Discount and Premium." The adjusted basis of a REMIC residual security is
determined as described above under "--Taxation of Beneficial Owners of REMIC
Residual Securities--Basis Rules and Distributions." Except as provided in the
following paragraph or under section 582(c) , any gain or loss will be capital
gain or loss, provided the security is held as a "capital asset" (generally,
property held for investment) within the meaning of section 1221.
Gain from the sale of a REMIC regular security that might otherwise be
capital gain will be treated as ordinary income to the extent that the gain does
not exceed the excess, if any, of (i) the amount that would have been includible
in the income of the beneficial owner of a REMIC regular security had income
accrued at a rate equal to 110% of the "applicable federal rate" (generally, an
average of current yields on treasury securities) as of the date of purchase
over (ii) the amount actually includible in the beneficial owner's income. In
addition, gain recognized on a sale by a beneficial owner of a REMIC regular
security who purchased the security at a market discount would also be taxable
as ordinary income in an amount not exceeding the portion of the discount that
accrued during the period a security was held by the beneficial owner, reduced
by any market discount includible in income under the rules described below
under "--Discount and Premium."
If a beneficial owner of a REMIC residual security sells its REMIC
residual security at a loss, the loss will not be recognized if, within six
months before or after the sale of the REMIC residual security, the beneficial
owner purchases another residual interest in any REMIC or any interest in a
taxable mortgage pool (as defined in section 7701(i) ) comparable to a residual
interest in a REMIC. That disallowed loss would be allowed upon the sale of the
other residual interest (or comparable interest) if the rule referred to in the
preceding sentence does not apply to that sale. While this rule may be modified
by Treasury Regulations, no such regulations have yet been published.
Transfers of REMIC Residual Securities. Section 860E(e) imposes a
substantial tax, payable by the transferor (or, if a transfer is through a
broker, nominee, or other middleman as the transferee's agent, payable by that
agent) upon any transfer of a REMIC residual security to a disqualified
organization and upon a pass-through entity (including regulated investment
companies, real estate investment trusts, common trust funds, partnerships,
trusts, estates, cooperatives, and nominees) that owns a REMIC residual security
if the pass-through entity has a disqualified organization as a record-holder.
For purposes of the preceding sentence, a transfer includes any transfer of
record or beneficial ownership, whether by purchase, by default under a secured
lending agreement or otherwise.
The term "disqualified organization" includes the United States, any
state or political subdivision thereof, any foreign government, any
international organization, or any agency or instrumentality of the foregoing
(other than taxable instrumentalities), any cooperative organization furnishing
electric energy or providing telephone service to persons in rural areas, or any
organization (other than a farmers' cooperative) that is exempt from federal
income tax, unless the organization is subject to the tax on unrelated business
income. Moreover, an entity will not qualify as a REMIC unless there are
reasonable arrangements designed to ensure that (i) residual interests in the
entity are not held by disqualified organizations and (ii) information necessary
for the application of the REMIC tax will be made available. Restrictions on the
transfer of a REMIC residual security and other provisions that are intended to
meet this requirement are described in the pooling and servicing agreement, and
will be discussed more fully in
52
the prospectus supplement relating to the offering of any REMIC residual
security. In addition, a pass-through entity (including a nominee) that holds a
REMIC residual security may be subject to additional taxes if a disqualified
organization is a record-holder of an interest in that entity. A transferor of a
REMIC residual security (or an agent of a transferee of a REMIC residual
security, as the case may be) will be relieved of that tax liability if (i) the
transferee furnishes to the transferor (or the transferee's agent) an affidavit
that the transferee is not a disqualified organization, and (ii) the transferor
(or the transferee's agent) does not have actual knowledge that the affidavit is
false at the time of the transfer. Similarly, no tax will be imposed on a
pass-through entity for a period with respect to an interest in that entity is
owned by a disqualified organization if (i) the record-holder of the interest
furnishes to the pass-through entity an affidavit that it is not a disqualified
organization, and (ii) during that period, the pass-through entity has no actual
knowledge that the affidavit is false.
The Taxpayer Relief Act of 1997 adds provisions to the code that will
apply to an "electing large partnership." If an electing large partnership holds
a residual certificate, all interests in the electing large partnership are
treated as held by disqualified organizations for purposes of the tax imposed
upon a pass-through entity by section 860E(e). An exception to this tax,
otherwise available to a pass-through entity that is furnished with affidavits
by record holders of interests in the entity and that does not know the
affidavits are false, is not available to an electing large partnership.
Under the REMIC regulations, a transfer of a "noneconomic residual
interest" to a U.S. Person (as defined below in "--Foreign Investors--grantor
trust securities and REMIC regular securities") will be disregarded for all
federal tax purposes unless no significant purpose of the transfer is to impede
the assessment or collection of tax. A REMIC residual security would be treated
as constituting a noneconomic residual interest unless, at the time of the
transfer, (i) the present value of the expected future distributions on the
REMIC residual security is no less than the product of the present value of the
"anticipated excess inclusions" with respect to that security and the highest
corporate 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 applicable REMIC trust in an amount sufficient to satisfy the liability
for income tax on any "excess inclusions" at or after the time when the
liability accrues. Anticipated excess inclusions are the excess inclusions that
are anticipated to be allocated to each calendar quarter (or portion thereof)
following the transfer of a REMIC residual security, determined as of the date
the security is transferred and based on events that have occurred as of that
date and on the prepayment assumption. See "--Discount and Premium" and
"--Taxation of Beneficial Owners of REMIC Residual Securities--Excess
Inclusions."
The REMIC regulations provide that a significant purpose to impede the
assessment or collection of tax exists if, at the time of the transfer, a
transferor of a REMIC residual security has "improper knowledge" (i.e., 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 trust). A
transferor is presumed not to have improper knowledge if (i) the transferor
conducts, at the time of a transfer, a reasonable investigation of the financial
condition of the transferee and, as a result of the investigation, the
transferor finds that the transferee has historically paid its debts as they
come due and finds no significant evidence to indicate that the transferee will
not continue to pay its debts as they come due in the future; and (ii) the
transferee makes representations to the transferor in the affidavit relating to
disqualified organizations discussed above. Transferors of a REMIC residual
security should consult with their own tax advisors for further information
regarding the transfers.
Reporting and Other Administrative Matters. For purposes of the
administrative provisions , each REMIC trust will be treated as a partnership
and the beneficial owners of REMIC residual securities will be treated as
partners. The trustee will prepare, sign and file federal income tax returns for
each REMIC trust, which returns are subject to audit by the IRS. Moreover,
within a reasonable time after the
53
end of each calendar year, the trustee will furnish to each beneficial owner
that received a distribution during that year a statement setting forth the
portions of any distributions that constitute interest distributions, original
issue discount, and any other information required by Treasury Regulations and,
with respect to beneficial owners of REMIC residual securities in a REMIC trust,
information necessary to compute the daily portions of the taxable income (or
net loss) of the REMIC trust for each day during the year. The trustee will also
act as the tax matters partner for each REMIC trust, either in its capacity as a
beneficial owner of a REMIC residual security or in a fiduciary capacity. Each
beneficial owner of a REMIC residual security, by the acceptance of its REMIC
residual security, agrees that the trustee will act as its fiduciary in the
performance of any duties required of it in the event that it is the tax matters
partner.
Each beneficial owner of a REMIC residual security is required to treat
items on its return consistently with the treatment on the return of the REMIC
trust, unless the beneficial owner either files a statement identifying the
inconsistency or establishes that the inconsistency resulted from incorrect
information received from the REMIC trust. The IRS may assert a deficiency
resulting from a failure to comply with the consistency requirement without
instituting an administrative proceeding at the REMIC trust level.
Termination
In general, no special tax consequences will apply to a beneficial
owner of a REMIC regular security upon the termination of a REMIC trust by
virtue of the final payment or liquidation of the last mortgage loan remaining
in the trust fund. If a beneficial owner of a REMIC residual security's adjusted
basis in its REMIC residual security at the time the termination occurs exceeds
the amount of cash distributed to the beneficial owner in liquidation of its
interest, although the matter is not entirely free from doubt, it would appear
that the beneficial owner of the REMIC residual security is entitled to a loss
equal to the amount of that excess.
DEBT SECURITIES
With respect to each series of debt securities, Dewey Ballantine LLP,
special tax counsel to the sponsor, will deliver its opinion to the sponsor that
the securities will be classified as debt secured by the related loans.
Consequently, the debt securities will not be treated as ownership interests in
the loans or the trust. Beneficial owners will be required to report income
received with respect to the debt securities in accordance with their normal
method of accounting. For additional tax consequences relating to debt
securities purchased at a discount or with premium, see "--Discount and
Premium," below.
Special Tax Attributes
As described above, REMIC securities will possess special tax
attributes by virtue of the REMIC provisions. In general, debt securities will
not possess these special tax attributes. Investors to whom these attributes are
important should consult their own tax advisors regarding investment in debt
securities.
Sale or Exchange
If a beneficial owner of a debt security sells or exchanges the
security, the beneficial owner will recognize gain or loss equal to the
difference, if any, between the amount received and the beneficial owner's
adjusted basis in the security. The adjusted basis in the security generally
will equal its initial cost, increased by any original issue discount or market
discount previously included in the seller's gross income with respect to the
security and reduced by the payments previously received on the security, other
than payments of qualified stated interest, and by any amortized premium.
54
In general (except as described in "--Discount and Premium--Market
Discount," below), except for financial institutions subject to section 582(c) ,
any gain or loss on the sale or exchange of a debt security recognized by an
investor who holds the security as a capital asset (within the meaning of
section 1221 ), will be capital gain or loss and will be long-term or short-term
depending on whether the security has been held for more than one year.
PARTNERSHIP INTERESTS
With respect to each series of partnership interests, Dewey Ballantine
LLP, special tax counsel to the sponsor, will deliver its opinion to the sponsor
that the trust will be treated as a partnership and not an association taxable
as a corporation for federal income tax purposes. The opinion shall be attached
on Form 8-K to be filed with the Securities and Exchange Commission within
fifteen days after the initial issuance of the securities or filed with the
Securities and Exchange Commission as a post-effective amendment to the
prospectus. Accordingly, each beneficial owner of a partnership interest will
generally be treated as the owner of an interest in the loans.
Special Tax Attributes
As described above, REMIC securities will possess special tax
attributes by virtue of the REMIC provisions. In general, partnership interests
will not possess these special tax attributes. Investors to whom these
attributes are important should consult their own tax advisors regarding
investment in partnership interests.
Taxation of Beneficial Owners of Partnership Interests
If the trust is treated as a partnership for federal income tax
purposes, the trust will not be subject to federal income tax. Instead, each
beneficial owner of a partnership interest will be required to separately take
into account an allocable share of income, gains, losses, deductions, credits
and other tax items of the trust. These partnership allocations are made in
accordance with the code, Treasury Regulations and the partnership agreement
(here, the trust agreement and related documents).
The trust's assets will be the assets of the partnership. The trust's
income will consist primarily of interest and finance charges earned on the
underlying mortgage loans. The trust's deductions will consist primarily of
interest accruing with respect to any indebtedness issued by the trust,
servicing and other fees, and losses or deductions upon collection or
disposition of the trust's assets.
The trust could have an obligation to make payments of withholding tax
on behalf of a beneficial owner of a partnership interest. (See "Backup
Withholding" and "Foreign Investors" below).
Substantially all of the taxable income allocated to a beneficial owner
of a partnership interest that is a pension, profit sharing or employee benefit
plan or other tax-exempt entity (including an individual retirement account)
will constitute "unrelated business taxable income" generally taxable to the
holder under the code.
Under section 708 , the trust will be deemed to terminate for federal
income tax purposes if 50% or more of the capital and profits interests in the
trust are sold or exchanged within a 12-month period. Under the final
regulations issued on May 9, 1997 if such a termination occurs, the trust is
deemed to contribute all of its assets and liabilities to a newly formed
partnership in exchange for a partnership interest. Immediately thereafter, the
terminated partnership distributes interests in the new partnership to the
purchasing partner and remaining partners in proportion to their interests in
liquidation of the terminated partnership.
55
Sale or Exchange of Partnership Interests
Generally, capital gain or loss will be recognized on a sale or
exchange of partnership interests in an amount equal to the difference between
the amount realized and the seller's tax basis in the partnership interests
sold. A beneficial owner of a partnership interest's tax basis in a partnership
interest will generally equal the beneficial owner's cost increased by the
beneficial owner's share of trust income (includible in income) and decreased by
any distributions received with respect to the partnership interest. In
addition, both the tax basis in the partnership interest and the amount realized
on a sale of a partnership interest would take into account the beneficial
owner's share of any indebtedness of the trust. A beneficial owner acquiring
partnership interests at different prices may be required to maintain a single
aggregate adjusted tax basis in the partnership interest, and upon sale or other
disposition of some of the partnership interests, allocate a portion of the
aggregate tax basis to the partnership interests sold (rather than maintaining a
separate tax basis in each partnership interest for purposes of computing gain
or loss on a sale of that partnership interest).
Any gain on the sale of a partnership interest attributable to the
beneficial owner's share of unrecognized accrued market discount on the assets
of the trust would generally be treated as ordinary income to the holder and
would give rise to special tax reporting requirements. If a beneficial owner of
a partnership interest is required to recognize an aggregate amount of income
over the life of the partnership interest that exceeds the aggregate cash
distributions with respect thereto, that excess will generally give rise to a
capital loss upon the retirement of the partnership interest. If a beneficial
owner sells its partnership interest at a profit or loss, the transferee will
have a higher or lower basis in the partnership interests than the transferor
had. The tax basis of the trust's assets will not be adjusted to reflect that
higher or lower basis unless the trust files an election under section 754.
Partnership Reporting Matters
The Owner trustee is required to (i) keep complete and accurate books
of the trust, (ii) file a partnership information return (IRS Form 1065) with
the IRS for each taxable year of the trust and (iii) report each beneficial
owner of a partnership interest's allocable share of items of trust income and
expense to beneficial owners and the IRS on Schedule K-1. The trust will provide
the Schedule K-1 information to nominees that fail to provide the trust with the
information statement described below and those nominees will be required to
forward the information to the beneficial owners of the partnership interests.
Generally, beneficial owners of a partnership interests must file tax returns
that are consistent with the information return filed by the trust or be subject
to penalties unless the beneficial owner of a partnership interest notifies the
IRS of all the inconsistencies.
Under section 6031 , any person that holds partnership interests as a
nominee at any time during a calendar year is required to furnish the trust with
a statement containing information on the nominee, the beneficial owners and the
partnership interests so held. Required information includes (i) the name,
address and taxpayer identification number of the nominee and (ii) as to each
beneficial owner (x) the name, address and identification number of the person,
(y) whether the person is a United States person, a tax-exempt entity or a
foreign government, and international organization, or any wholly owned agency
or instrumentality of either of the foregoing, and (z) information on
partnership interests that were held, bought or sold on behalf of the person
throughout the year. In addition, brokers and financial institutions that hold
partnership interests through a nominee are required to furnish directly to the
trust information as to themselves and their ownership of partnership interests.
A clearing agency registered under section 17A of the Securities Exchange Act of
1934 is not required to furnish any such information statement to the trust.
Nominees, brokers and financial institutions that fail to provide the trust with
the information described above may be subject to penalties.
56
The Code provides for administrative examination of a partnership as if
the partnership were a separate and distinct taxpayer. Generally, the statute of
limitations for partnership items does not expire before three years after the
date on which the partnership information return is filed. Any adverse
determination following an audit of the return of the trust by the appropriate
taxing authorities could result in an adjustment of the returns of the
beneficial owner of a partnership interests, and a beneficial owner of a
partnership interest may be precluded from separately litigating a proposed
adjustment to the items of the trust. An adjustment could also result in an
audit of the beneficial owner of a partnership interest's returns and
adjustments of items note related to the income and losses of the trust.
FASIT SECURITIES
If provided in a prospectus supplement, an election will be made to
treat the trust as a FASIT within the meaning of section 860L(a). With respect
to each series of securities for which an election is made, Dewey Ballantine
LLP, special tax counsel to the sponsor, will deliver its opinion to the sponsor
that, assuming compliance with the pooling and servicing agreement, the trust
will be treated as a FASIT for federal income tax purposes. A trust for which a
FASIT election is made will be referred to in this prospectus as a "FASIT
trust." The securities of each class will be designated as "regular interests"
or "high-yield regular interests" in the FASIT trust except that one separate
class will be designated as the "ownership interest" in the FASIT trust. The
prospectus supplement for each series of securities will state whether
securities of each class will constitute either a regular interest or a
high-yield regular interest (a FASIT regular security) or an ownership interest
(a FASIT Ownership security). The opinion shall be attached on Form 8-K to be
filed with the securities and Exchange Commission within fifteen days after the
initial issuance of the securities or filed with the securities and Exchange
Commission as a post-effective amendment to the prospectus.
Special Tax Attributes
FASIT securities held by a real estate investment trust will constitute
"real estate assets" within the meaning of sections 856(c)(5)(A) and 856(c)(6)
and interest on the FASIT regular securities will be considered "interest on
obligations secured by mortgages on real property or on interests in real
property" within the meaning of section 856(c)(3)(B) in the same proportion
that, for both purposes, the assets of the FASIT trust and the income thereon
would be so treated. FASIT regular securities held by a domestic building and
loan association will be treated as "regular interest[s] in a FASIT" under
section 7701(a)(19)(C)(xi), but only in the proportion that the FASIT trust
holds "loans . . . secured by an interest in real property which is . . .
residential real property" within the meaning of section 7701(a)(19)(C)(v). If
at all times 95% or more of the assets of the FASIT trust or the income thereon
qualify for the foregoing treatments, the FASIT regular securities will qualify
for the corresponding status in their entirety. For purposes of section
856(c)(5)(A), payments of principal and interest on a mortgage loan that are
reinvested pending distribution to holders of FASIT regular securities should
qualify for that treatment. FASIT regular securities held by a regulated
investment company will not constitute "government securities" within the
meaning of section 851(b)(4)(A)(i). FASIT regular securities held by financial
institutions will constitute an "evidence of indebtedness" within the meaning of
section 582(c)(1).
Taxation of Beneficial Owners of FASIT Regular Securities
A FASIT trust will not be subject to federal income tax except with
respect to income from prohibited transactions and in other instances as
described below. The FASIT regular securities generally will be treated for
federal income tax purposes as newly-originated debt instruments. In general,
interest, original issue discount and market discount on a FASIT regular
security will be treated as ordinary income to the beneficial owner, and
principal payments, other than principal payments that do not exceed
57
accrued market discount, on an FASIT regular security will be treated as a
return of capital to the extent of the beneficial owner's basis allocable
thereto. Beneficial owners must use the accrual method of accounting with
respect to FASIT regular securities, regardless of the method of accounting
otherwise used by those beneficial owners. See discussion of "Discount and
Premium" below.
In order for the FASIT trust to qualify as a FASIT, there must be
ongoing compliance with the requirements of the code. The FASIT must fulfill an
asset test, which requires that substantially all the assets of the FASIT, as of
the close of the third calendar month beginning after the "startup day," which
for purposes of this discussion is the date of the initial issuance of the FASIT
securities, and at all times thereafter, must consist of cash or cash
equivalents, debt instruments, other than debt instruments issued by the owner
of the FASIT or a related party, and hedges, and contracts to acquire the same,
foreclosure property and regular interests in another FASIT or in a REMIC. Based
on identical statutory language applicable to REMICs, it appears that the
"substantially all" requirement should be met if at all times the aggregate
adjusted basis of the nonqualified assets is less than one percent of the
aggregate adjusted basis of all the FASIT's assets. The FASIT provisions,
sections 860H through 860L, also require the FASIT ownership interest and
"high-yield regular interests" to be held only by fully taxable domestic
corporations.
Permitted debt instruments must bear interest, if any, at a fixed or
qualified variable rate. Permitted hedges include interest rate or foreign
currency notional principal contracts, letters of credit, insurance, guarantees
of payment default and similar instruments to be provided in regulations, and
which are reasonably required to guarantee or hedge against the FASIT's risks
associated with being the obligor on interests issued by the FASIT. Foreclosure
property is real property acquired by the FASIT in connection with the default
or imminent default of a qualified mortgage, provided the sponsor had no
knowledge or reason to know as of the date the asset was acquired by the FASIT
that a default had occurred or would occur.
The various interests in a FASIT also must meet additional
requirements. All of the interests in a FASIT must be either one or more classes
of regular interests or a single class of ownership interest. A regular interest
is an interest in a FASIT that is issued on or after the Startup Day with fixed
terms, is designated as a regular interest, and (1) unconditionally entitles the
holder to receive a specified principal amount (or other similar amount), (2)
provides that interest payments (or other similar amounts), if any, at or before
maturity either are payable based on a fixed rate or a qualified variable rate,
(3) has a stated maturity of not longer than 30 years, (4) has an issue price
not greater than 125% of its stated principal amount, and (5) has a yield to
maturity not greater than 5 percentage points higher than the related applicable
federal rate, as defined in section 1274(d). In order to meet the 30 year
maturity requirement, the FASIT regular securities will be retired and replaced,
to the extent then-outstanding, with new regular interests on the 30th
anniversary of the date of issuance of the FASIT regular securities. A regular
interest that is described in the preceding sentence except that if fails to
meet one or more of requirements (1), (2) (4) or (5) is a "high-yield regular
interest." A high-yield regular interest that fails requirement (2) must consist
of a specified, nonvarying portion of the interest payments on the permitted
assets, by reference to the REMIC rules. An ownership interest is an interest in
a FASIT other than a regular interest that is issued on the Startup Day, is
designated an ownership interest and is held by a single, fully-taxable,
domestic corporation. An interest in a FASIT may be treated as a regular
interest even if payments of principal with respect to the interest are
subordinated to payments on other regular interests or the ownership interest in
the FASIT, and are dependent on the absence of defaults or delinquencies on
permitted assets lower than reasonably expected returns on permitted assets,
unanticipated expenses incurred by the FASIT or prepayment interest shortfalls.
If an entity fails to comply with one or more of the ongoing
requirements for status as a FASIT during any taxable year, the code provides
that the entity or applicable potion thereof will not be treated
58
as a FASIT thereafter. In this event, any entity that holds mortgage loans and
is the obligor with respect to debt obligations with two or more maturities,
such as the trust fund, may be treated as a separate association taxable as a
corporation, and the FASIT regular securities may be treated as equity interests
in that association. The legislative history to the FASIT provisions indicates,
however, that an entity can continue to be a FASIT if loss of its status was
inadvertent, it takes prompt steps to requalify and other requirements that may
be provided in Treasury Regulations are met. Loss of FASIT status results in
retirement of all regular interests and their reissuance. If the resulting
instruments would be treated as equity under general tax principles,
cancellation of debt income may result.
Taxes on a FASIT Trust
Income from "prohibited transactions" by a FASIT are taxable to the
holder of the ownership interest in a FASIT at a 100% rate. Prohibited
transactions generally include (1) the disposition of a permitted asset other
than for (a) foreclosure, default, or imminent default of a qualified mortgage,
(b) bankruptcy or insolvency of the FASIT, (c) a qualified (complete)
liquidation, (d) substitution for another permitted debt instrument or
distribution of the debt instrument to the holder of the ownership interest to
reduce overcollateralization, but only if a principal purpose of acquiring the
debt instrument which is disposed of was not the recognition of gain, or the
reduction of a loss, on the withdrawn asset as a result of an increase in the
market value of the asset after its acquisition by the FASIT or (e) the
retirement of a class of FASIT regular interests; (2) the receipt of income from
nonpermitted assets; (3) the receipt of compensation for services; or (4) the
receipt of any income derived from a loan originated by the FASIT. It is unclear
the extent to which tax on these transactions could be collected from the FASIT
trust directly under the applicable statutes rather than from the holder of the
FASIT residual security.
Due to the complexity of these rules, the absence of Treasury
Regulations and the current uncertainty as to the manner to their application to
the trust and to holders of FASIT securities, it is particularly important that
potential investors consult their own tax advisors regarding the tax treatment
of their acquisition ownership and disposition of the FASIT regular securities.
DISCOUNT AND PREMIUM
A security purchased for an amount other than its outstanding principal
amount will be subject to the rules governing original issue discount, market
discount or premium. In addition, all grantor trust strip securities and some
grantor trust fractional interest securities will be treated as having original
issue discount by virtue of the coupon stripping rules in section 1286. In very
general terms, (1) original issue discount is treated as a form of interest and
must be included in a beneficial owner's income as it accrues (regardless of the
beneficial owner's regular method of accounting) using a constant yield method;
(2) market discount is treated as ordinary income and must be included in a
beneficial owner's income as principal payments are made on the security (or
upon a sale of a security); and (3) if a beneficial owner so elects, premium may
be amortized over the life of the security and offset against inclusions of
interest income. These tax consequences are discussed in greater detail below.
Original Issue Discount
In general, a security will be considered to be issued with original
issue discount equal to the excess, if any, of its "stated redemption price at
maturity" over its "issue price." The issue price of a security is the initial
offering price to the public, excluding bond houses and brokers, at which a
substantial number of the securities was sold. The issue price also includes any
accrued interest attributable to the period between the beginning of the first
remittance period and the settlement date. The stated redemption price at
maturity of a security that has a notional principal amount or receives
principal only or that is or may be an accrual security is equal to the sum of
all distributions to be made
59
under the security. The stated redemption price at maturity of any other
security is its stated principal amount, plus an amount equal to the excess, if
any, of the interest payable on the first distribution date over the interest
that accrues for the period from the settlement date to the first distribution
date.
Notwithstanding the general definition, original issue discount will be
treated as zero if the discount is less than 0.25% of the stated redemption
price at maturity multiplied by its weighted average life. The weighted average
life of a security is apparently computed for this purpose as the sum, for all
distributions included in the stated redemption price at maturity of the amounts
determined by multiplying (1) the number of complete years (rounding down for
partial years) from the settlement date until the date on which each
distribution is expected to be made under the assumption that the mortgage loans
prepay at the rate specified in the prospectus supplement by (2) a fraction, the
numerator of which is the amount of the distribution and the denominator of
which is the security's stated redemption price at maturity. If original issue
discount is treated as zero under this rule, the actual amount of original issue
discount must be allocated to the principal distributions on the security and,
when each distribution is received, gain equal to the discount allocated to the
distribution will be recognized.
Section 1272(a)(6) contains special original issue discount rules
directly applicable to REMIC securities and debt securities. The Taxpayer Relief
Act of 1997 extends application of section 1272(a)(6) to the grantor trust
securities for tax years beginning after August 5, 1997. Under these rules, (1)
the amount and rate of accrual of original issue discount on each series of
securities will be based on (x) the prepayment assumption, and (y) in the case
of a security calling for a variable rate of interest, an assumption that the
value of the index upon which the variable rate is based remains equal to the
value of that rate on the settlement date, and (2) adjustments will be made in
the amount of discount accruing in each taxable year in which the actual
prepayment rate differs from the prepayment assumption.
Section 1272(a)(6)(B)(iii) requires that the prepayment assumption used
to calculate original issue discount be determined in the manner prescribed in
Treasury Regulations. To date, no such regulations have been promulgated. The
legislative history of this Code provision indicates that the assumed prepayment
rate must be the rate used by the parties in pricing the particular transaction.
The sponsor anticipates that the prepayment assumption for each series of
securities will be consistent with this standard. The sponsor makes no
representation, however, that the mortgage loans for a given series will prepay
at the rate reflected in the prepayment assumption for that series or at any
other rate. Each investor must make its own decision as to the appropriate
prepayment assumption to be used in deciding whether or not to purchase any of
the securities.
Each beneficial owner must include in gross income the sum of the
"daily portions" of original issue discount on its security for each day during
its taxable year on which it held the security. For this purpose, in the case of
an original beneficial owner, the daily portions of original issue discount will
be determined as follows. A calculation will first be made of the portion of the
original issue discount that accrued during each "accrual period." The trustee
will supply, at the time and in the manner required by the IRS, to beneficial
owners, brokers and middlemen information with respect to the original issue
discount accruing on the securities. The trustee will report original issue
discount based on accrual periods of no longer than one year either (1)
beginning on a distribution date or, in the case of the first accrual period,
the settlement date, and ending on the day before the next distribution date or
(2) beginning on the next day following a distribution date and ending on the
next distribution date.
Under section 1272(a)(6), the portion of original issue discount
treated as accruing for any accrual period will equal the excess, if any, of (1)
the sum of (A) the present values of all the distributions remaining to be made
on the security, if any, as of the end of the accrual period and (B) the
distribution made on the security during the accrual period of amounts included
in the stated redemption price at maturity, over (2) the adjusted issue price of
the security at the beginning of the accrual period. The
60
present value of the remaining distributions referred to in the preceding
sentence will be calculated based on (1) the yield to maturity of the security,
calculated as of the settlement date, giving effect to the prepayment
assumption, (2) events (including actual prepayments) that have occurred prior
to the end of the accrual period, (3) the prepayment assumption, and (4) in the
case of a security calling for a variable rate of interest, an assumption that
the value of the index upon which the variable rate is based remains the same as
its value on the settlement date over the entire life of the security. The
adjusted issue price of a security at any time will equal the issue price of the
security, increased by the aggregate amount of previously accrued original issue
discount with respect to that security, and reduced by the amount of any
distributions made on the security as of that time of amounts included in the
stated redemption price at maturity. The original issue discount accruing during
any accrual period will then be allocated ratably to each day during the period
to determine the daily portion of original issue discount.
In the case of grantor trust strip securities and some REMIC
securities, the calculation described in the preceding paragraph may produce a
negative amount of original issue discount for one or more accrual periods. No
definitive guidance has been issued regarding the treatment of the negative
amounts. The legislative history to section 1272(a)(6) indicates that the
negative amounts may be used to offset subsequent positive accruals but may not
offset prior accruals and may not be allowed as a deduction item in a taxable
year in which negative accruals exceed positive accruals. Beneficial owners of
the securities should consult their own tax advisors concerning the treatment of
negative accruals.
A subsequent purchaser of a security that purchases the security at a
cost less than its remaining stated redemption price at maturity also will be
required to include in gross income for each day on which it holds the security,
the daily portion of original issue discount with respect to that security, but
reduced, if the cost of the security to the purchaser exceeds its adjusted issue
price, by an amount equal to the product of (1) the daily portion and (2) a
constant fraction, the numerator of which is the excess and the denominator of
which is the sum of the daily portions of original issue discount on the
security for all days on or after the day of purchase.
Market Discount
A beneficial owner that purchases a security at a market discount, that
is, at a purchase price less than the remaining stated redemption price at
maturity of the security, or, in the case of a security with original issue
discount, its adjusted issue price, will be required to allocate each principal
distribution first to accrued market discount on the security, and recognize
ordinary income to the extent that the distribution does not exceed the
aggregate amount of accrued market discount on the security not previously
included in income. With respect to securities that have unaccrued original
issue discount, the market discount must be included in income in addition to
any original issue discount. A beneficial owner that incurs or continues
indebtedness to acquire a security at a market discount may also be required to
defer the deduction of all or a portion of the interest on the indebtedness
until the corresponding amount of market discount is included in income. In
general terms, market discount on a security may be treated as accruing either
(1) under a constant yield method or (2) in proportion to remaining accruals of
original issue discount, if any, or if none, in proportion to remaining
distributions of interest on the security, in any case taking into account the
prepayment assumption. The trustee will make available, as required by the IRS,
to beneficial owners of securities information necessary to compute the accrual
of market discount.
Notwithstanding the above rules, market discount on a security will be
considered to be zero if that discount is less than 0.25% of the remaining
stated redemption price at maturity of the security multiplied by its weighted
average remaining life. Weighted average remaining life presumably would be
calculated in a manner similar to weighted average life, taking into account
payments, including prepayments, prior to the date of acquisition of the
security by the subsequent purchaser. If market
61
discount on a security is treated as zero under this rule, the actual amount of
market discount must be allocated to the remaining principal distributions on
the security and, when each distribution is received, gain equal to the discount
allocated to that distribution will be recognized.
Securities Purchased at a Premium
A purchaser of a security that purchases the security at a cost greater
than its remaining stated redemption price at maturity will be considered to
have purchased that "premium security" at a premium. The purchaser need not
include in income any remaining original issue discount and may elect, under
section 171(c)(2) , to treat the premium as an "amortizable bond premium." If a
beneficial owner makes that election, the amount of any interest payment that
must be included in the beneficial owner's income for each period ending on a
distribution date will be reduced by the portion of the premium allocable to
each period based on the plan's yield to maturity. The premium amortization
should be made using constant yield principles. If the election is made by the
beneficial owner, the election will also apply to all bonds the interest on
which is not excludible from gross income held by the beneficial owner at the
beginning of the first taxable year to which the election applies and to all the
fully taxable bonds thereafter acquired by it, and is irrevocable without the
consent of the IRS. If the election is not made, (1) the beneficial owner must
include the full amount of each interest payment in income as it accrues, and
(2) the premium must be allocated to the principal distributions on the plan
and, when each principal distribution is received, a loss equal to the premium
allocated to that distribution will be recognized. Any tax benefit from the
premium not previously recognized will be taken into account in computing gain
or loss upon the sale or disposition of the plan.
Some securities may provide for only nominal distributions of principal
in comparison to the distributions of interest thereon. It is possible that the
IRS or the Treasury Department may issue guidance excluding some securities from
the rules generally applicable to debt instruments issued at a premium. In
particular, it is possible that a security will be treated as having original
issue discount equal to the excess of the total payments to be received thereon
over its issue price. In that event, section 1272(a)(6) would govern the accrual
of the original issue discount, but a beneficial owner would recognize
substantially the same income in any given period as would be recognized if an
election were made under section 171(c)(2). Unless and until the Treasury
Department or the IRS publishes specific guidance relating to the tax treatment
of these securities, the trustee intends to furnish tax information to
beneficial owners of the securities in accordance with the rules described in
the preceding paragraph.
Special Election
For any security acquired on or after April 4, 1994, a beneficial owner
may elect to include in gross income all "interest" that accrues on the security
by using a constant yield method. For purposes of the election, the term
"interest" includes stated interest, acquisition discount, original issue
discount, de minimis original issue discount, market discount, de minimis market
discount and unstated interest as adjusted by any amortizable bond premium or
acquisition premium. A beneficial owner should consult its own tax advisor
regarding the time and manner of making and the scope of the election and the
implementation of the constant yield method.
BACKUP WITHHOLDING
Distributions of interest and principal, as well as distributions of
proceeds from the sale of securities, may be subject to the "backup withholding
tax" under section 3406 at a rate of 31% if recipients of the distributions fail
to furnish to the payor information, including their taxpayer identification
numbers, or otherwise fail to establish an exemption from the tax. Holders that
are not exempt recipients must provide Form W-9 or the equivalent to avoid
having such amounts withheld. Any amounts deducted and withheld from a
distribution to a recipient would be allowed as a credit against that
recipient's federal income tax. Furthermore, penalties may be imposed by the IRS
on a recipient of distributions that is required to supply information but that
does not do so in the proper manner.
62
FOREIGN INVESTORS
General
U.S. withholding regulations require, in the case of securities held by
a foreign partnership, that (x) certification of exemption from U.S. tax be
provided by the partners rather than by the foreign partnership and (y) the
partnership provide information, including a United States taxpayer
identification number. A look-through rule would apply in the case of tiered
partnerships. Non-U.S. Persons should consult their own tax advisors regarding
the application to them of U.S. withholding regulations.
Grantor Trust Securities and REMIC Regular Securities
Distributions made on a grantor trust security, Debt security or a
REMIC regular security to, or on behalf of, a beneficial owner that is not a
U.S. Person generally will be exempt from U.S. federal income and withholding
taxes. The term "U.S. Person" means a citizen or resident of the United States,
a corporation, partnership or other entity created or organized in or under the
laws of the United States or any political subdivision thereof, an estate that
is subject to U.S. federal income tax regardless of the source of its income, or
a trust if a court within the United States can exercise primary supervision
over its administration and at least one United States fiduciary has the
authority to control all substantial decisions of the trust. This exemption is
applicable provided (a) the beneficial owner is not subject to U.S. tax as a
result of a connection to the United States other than ownership of the
security, (b) the beneficial owner signs a statement under penalties of perjury
that certifies that the beneficial owner is not a U.S. Person, and provides the
name and address of that beneficial owner, and (c) the last U.S. Person in the
chain of payment to the beneficial owner receives a statement from the
beneficial owner or a financial institution holding on its behalf and does not
have actual knowledge that the statement is false. Beneficial owners should be
aware that the IRS might take the position that this exemption does not apply to
a beneficial owner that also owns 10% or more of the REMIC residual securities
of any REMIC trust, or to a beneficial owner that is a "controlled foreign
corporation" described in section 881(c)(3)(C).
REMIC Residual Securities and FASIT Ownership Securities
Amounts distributed to a beneficial owner of a REMIC residual security
that is a not a U.S. Person generally will be treated as interest for purposes
of applying the 30%, or lower treaty rate, withholding tax on income that is not
effectively connected with a U.S. trade or business. Temporary Treasury
Regulations clarify that amounts not constituting excess inclusions that are
distributed on a REMIC residual security or a FASIT ownership security to a
beneficial owner that is not a U.S. Person generally will be exempt from U.S.
federal income and withholding tax, subject to the same conditions applicable to
distributions on grantor trust securities, debt securities and REMIC regular
securities, as described above, but only to the extent that the obligations
directly underlying the REMIC or FASIT trust that issued the REMIC residual
security or FASIT ownership security, e.g., mortgage loans or regular interests
in another REMIC or FASIT, were issued after July 18, 1984. In no case will any
portion of REMIC or FASIT income that constitutes an excess inclusion be
entitled to any exemption from the withholding tax or a reduced treaty rate for
withholding. See "--REMIC Securities--Taxation of Beneficial Owners of REMIC
residual securities--Excess Inclusions."
63
Partnership Interests
Depending upon the particular terms of the trust agreement and
servicing agreement, a trust may be considered to be engaged in a trade or
business in the United States for purposes of federal withholding taxes with
respect to non-U.S. persons. If the trust is considered to be engaged in a trade
or business in the United States for those purposes and the trust is treated as
a partnership, the income of the trust distributable to a non-U.S. person would
be subject to federal withholding tax. Also, in those cases, a non-U.S.
beneficial owner of a partnership interest that is a corporation may be subject
to the branch profits tax. If the trust is notified that a beneficial owner of a
partnership interest is a foreign person, the trust may withhold as if it were
engaged in a trade or business in the United States in order to protect the
trust from possible adverse consequences of a failure to withhold. A foreign
holder generally would be entitled to file with the IRS a claim for refund with
respect to withheld taxes, taking the position that no taxes were due because
the trust was not in a U.S. trade or business.
FASIT Regular Securities
"High-yield" FASIT regular securities may not be sold to or
beneficially owned by non-U.S. Persons. Any such purported transfer will be null
and void and, upon the trustee's discovery of any purported transfer in
violation of this requirement, the last preceding owner of the high-yield FASIT
regular securities will be restored to ownership thereof as completely as
possible. The last preceding owner will, in any event, be taxable on all income
with respect to the high-yield FASIT regular securities for federal income tax
purposes. The pooling and servicing agreement will provide that, as a condition
to transfer of a high-yield FASIT regular security, the proposed transferee must
furnish an affidavit as to its status as a U.S. Person and otherwise as a
permitted transferee.
STATE TAX CONSIDERATIONS
In addition to the federal income tax consequences described in
"Material Federal Income Tax Consequences," potential investors should consider
the state and local income tax consequences of the acquisition, ownership, and
disposition of the securities. State and local income tax law may differ
substantially from the corresponding federal law, and this discussion does not
purport to describe any aspect of the income tax laws of any state or locality.
Therefore, potential investors should consult their own tax advisors with
respect to the various state and local tax consequences of an investment in the
securities.
ERISA CONSIDERATIONS
Section 406 of ERISA and section 4975 of the Internal Revenue Code
prohibit a "plan," which is a pension, profit sharing or other employee benefit
plan and individual retirement arrangements from engaging in transactions
involving "plan assets" with persons that are "parties in interest" under ERISA
or "disqualified persons" under the Internal Revenue Code with respect to the
plan, unless a statutory or administrative exemption applies to the transaction.
ERISA and the Internal Revenue Code also prohibit generally actions involving
conflicts of interest by persons who are fiduciaries of those plans or
arrangements. A violation of these "prohibited transaction" rules may generate
excise tax and other liabilities under ERISA and the Internal Revenue Code for
those persons. In addition, investments by plans 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 plan. Employee benefit plans that
are governmental plans, as defined in Section 3(32) of ERISA, and church plans,
as defined in section 3(33) of ERISA, are not subject to ERISA requirements.
Accordingly, assets of these plans may be invested in securities without regard
to the ERISA considerations discussed below, subject to the provisions of other
applicable federal, state and local law. Any plan which is qualified and exempt
from taxation under section 401(a) and 501(a) of the Internal Revenue Code,
however, is subject to the prohibited transaction rules of section 503 of the
Internal Revenue Code.
64
Transactions involving the trust might be deemed to constitute
prohibited transactions under ERISA and the Internal Revenue Code with respect
to a plan, including an individual retirement arrangement, that purchased
securities. Therefore, in the absence of an exemption, the purchase, sale or
holding of a security by a plan, including individual retirement arrangements,
subject to section 406 of ERISA or section 4975 of the Internal Revenue Code
might result in prohibited transactions and the imposition of excise taxes and
civil penalties.
CERTIFICATES
First Union Corporation has received from the Department of Labor an
underwriter individual prohibited transaction exemption (which has been amended
by prohibited transaction exemptions 97-34 and 2000-58), which generally exempts
from the application of the prohibited transaction provisions of section 406(a),
406(b)(1), 406(b)(2) and 407(a) of ERISA and the excise taxes imposed by
sections 4975(a) and (b) of the Internal Revenue Code, transactions with respect
to the initial purchase, the holding and the subsequent resale by plans of
certificates in pass-through trusts that consist of secured receivables, secured
loans and other secured obligations that meet the conditions and requirements of
the underwriter exemption. The underwriter exemption will only be available for
securities that are certificates.
Among the conditions that must be satisfied in order for the
underwriter exemption to apply to offered certificates are the following:
o the acquisition of the certificates by a plan is on terms, including
the price for the certificates, that are at least as favorable to
the plan as they would be in an arm's-length transaction with an
unrelated party;
o the assets held by the trust must be fully secured (other than
one-to-four family residential mortgage loans and home equity loans
or receivables backing certain types of certificates, as described
below);
o unless the certificates are issued in "designated transactions" (as
described below) and are backed by fully-secured loans, the rights
and interests evidenced by the certificates acquired by the plan are
not subordinated to the rights and interests evidenced by other
certificates of the trust;
o the certificates acquired by the plan have received a rating at the
time of the acquisition that is one of the three (or, in the case of
designated transactions, four) highest generic rating categories
from Standard & Poor's, Moody's Investors Service or Fitch, Inc.;
o the trustee is not an affiliate of any other member of the
restricted group, as defined below)
o the sum of all payments made to and retained by the underwriters in
connection with the distribution of the certificates represents not
more than reasonable compensation for underwriting the certificates;
the sum of all payments made to and retained by the originators and
the sponsor in exchange for the assignment of the loans to the trust
estate represents not more than the fair market value of the loans;
the sum of all payments made to and retained by any servicer
represents not more than reasonable compensation for that person's
services under the pooling and servicing agreement and reimbursement
of that person's reasonable expenses;
65
o the plan investing in the certificates is an "accredited investor"
as defined in Rule 501(a)(1) of Regulation D of the Securities and
Exchange Commission under the Securities Act of 1933; and
o in the event that all of the obligations used to fund the trust have
not been transferred to the trust on the closing date, additional
obligations of the types specified in the prospectus supplement
and/or pooling and servicing agreement having an aggregate value
equal to no more than 25% of the total principal amount of the
certificates being offered by the trust may be transferred to the
trust, in exchange for amounts credited to the account funding the
additional obligations, within a funding period of no longer than 90
days or 3 months following the closing date.
The trust estate must also meet the following requirements:
o the corpus of the trust estate must consist solely of assets of the
type that have been included in other investment pools;
o certificates in the other investment pools must have been rated in
one of the three (or, in the case of designated transactions, four)
highest rating categories of Standard & Poor's, Moody's Investors
Service or Fitch, Inc. for at least one year prior to the plan's
acquisition of certificates; and
o certificates evidencing interests in other investment pools must
have been purchased by investors other than plans for at least one
year prior to the plan's acquisition of certificates.
In the case where the certificates are backed by trust assets which are
residential, home equity, manufactured housing or multi-family loans which are
described and defined in the underwriter exemption as designated transactions,
certificates issued by the trust in such transactions may be rated in one of the
highest four generic rating categories by the specified rating agencies and/or
may be subordinated. In addition, one subset of designated transactions,
residential (one-to-four family) and home equity loans, may be less than fully
secured, provided that the rights and interests evidenced by certificates issued
in such designated transactions are: (a) not subordinated to the rights and
interests evidenced by securities of the same trust; (b) such certificates
acquired by the plan have received a rating from the specified rating agencies
at the time of such acquisition that is in one of the two highest generic rating
categories; and (c) any loan included in the corpus or assets of the trust is
secured by collateral whose fair market value on the closing date of the
designated transactions is at least equal to 80% of the sum of: (i) the
outstanding principal balance due under the loan which is held by the trust and
(ii) the outstanding principal balance(s) of any other loan(s) of higher
priority (whether or not held by the trust) which are secured by the same
collateral.
Moreover, the underwriter exemption provides relief from
self-dealing/conflict of interest prohibited transactions that may occur when
the plan fiduciary causes a plan to acquire certificates in a trust in which the
fiduciary, or its affiliate, is an obligor on the receivables held in the trust;
although, among other requirements, (1) in the case of an acquisition in
connection with the initial issuance of certificates, at least fifty percent of
each class of certificates 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 trust is acquired by persons independent of the restricted
group; (2) the fiduciary, or its affiliate, is an obligor with respect to five
percent or less of the fair market value of the obligations contained in the
trust; (3) the plan's investment in certificates of any class does not exceed
twenty-five percent of all of the certificates of that class outstanding at the
time of the acquisition; and (4) immediately after the
66
acquisition, no more than twenty-five percent of the assets of the plan with
respect to 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 exemption does not apply to plans
sponsored by the "restricted group," which is the sponsor, the underwriters, the
trustee, any servicer, any obligor with respect to mortgage loans included in
the trust fund constituting more than five percent of the aggregate unamortized
principal balance of the assets in the trust fund, the insurer, the counterparty
of any interest rate swap or any affiliate of the parties.
The underwriter exemption permits interest-rate swaps and/or a yield
supplement agreements to be assets of a trust provided that certain requirements
are satisfied. The prospectus supplement for a series of securities will provide
further information if the trust holds such a contract.
In addition to the underwriter exemption, the Department of Labor has
issued Prohibited Transaction Class Exemption ("PTCE") 83-1 which provides an
exemption for transactions involving the sale or exchange of residential
mortgage pool pass-through certificates by plans and for transactions in
connection with the servicing and operation of the mortgage pool.
NOTES
The underwriter exemption will not be available for securities that are
notes. Under the "plan assets regulation" issued by the United States Department
of Labor, the assets of the trust would be treated as plan assets of a plan for
the purposes of ERISA and the Internal Revenue Code only if the plan acquired an
equity interest in the trust and none of the exceptions contained in the plan
assets regulation were applicable. An "equity interest" is defined under the
plan assets regulation as an interest other than an instrument which is treated
as indebtedness under applicable local law and which has no substantial equity
features. Accordingly, if the notes are treated as having substantial equity
features, the purchase, holding and resale of the notes could result in a
transaction that is prohibited under ERISA or the Internal Revenue Code. If the
notes are treated as indebtedness without substantial equity features, the
trust's assets would not be deemed assets of a plan. However, in that case, the
acquisition or holding of the notes by or on behalf of a plan could nevertheless
give rise to a prohibited transaction, if the acquisition and holding of notes
by or on behalf of a plan was deemed to be a prohibited loan to a party in
interest with respect to the plan. Exemptions from the prohibited transaction
rules could be applicable to the purchase and holding of notes by a plan,
depending on the type and circumstances of the plan fiduciary making the
decision to acquire the notes. Included among these exemptions are: PTCE 84-14,
regarding transactions effected by "qualified professional asset managers"; PTCE
90-1, regarding transactions entered into by insurance company pooled separate
accounts; PTCE 91-38, regarding transactions entered into by bank collective
investment funds; PTCE 95-60, regarding transactions entered into by insurance
company general accounts; and PTCE 96-23, regarding transactions effected by
"in-house asset managers". Each purchaser and each transferee of a note that is
treated as debt for purposes of the plan assets regulation may be required to
represent and warrant that its purchase and holding of the note will be covered
by one of the exemptions listed above or by another Department of Labor class
exemption.
CONSULTATION WITH COUNSEL
The prospectus supplement for each series of securities will provide
further information which plans should consider before purchasing the offered
securities. A plan fiduciary considering the purchase of securities should
consult its tax and/or legal advisors regarding whether the assets of the trust
would be considered plan assets, the possibility of exemptive relief from the
prohibited transaction rules and other ERISA issues and their potential
consequences. Moreover, each plan fiduciary should determine whether under the
general fiduciary standards of investment prudence and diversification, an
investment in the securities is appropriate for the plan, taking into account
the overall investment policy of the plan and the
67
composition of the plan's investment portfolio. The sale of securities to a plan
is in no respect a representation by the sponsor or the underwriters that this
investment meets all relevant requirements with respect to investments by plans
generally or any particular plan or that this investment is appropriate for
plans generally or any particular plan.
In John Hancock Mutual Life Insurance Co. v. Harris Trust and Savings
Bank, 510 U.S. 86 (1993), the United States Supreme Court ruled that assets held
in an insurance company's general account may be deemed to be "plan assets" for
ERISA purposes.
LEGAL INVESTMENT
The related prospectus supplement will describe whether or not the
securities will constitute "mortgage-related securities" within the meaning of
SMMEA. Accordingly, investors whose investment authority is subject to legal
restrictions should consult their own legal advisors to determine whether and to
what extent the securities constitute legal investments for them.
AVAILABLE INFORMATION
The sponsor has filed a registration statement with respect to the
securities with the Securities and Exchange Commission. This prospectus, which
forms a part of the registration statement, and the prospectus supplement
relating to each series of securities contain summaries of the material terms of
the agreements, but do not contain all of the information in the registration
statement. For further information, reference is made to the registration
statement and its exhibits. The registration statement and exhibits can be
inspected and copied at prescribed rates at the public reference facilities
maintained by the Securities and Exchange Commission at its Public Reference
Section, 450 Fifth Street, NW, Washington, D.C. 20549, and at its Regional
Office located as follows, Midwest Regional Office, 500 West Madison Street,
Chicago, Illinois 60661; and Northeast Regional Office, Seven World Trade
Center, New York, New York 10048. In addition, the Securities and Exchange
Commission maintains a World Wide Web site at http://www.sec.gov containing
reports, proxy and information statements and other information regarding
registrants, including the sponsor, that file electronically with the Securities
and Exchange Commission.
Each trust fund will be required to file reports with the Securities
and Exchange Commission as required by the Securities Exchange Act of 1934. The
sponsor may cause any trust fund to suspend filing the reports if and when the
reports are no longer required under said act.
No person has been authorized to give any information or to make any
representation other than those contained in this prospectus and any prospectus
supplement and you must not rely upon such information or representations. This
prospectus and any prospectus supplement do not constitute an offer to sell or a
solicitation of an offer to buy any securities other than the securities offered
hereby and thereby nor an offer of the securities to any person in any state or
other jurisdiction in which that offer would be unlawful. You should not assume
that information in this prospectus is correct as of any time subsequent to its
date.
INCORPORATION OF DOCUMENTS BY REFERENCE
All documents that we subsequently file with the Securities and
Exchange Commission under section 13(a), 13(c), 14 or 15(d) of the Securities
Exchange Act of 1934, after the date of this prospectus shall be incorporated by
reference in this prospectus and be a part of this prospectus. Any statement
contained in a document incorporated by reference shall be modified or
superseded if a statement contained in this prospectus, the prospectus
supplement or in any other document subsequently incorporated by reference
modifies or replaces that statement.
68
The sponsor will provide without charge, on request of each person to
whom this prospectus is delivered, a copy of any of the documents that are
incorporated by reference in this prospectus. Requests should be directed to the
sponsor at One First Union Center, 301 S. College Street, Charlotte, North
Carolina 28288, telephone no. (704) 590-6161.
PLAN OF DISTRIBUTION
The sponsor may offer each series of securities through First Union
Securities, Inc. or one or more other firms that may be designated at the time
of each offering of the securities. The prospectus supplement will describe the
specific terms of the offering of the series and of each class within the
series, the names of the underwriters, the purchase price of the securities, the
proceeds to the sponsor from the sale, any securities exchange on which the
securities may be listed, and, if applicable, the initial public offering
prices, the discounts and commissions to the underwriters and any discounts and
concessions allowed or reallowed to dealers. The place and time of delivery of
each series will be stated in the prospectus supplement. First Union is an
affiliate of the sponsor.
This prospectus and prospectus supplement also may be used by the
sponsor, First Union Securities, Inc., an affiliate of the sponsor, and any
other affiliate of the sponsor when required under the federal securities laws
in connection with offers and sales of securities in furtherance of
market-making activities in securities. First Union Securities, Inc. or any
other such affiliate may act as principal or agent in such transactions. Such
sales will be made at prices related to prevailing market prices at the time of
sale or otherwise.
LEGAL MATTERS
Dewey Ballantine LLP, New York, New York, or any other counsel
identified in the prospectus supplement, will pass upon legal matters for the
sponsor.
FINANCIAL INFORMATION
The sponsor has determined that its financial statements are not
material to the offering made hereby.
A new trust will be formed to own the primary assets and to issue each
series of securities. Each new trust will have no assets or obligations prior to
the issuance of the securities and will not engage in any activities other than
those described in this prospectus. Accordingly, no financial statements with
respect to the trusts will be included in this prospectus or any prospectus
supplement.
A prospectus supplement and the related Form 8-K may contain financial
statements of any credit enhancer.
69
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED OCTOBER 30, 2001)
$838,057,000
(APPROXIMATE, SUBJECT TO CHANGE)
RAFC ASSET-BACKED TRUST 2001-1
RAFC ASSET-BACKED SECURITIES, SERIES 2001-1
We will form a trust and the trust will issue the RAFC
Asset-Backed Securities, Series 2001-1. We are offering for
sale only the certificates listed in the table below:
------------------------------------------------------------------------------------------------------------
Consider ORIGINAL EXPECTED FINAL
carefully the risk PRINCIPAL PASS-THROUGH RATING MATURITY
factors beginning CLASS AMOUNT* RATE (1) S&P Moody's Date
on page S-9 in ------------------------------------------------------------------------------------------------------------
this prospectus
supplement and A-1 $ 53,351,000 (2) A-1+ P-1 December 25, 2002
on page 3 in the ------------------------------------------------------------------------------------------------------------
prospectus. The A-2 $ 85,000,000 (3) AAA Aaa November 25, 2029
certificates ------------------------------------------------------------------------------------------------------------
represent non- A-3 $ 564,106,000 5.115% AAA Aaa November 25, 2029
recourse ------------------------------------------------------------------------------------------------------------
obligations of the M-1 $ 55,574,000 6.695% AA Aa2 June 25, 2032
trust only. ------------------------------------------------------------------------------------------------------------
M-2 $ 44,459,000 7.050% A A2 June 25, 2032
------------------------------------------------------------------------------------------------------------
B-1 $ 35,567,000 7.425% BBB Baa2 June 25, 2032
------------------------------------------------------------------------------------------------------------
* Approximate, subject to change of not more than 5.0%.
(1) The pass-through rate for each class of offered
certificates is subject to a pool cap. See "Description
of the Certificates--Flow of Funds" in this prospectus
supplement. Also, the pass-through rate for each class of
offered certificates (other than class A-1 certificates)
will increase if the servicer does not exercise the
clean-up call.
(2) The pass-through rate for the class A-1 certificates
will be established on December 24, 2001 as a fixed rate
of interest equal to two-month LIBOR plus 0.050%.
(3) The pass-through rate for the class A-2 certificates
will be equal to one-month LIBOR plus 0.390%.
The assets of the trust will primarily consist of a pool of single
family residential mortgage loans. The loans bear fixed rates of
interest and are secured primarily by first and junior liens on
residential properties.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE OFFERED CERTIFICATES OR
DETERMINED THAT THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS IS
ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
Subject to the satisfaction of particular conditions, the underwriters
named below will purchase the class A-1, class A-2 and class B-1
certificates from us. See "Underwriting" in this prospectus supplement.
The underwriters will offer these underwritten certificates to the
public from time to time in negotiated transactions or otherwise at
varying prices to be determined at the time of sale. The underwriters
will pay us an amount equal to approximately 100% of the aggregate
principal balance of the underwritten certificates, before deducting
issuance expenses payable by us estimated to be $345,878.
In addition, Wachovia Securities has agreed to solicit offers from time
to time on a best efforts basis for the class A-3, class M-1 and class
M-2 certificates, at prices to be determined at the time of sale.
First Union Securities, Inc., acting under the trade name Wachovia
Securities, expects to enter into market making transactions in the
underwritten certificates and may act as principal or agent in any of
these transactions. Any such purchases or sales will be made at prices
related to prevailing market prices at the time of sale. This
prospectus supplement and the prospectus may be used by First Union
Securities, Inc. in connection with these transactions.
The offered certificates will be delivered in book-entry form
only on or about December 27, 2001.
---------------------
WACHOVIA SECURITIES
LOOP CAPITAL MARKETS LLP UTENDAHL CAPITAL PARTNERS, L.P.
December 19, 2001
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS
PROSPECTUS SUPPLEMENT AND THE PROSPECTUS
We provide information to you about the offered certificates in two
separate documents that provide progressively more detail:
o the prospectus, which provides general information, some of which
may not apply to the offered certificates; and
o this prospectus supplement, which describes the specific terms of
the offered certificates.
IF THE DESCRIPTION OF YOUR OFFERED CERTIFICATES IN THIS PROSPECTUS
SUPPLEMENT DIFFERS FROM THE RELATED DESCRIPTION IN THE PROSPECTUS, YOU SHOULD
RELY ON THE INFORMATION IN THIS PROSPECTUS SUPPLEMENT.
Cross-references are included in this prospectus supplement and the
accompanying prospectus to captions in these materials where you can find
further discussions about related topics. The following table of contents
provides the pages on which these captions are located.
S-2
TABLE OF CONTENTS
Summary...........................................S-4
Principal Parties..............................S-4
Dates..........................................S-4
Description of the Offered Certificates........S-5
Description of the Trust.......................S-6
Credit Enhancement.............................S-7
Optional Termination...........................S-7
Tax Considerations.............................S-7
Money Market Funds.............................S-7
ERISA Considerations...........................S-8
Legal Investment...............................S-8
Risk Factors......................................S-9
The Mortgage Loans...............................S-13
Yield, Maturity and Prepayment
Considerations...............................S-23
The Servicer.....................................S-34
Delinquency Experience........................S-35
Delinquencies and Charge-Offs (Dollars in
thousands)....................................S-35
The Originator...................................S-36
Description of the Certificates..................S-38
Designations..................................S-38
Distributions on the Certificates.............S-40
Interest Allocations..........................S-41
Principal Allocations.........................S-42
Application of Monthly Excess
Cash Flow....................................S-43
Glossary......................................S-44
Realized Losses...............................S-49
Overcollateralization.........................S-50
Subordination.................................S-50
Credit Enhancement Does Not Apply to
Prepayment and Certain Other Risks...........S-50
Reports to Certificateholders.................S-51
Book-Entry Certificates.......................S-52
The Pooling and Servicing Agreement..............S-57
Assignment of the Loans.......................S-57
Payments on the Loans.........................S-58
Monthly Advances..............................S-60
Compensating Interest.........................S-60
Calculation of LIBOR..........................S-61
Servicing and Other Compensation and
Payment of Expenses.........................S-61
Removal and Resignation of Servicer...........S-62
Termination; Purchase of Loans................S-63
The Trustee...................................S-65
The Certificate Administrator.................S-65
The Custodian.................................S-66
Certain Federal Income Tax
Considerations................................S-66
State Tax Considerations.........................S-68
ERISA Considerations.............................S-68
Legal Investment.................................S-71
Underwriting.....................................S-71
Ratings..........................................S-73
Legal Matters....................................S-73
Annex A Global Clearance, Settlement
And Tax Documentation Procedures.............S-74
Initial Settlement............................S-74
Secondary Market Trading......................S-75
Certain U.S. Federal Income Tax
Documentation Requirements..................S-77
Annex B Notional Amount Schedule for Cap
Agreement.....................................S-79
S-3
SUMMARY
o This summary highlights selected information from this prospectus
supplement 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 offered certificates, you should carefully
read this entire prospectus supplement and the accompanying prospectus.
o This summary provides an overview of certain information to aid your
understanding and is qualified by the full description of this other
information in this prospectus supplement and the accompanying
prospectus.
PRINCIPAL PARTIES
THE TRUST
RAFC Asset-Backed Trust 2001-1
ORIGINATOR
First Union National Bank of Delaware
SELLER
First Union National Bank
SERVICER
HomEq Servicing Corporation
REPLACEMENT SERVICER
Prior to the occurrence of an event of default, the initial holder of the class
X certificates may require the servicer to:
o appoint a special sub-servicer for specific loans; or
o replace HomEq Servicing Corporation as servicer with an entity to be
named by the initial holder of the class X certificates that is
satisfactory to the rating agencies and has been designated at least a
select servicer by Standard & Poor's.
Prior to the occurrence of an event of default, the holders of the offered
certificates will not be entitled to vote on a replacement servicer.
TRANSFEROR
RAFC Transferor Trust
DEPOSITOR
Residential Asset Funding Corporation
TRUSTEE
Citibank, N.A.
CUSTODIAN
First Union National Bank
CERTIFICATE ADMINISTRATOR
First Union National Bank
DATES
CUT-OFF DATE
November 30, 2001. The trust will receive payments made on the loans after this
date.
CLOSING DATE
December 27, 2001.
DISTRIBUTION DATES
The 25th day of each month, or if such day is not a business day, the next
business day, beginning in January 2002.
S-4
RECORD DATES
With respect to the certificates other than the class A-1 and class A-2
certificates, the last business day of the calendar month immediately preceding
a distribution date. With respect to the class A-1 and class A-2 certificates,
the business day immediately preceding the applicable distribution date.
DESCRIPTION OF THE OFFERED CERTIFICATES
CLASSES
We are offering for sale the following classes of certificates pursuant to this
prospectus supplement and the accompanying prospectus:
ORIGINAL PRINCIPAL
CLASS AMOUNT* PASS-THROUGH RATE(1)
- -------- ------------------ --------------------
A-1 $53,351,000 (2)
A-2 $85,000,000 (3)
A-3 $564,106,000 5.115%
M-1 $55,574,000 6.695%
M-2 $44,459,000 7.050%
B-1 $35,567,000 7.425%
- -----------
Only the class A-1, class A-2 and class B-1 certificates will be sold to the
underwriters and offered to the public on the closing date. The class A-3, class
M-1 and class M-2 certificates will initially be retained by First Union
National Bank. Wachovia Securities has agreed to solicit offers for the purchase
of these securities on a best efforts basis.
* Approximate, subject to change of not more than 5.0%.
(1) The pass-through rate for each class of offered certificates is subject to a
pool cap. See "Description of the Certificates--Flow of Funds" in this
prospectus supplement. In addition, the pass-through rate on the class A-2
certificates will be subject to a fixed cap, which is 10.700% per annum. Also,
the pass-through rate for each class of offered certificates (other than class
A-1 certificates) will increase if the servicer does not exercise the clean-up
call.
(2) The pass-through rate for the class A-1 certificates will be established on
December 24, 2001 as a fixed rate of interest equal to two month LIBOR plus
0.050%.
(3) The pass-through rate for the class A-2 certificates will be equal to
one-month LIBOR plus 0.390%.
The trust also will issue class B-2 certificates, class X certificates and class
R certificates. These certificates are not being offered for sale.
DENOMINATIONS
The offered certificates will be issued in book-entry form in minimum
denominations of $25,000 and in multiples of $1,000 in excess thereof.
You may hold your offered certificates through The Depository Trust Company,
Clearstream Banking, societe anonyme or the Euroclear System.
INTEREST
o Interest Accrual Period--For the class A-1 and class A-2 certificates,
initially, the period beginning on the closing date and ending on the
day immediately preceding the first distribution date, and thereafter,
the period beginning on a distribution date and ending on the day
immediately preceding the next distribution date. With respect to the
other offered certificates and any distribution date, the calendar
month immediately preceding such distribution date.
o Interest Calculations--With respect to the class A-1 and class A-2
certificates, interest will be calculated on an actual/360 basis, and
with respect to the other offered certificates, interest will be
calculated on a 30/360 basis.
S-5
o Pool Cap--The pass-through rate for each class of offered certificates
will be subject to a pool cap, which is based on the weighted average
of the mortgage rates less certain fees and expenses. In addition, the
pass-through rate on the class A-2 certificates is subject to a fixed
rate cap of 10.700%.
o Cap Agreement--Payments from a cap agreement will be available to make
payments of supplemental interest to the class A-2 certificates for
payments not made due to operation of the fixed cap. Such cash flows
will not be available to pay the principal of any certificate or to
cover losses on the mortgage loans.
o Margin Increase--On each distribution date following the date when the
outstanding balance of the loans declines to 10% or less of their
balance as of the cut-off date, the margin used to determine the
pass-through rate for the class A-2 certificates will double. With
respect to the other offered certificates (other than the class A-1
certificates), the fixed rate coupon will increase by 50 basis points.
Please see "Description of the Certificates-- Distributions on the Certificates"
in this prospectus supplement for a description of how the interest rate for
each class of offered certificates is calculated and the adjustments that may be
made for each distribution date.
PRINCIPAL
Principal payments on the certificates will be made from:
o principal collections received on the loans; and
o excess interest received on the loans.
Please see "Description of the Certificates-- Distributions on the Certificates"
in this prospectus supplement for a complete description of the amount of
principal payable on each distribution date.
ADVANCES
With respect to actuarial loans, the servicer will advance delinquent payments
of principal and interest (net of the servicing fee), unless the servicer
determines that the advance would not be recovered from future payments on such
loans. The servicer is also not required to make advances to compensate for
reductions in payments due to bankruptcy proceedings or the application of the
Soldiers' and Sailors' Civil Relief Act of 1940, as amended. Additionally, the
servicer is not required to make advances on simple interest loans. These
advances are only intended to maintain a regular flow of scheduled payments on
the offered certificates and are not intended to guarantee or insure against
losses.
COMPENSATING INTEREST
If a loan prepays, the servicer will make a payment of compensating interest
equal to a full month's interest on the prepaid mortgage loan. The servicer will
not be required to make payments of compensating interest in excess of the
servicing fee. The servicer will not make a payment of interest on any mortgage
loan that is subject to the Solders' and Sailors' Civil Relief Act of 1940, as
amended.
DESCRIPTION OF THE TRUST
The trust will primarily consist of a pool of single family, residential
mortgage loans originated or purchased by First Union National Bank of Delaware
or its subsidiaries. The loans bear fixed rates of interest and are secured
primarily by first and junior liens on residential properties.
S-6
The trust will also include a certain interest rate cap agreement and related
supplemental interest payments, which will be deemed to be held in a separate
sub-trust.
CREDIT ENHANCEMENT
The credit enhancement for the offered certificates will consist primarily of
the following:
o overcollateralization,
o subordination, and
o excess spread
OVERCOLLATERALIZATION
On the closing date, the principal balance of the loans will exceed the
principal balance of the certificates. This excess is referred to as
overcollateralization and serves as credit enhancement. The initial level of
overcollateralization is expected to be approximately 1.00%. We also will pay
additional principal on the certificates with some of the interest we receive on
the loans. This will increase the amount of overcollateralization. If borrowers
default on their loan payments, the loans may experience losses. If excess
spread is not sufficient to cover these losses, the amount of
overcollateralization will be reduced. The certificates will not experience any
losses unless the overcollateralization is eliminated.
SUBORDINATION
Certain classes of certificates are senior in right of payment to other,
subordinated classes. The certificates rank in the following order of priority,
from most senior to most subordinated: class A-1, class A-2 and class A-3, class
M-1, class M-2, class B-1, class B-2, class X and class R. This subordination
will be effected through the priority of payments described under "Distributions
on the Certificates--Flow of Funds" in this prospectus supplement.
EXCESS SPREAD
We expect that the interest due on the loans will exceed the sum of the interest
due on the certificates and the fees and expenses payable to the transaction
parties. Some of this excess interest, or "excess spread," will be available to
offset the losses realized on the loans.
OPTIONAL TERMINATION
The servicer may terminate the trust when the then outstanding aggregate
principal balance of the loans is equal to or less than 10% of the aggregate
principal balance of the loans as of the cut-off date.
TAX CONSIDERATIONS
One or more elections will be made to treat certain assets of the trust as one
or more REMICs for federal income tax purposes.
Except as discussed under "The Class A-2 Certificates," the offered certificates
will be treated as newly originated debt instruments, and beneficial owners of
the certificates will be required to report income on such certificates in
accordance with the accrual method of accounting. Holders of the class A-2
certificates will be treated for federal income tax purposes as owning two
separate investments: (i) a REMIC regular interest, and (ii) the right to
receive Supplemental Interest Payments.
MONEY MARKET FUNDS
The class A-1 certificates will be eligible for purchase by money market funds
under Rule 2a-7 under the Investment Company Act of 1940, as amended. A money
market fund should consult its legal advisers regarding the eligibility of such
S-7
notes under Rule 2a-7 and whether an investment in such certificates satisfies
such fund's investment policies and objectives.
ERISA CONSIDERATIONS
Subject to the considerations discussed in this prospectus supplement under
"ERISA Considerations," the offered certificates may be purchased by employee
benefit plans.
LEGAL INVESTMENT
The certificates will not be mortgage related securities for purposes of the
Secondary Mortgage Market Enhancement Act of 1984.
S-8
RISK FACTORS
The offered certificates are not suitable investments for all
investors. In particular, you should not purchase any class of offered
certificates unless you understand the prepayment, credit, liquidity and market
risks associated with that class.
An investment in the offered certificates involves significant risks.
Before you decide to invest, you should consider carefully the following risk
factors and the risk factors discussed under the heading "Risk Factors" in the
prospectus.
THE INITIAL HOLDER OF THE CLASS X Prior to the occurrence of an event of default, the initial
CERTIFICATES MAY REPLACE THE holder of the class x certificates may require the
SERVICER servicer to:
o appoint a special sub-servicer for specific loans; or
o replace HomEq Servicing Corporation as servicer
with an entity to be named by the initial holder of
the class X certificates that is satisfactory to the
rating agencies and has been designated at least a
select servicer by Standard & Poor's.
Prior to the occurrence of an event of default, the
holders of the offered certificates will not be entitled to
vote on a replacement servicer.
Any transfer of servicing may result in short-term
increases in delinquencies on the loans and other
interruptions in servicing.
YOU MAY HAVE DIFFICULTY We will not list the offered certificates on any securities
SELLING YOUR CERTIFICATES exchange. As a result, if you want to sell your
certificates you must locate a purchaser that is willing to
purchase those certificates. The underwriter intends to
make a secondary market for the underwritten
certificates. The underwriter will do so by offering to
buy the underwritten certificates from investors that
wish to sell. However, the underwriter will not be
obligated to make offers to buy the underwritten
certificates and may stop making offers at any time. In
addition, the prices offered, if any, may not reflect prices
that other potential purchasers would be willing to pay,
were they to be given the opportunity. There have been
times in the past where there have been very few buyers
of asset backed securities, i.e., there has been a lack of
liquidity, and there may be similar times in the future.
As a result, you may not be able to sell your certificates
S-9
when you want to do so or you may not be able to obtain
the price that you wish to receive.
THE TRUST HAS LIMITED The loans will be the sole sources of payment for the
ASSETS TO MAKE PAYMENTS certificates. The subordination of the more
ON YOUR CERTIFICATES. subordinate classes to the more senior classes, the
availability of excess spread and the
overcollateralization provisions of the trust are the
sole sources of protection against losses on loans
and other shortfalls in available funds. If losses or
other shortfalls exceed the protection afforded by
such mechanisms, certificateholders will bear such
losses and shortfalls.
DEFAULTS ON JUNIOR LIENS MAY Many of the loans are secured by junior liens on the
RESULT IN MORE SEVERE LOSSES related collateral. If a borrower on such a loan
defaults, the trust's right to liquidation proceeds
is subordinate to the rights of the holders of the
prior liens. There may be insufficient proceeds to
pay the holders of the prior liens and the trust.
GEOGRAPHIC CONCENTRATION Approximately 7.22%, 6.62%, 6.62%, 6.61%, 5.51% and
MAY RESULT IN MORE 5.33% of the loans, by principal balance, are secured
FREQUENT LOSSES by residential properties located in the states of
Ohio, Florida, North Carolina, Alabama, New York, and
Georgia, respectively. These states may suffer
economic problems to a greater degree than other
states. This may lead to higher levels of
delinquencies and losses than would be the case if
the loans were more geographically diversified.
THE SUBORDINATE If the trust has insufficient funds to make all required
CERTIFICATES HAVE A GREATER distributions, the certificates will receive interest
RISK OF LOSS THAN THE SENIOR payments in the following order of priority: class A-1,
CERTIFICATES class A-2 and class A-3 concurrently, then class M-1, class
M-2, class B-1 and class B-2. Also, the certificates will
receive principal that they are entitled to receive on each
distribution date in the following order of priority: class
A-1, then class A-2 and class A-3 concurrently, class M-1,
class M-2, class B-1 and class B-2. Therefore, it is more
likely that the holders of the more subordinate certificates
will realize losses than the more senior certificates if
there are insufficient assets in the trust.
YOUR PASS-THROUGH RATE MAY You may not receive interest at your pass-through rate as a
BE LIMITED result of a pool cap. The class A-2 certificates are also
subject to a fixed cap, which will be set at 10.700% per
S-10
annum. With respect to the class A-2 certificates, any
interest not paid as the result of the fixed cap may
subsequently be paid to you as supplemental interest from
the cap agreement. There is no provision for supplemental
interest for the other classes of certificates or for
interest not paid as a result of the pool cap.
OUR PARENT'S INSOLVENCY MAY So long as adverse events do not occur, the cash payments
RESULT IN OTHERS OWNING THE received on the loans and other funds will be held by First
TRUST'S ASSETS Union National Bank, as certificate administrator. First
Union National Bank may commingle this cash with its other
funds for specified periods. The trustee may be unable to
access this cash in a timely manner if First Union National
Bank becomes subject to an insolvency proceeding,
receivership or conservatorship.
RECENT DEVELOPMENTS MAY INCREASE On September 11, 2001, the United States was subjected to
THE RISK OF LOSS ON THE MORTGAGE multiple terrorist attacks, resulting in the loss of many
LOANS lives and massive property damage and destruction in the New
York and Washington, D.C. metropolitan areas. Although the
damaged and destroyed properties consisted primarily of
commercial and government buildings, these tragic events may
nevertheless have an adverse effect on the value of
residential real estate in the United States, particularly
in the New York and Washington, D.C. metropolitan areas. In
addition, it is possible (although we cannot predict the
likelihood) that these events, or any consequential or
subsequent events involving the United States, may have a
temporary or sustained adverse effect on the financial
markets (including the market for mortgage-backed
securities) or the U.S. economy generally or economic
conditions in the New York or Washington, D.C. metropolitan
areas or other areas of the United States.
We have not made a determination as to whether any of the
borrowers under the mortgage loans may have been a victim or
the dependent of a victim of the terrorist attacks or a
person involved in the ongoing rescue, recovery and response
efforts, or a dependent of such person. However, it is
possible that there could be an increase in the number of
delinquencies and foreclosures of the mortgage loans as a
result of these events.
As a result of the terrorist attacks, President Bush on
September 14, 2001 authorized the placement of 55,000
S-11
military reservists on active duty status. To the extent
that any such person is a borrower under a loan, the
interest rate limitations and other provisions of the
Soldiers' and Sailors' Civil Relief Act of 1940, as amended,
would apply to the loan during the period of active duty. It
is possible that the number of reservists placed on active
duty status in the near future may increase. In addition,
other borrowers who enter military service after the
origination of their loans (including borrowers who are
members of the National Guard at the time of the origination
of their loans and are later called to active duty) would be
covered by the terms of the Soldiers' and Sailors' Civil
Relief Act.
THE CAP AGREEMENT IS LIMITED IN The cap agreement features a notional balance which is
TERM AND AMOUNT initially equal to the class A-2 original principal amount,
then declines over time until March 26, 2012, when it will
terminate. To the extent that the rate of interest on the
class A-2 certificates was reduced by application of the
fixed cap after the cap agreement had terminated or on a
date when the notional balance was less than the class A-2
principal balance, payments under the cap agreement would
not be sufficient to make supplemental interest payments.
S-12
THE MORTGAGE LOANS
GENERAL
The statistical information presented in this prospectus supplement
concerning the loans is based on the characteristics as of the cut-off date of
the pool expected to be sold to the trust on the closing date. On the closing
date, we will sell the principal balances of the loans as of the cut-off date,
after giving effect to all payments received on the loans on or before this
date.
The loans consist of mortgages, deeds of trust or other security
instruments, and the related promissory notes, secured primarily by one- to
four-family residences. The aggregate principal balance of the loans as of the
cut-off date was approximately $889,185,900. The loans were originated and
underwritten, or purchased and re-underwritten, by the originator, substantially
in accordance with the underwriting criteria described in this prospectus
supplement under the heading "The Mortgage Loans-Underwriting Criteria." Certain
of the loans contain provisions requiring the related mortgagor to pay a penalty
in connection with certain prepayments.
Each loan bears a fixed rate of interest and is secured primarily by a
first or junior lien on the related mortgaged property. As of the cut-off date,
80.81% of the loans were secured by a first lien and 19.19% of the loans were
secured by a junior lien.
As of the cut-off date, none of the loans were delinquent.
As of the cut-off date, the interest rates of the loans ranged from
6.650% to 16.080% per annum and the weighted average interest rate of the loans
was 11.281% per annum.
As of the cut-off date, approximately 86.51% of the loans were
actuarial loans and approximately 13.49% of the loans were simple interest
loans.
As of the cut-off date, the average principal balance of the loans was
approximately $52,060. As of the cut-off date, the weighted average remaining
term to stated maturity of the loans will be no more than approximately 212
months and the weighted average term to stated maturity of the loans at
origination was 235 months.
As of the cut-off date, 38.90% of the loans were balloon loans. No loan
provides for negative amortization.
Based upon the original principal balance of the loans, as of the
cut-off date, 54.88% of the loans had a combined loan-to-value ratio exceeding
80%. As of the cut-off date, no loan had a combined loan-to-value ratio
exceeding 100%. The weighted average combined loan-to-value ratio of the loans,
as of the cut-off date, was 80.37%. The loans are not insured or guaranteed by
any governmental entity.
Set forth below is a description of certain characteristics of the
loans as of the cut-off date. Certain of the percentage columns may not sum to
100% due to rounding.
S-13
GEOGRAPHIC DISTRIBUTION OF THE MORTGAGE LOANS
PERCENTAGE OF
MORTGAGE LOANS
NUMBER AGGREGATE BY AGGREGATE
GEOGRAPHIC LOCATION OF LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -------------------------------------------- ----------------- -------------------------- -------------------------
Alabama 1,316 $58,774,291.88 6.61%
Alaska 2 103,581.12 0.01
Arizona 148 6,403,907.21 0.72
Arkansas 362 13,355,417.97 1.50
California 190 11,974,827.59 1.35
Colorado 81 4,845,625.04 0.54
Connecticut 132 8,123,312.42 0.91
Delaware 38 2,162,682.09 0.24
District of Columbia 37 2,453,847.48 0.28
Florida 1,204 58,908,006.71 6.62
Georgia 832 47,353,845.53 5.33
Idaho 41 1,526,209.53 0.17
Illinois 688 42,099,099.25 4.73
Indiana 724 36,567,421.94 4.11
Iowa 180 9,256,971.20 1.04
Kansas 234 9,992,587.45 1.12
Kentucky 280 15,021,311.50 1.69
Louisiana 252 11,429,212.61 1.29
Maine 42 2,065,877.50 0.23
Maryland 311 20,033,002.74 2.25
Massachusetts 263 14,508,505.04 1.63
Michigan 567 31,057,731.01 3.49
Minnesota 306 16,547,891.45 1.86
Mississippi 132 5,725,094.41 0.64
Missouri 700 34,300,177.14 3.86
Montana 1 20,341.93 0.00*
Nebraska 141 6,893,570.45 0.78
Nevada 38 2,036,310.95 0.23
New Hampshire 50 2,362,250.86 0.27
New Jersey 651 42,139,133.79 4.74
New Mexico 39 1,758,381.27 0.20
New York 768 49,029,868.04 5.51
North Carolina 1,114 58,902,411.64 6.62
North Dakota 3 215,965.96 0.02
Ohio 1,280 64,200,333.11 7.22
Oklahoma 204 8,238,594.67 0.93
Oregon 63 3,056,489.34 0.34
Pennsylvania 971 43,484,405.14 4.89
Rhode Island 65 3,068,648.11 0.35
South Carolina 522 25,732,732.04 2.89
South Dakota 4 178,555.46 0.02
Tennessee 356 19,790,896.79 2.23
Texas 489 30,278,957.35 3.41
Utah 78 3,796,223.60 0.43
Vermont 11 1,274,477.36 0.14
Virginia 566 27,034,999.86 3.04
Washington 172 8,980,228.81 1.01
West Virginia 61 2,813,338.68 0.32
Wisconsin 361 18,917,727.43 2.13
Wyoming 10 390,619.73 0.04
- -------------------------------------------- ----------------- -------------------------- -------------------------
TOTAL 17,080 $889,185,900.18 100.00%
================= ========================== =========================
*Less than 0.01%.
S-14
CUT-OFF DATE PRINCIPAL BALANCES OF THE MORTGAGE LOANS
PERCENTAGE OF
MORTGAGE LOANS
NUMBER AGGREGATE BY AGGREGATE
CUT-OFF DATE PRINCIPAL BALANCES ($) OF LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -------------------------------------------- ----------------- -------------------------- -------------------------
0.01 - 25,000.00 4,133 $72,768,943.81 8.18%
25,000.01 - 50,000.00 6,027 222,882,416.59 25.07
50,000.01 - 75,000.00 3,723 227,947,629.48 25.64
75,000.01 - 100,000.00 1,582 135,462,293.73 15.23
100,000.01 - 125,000.00 809 90,262,770.75 10.15
125,000.01 - 150,000.00 346 47,003,132.85 5.29
150,000.01 - 175,000.00 191 30,659,424.71 3.45
175,000.01 - 200,000.00 110 20,530,181.05 2.31
200,000.01 - 225,000.00 50 10,553,489.72 1.19
225,000.01 - 250,000.00 49 11,566,846.34 1.30
250,000.01 - 275,000.00 15 3,974,442.09 0.45
275,000.01 - 300,000.00 14 3,999,889.44 0.45
300,000.01 - 325,000.00 4 1,259,893.81 0.14
325,000.01 - 350,000.00 9 3,047,977.68 0.34
350,000.01 - 375,000.00 4 1,428,061.99 0.16
375,000.01 - 400,000.00 4 1,541,929.25 0.17
400,000.01 - 425,000.00 6 2,452,145.13 0.28
425,000.01 - 450,000.00 2 878,326.00 0.10
450,000.01 - 475,000.00 1 474,663.78 0.05
475,000.01 - 500,000.00 1 491,441.98 0.06
- -------------------------------------------- ----------------- -------------------------- -------------------------
TOTAL 17,080 $889,185,900.18 100.00%
================= ========================== =========================
S-15
ORIGINAL PRINCIPAL BALANCES OF THE MORTGAGE LOANS
PERCENTAGE OF
MORTGAGE LOANS
NUMBER AGGREGATE BY AGGREGATE
ORIGINAL PRINCIPAL BALANCES ($) OF LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -------------------------------------------- ----------------- -------------------------- -------------------------
0.01 - 25,000.00 3,819 $65,521,521.40 7.37%
25,000.01 - 50,000.00 6,074 217,377,946.79 24.45
50,000.01 - 75,000.00 3,856 230,992,763.38 25.98
75,000.01 - 100,000.00 1,661 139,902,864.22 15.73
100,000.01 - 125,000.00 806 88,513,207.67 9.95
125,000.01 - 150,000.00 383 50,961,878.88 5.73
150,000.01 - 175,000.00 201 31,870,599.14 3.58
175,000.01 - 200,000.00 114 20,995,043.13 2.36
200,000.01 - 225,000.00 54 11,281,614.22 1.27
225,000.01 - 250,000.00 50 11,721,280.51 1.32
250,000.01 - 275,000.00 12 3,107,714.88 0.35
275,000.01 - 300,000.00 18 5,067,033.18 0.57
300,000.01 - 325,000.00 4 1,236,414.27 0.14
325,000.01 - 350,000.00 9 3,036,999.80 0.34
350,000.01 - 375,000.00 5 1,760,512.57 0.20
375,000.01 - 400,000.00 3 1,147,873.20 0.13
400,000.01 - 425,000.00 6 2,426,432.86 0.27
425,000.01 - 450,000.00 3 1,298,094.32 0.15
475,000.01 - 500,000.00 2 966,105.76 0.11
- -------------------------------------------- ----------------- -------------------------- -------------------------
TOTAL 17,080 $889,185,900.18 100.00%
================= ========================== =========================
GROSS MORTGAGE RATES OF THE MORTGAGE LOANS
PERCENTAGE OF
MORTGAGE LOANS
NUMBER AGGREGATE BY AGGREGATE
GROSS MORTGAGE RATES (%) OF LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -------------------------------------------- ----------------- -------------------------- -------------------------
6.001 - 7.000 1 $39,346.62 0.00%*
7.001 - 8.000 99 8,183,848.58 0.92
8.001 - 9.000 669 49,093,753.69 5.52
9.001 - 10.000 2,055 136,655,269.51 15.37
10.001 - 11.000 3,208 197,377,954.27 22.20
11.001 - 12.000 4,851 251,053,196.29 28.23
12.001 - 13.000 3,301 147,314,791.17 16.57
13.001 - 14.000 1,940 70,675,336.66 7.95
14.001 - 15.000 824 25,523,114.19 2.87
15.001 - 16.000 131 3,232,523.45 0.36
16.001 - 17.000 1 36,765.75 0.00*
- -------------------------------------------- ----------------- -------------------------- -------------------------
TOTAL 17,080 $889,185,900.18 100.00%
================= ========================== =========================
*Less than 0.01%.
S-16
STATED PURPOSE OF THE MORTGAGE LOANS
PERCENTAGE OF
MORTGAGE LOANS
NUMBER AGGREGATE BY AGGREGATE
STATED PURPOSE OF LOAN OF LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -------------------------------------------- ----------------- -------------------------- -------------------------
Cash-Out Refinance 15,999 $808,688,418.74 90.95%
Purchase 958 73,665,092.55 8.28
Rate/Term Refinance 123 6,832,388.89 0.77
- -------------------------------------------- ----------------- -------------------------- -------------------------
TOTAL 17,080 $889,185,900.18 100.00%
================= ========================== =========================
COMBINED LOAN-TO-VALUE RATIO OF THE MORTGAGE LOANS(1)
PERCENTAGE OF
MORTGAGE LOANS
NUMBER AGGREGATE BY AGGREGATE
COMBINED LOAN-TO-VALUE RATIO (%) OF LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -------------------------------------------- ----------------- -------------------------- -------------------------
0.01 - 10.00 7 $209,082.99 0.02%
10.01 - 20.00 74 1,479,105.75 0.17
20.01 - 30.00 180 4,621,890.48 0.52
30.01 - 40.00 297 8,976,073.54 1.01
40.01 - 50.00 445 16,404,242.84 1.84
50.01 - 60.00 777 30,160,232.19 3.39
60.01 - 70.00 1,794 83,547,052.97 9.40
70.01 - 80.00 4,561 255,767,117.17 28.76
80.01 - 90.00 7,909 452,161,856.33 50.85
90.01 - 100.00 1,036 35,859,245.92 4.03
- -------------------------------------------- ----------------- -------------------------- -------------------------
TOTAL 17,080 $889,185,900.18 100.00%
================= ========================== =========================
(1) The combined loan-to-value ratios shown above are equal, with respect to
each loan, to (i) the sum of (a) the original principal balance of such
loan at the date of origination plus (b) the remaining balance of the
senior lien(s), if any, at the date of origination of such loan, minus (ii)
premiums for credit life insurance, if any, divided by (iii) the lesser of
(a) the value of the related mortgaged property, based upon the appraisal
made at the time of origination of such loan or (b) the purchase price of
such mortgaged property if the loan proceeds from such loan are used to
purchase such mortgaged property.
S-17
OCCUPANCY STATUS OF THE MORTGAGED PROPERTY OF THE MORTGAGE LOANS
PERCENTAGE OF
MORTGAGE LOANS
NUMBER AGGREGATE BY AGGREGATE
OCCUPANCY STATUS OF LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -------------------------------------------- ----------------- -------------------------- -------------------------
Owner Occupied 16,372 $857,111,006.78 96.39%
Second Home 626 28,291,350.55 3.18
Investor Owned 82 3,783,542.85 0.43
- -------------------------------------------- ----------------- -------------------------- -------------------------
TOTAL 17,080 $889,185,900.18 100.00%
================= ========================== =========================
FICO SCORE OF THE MORTGAGE LOANS
PERCENTAGE OF
MORTGAGE LOANS
NUMBER AGGREGATE BY AGGREGATE
FICO SCORE OF LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -------------------------------------------- ----------------- -------------------------- -------------------------
451 - 475 12 $817,390.99 0.09%
476 - 500 619 35,248,462.60 3.96
501 - 525 1,512 85,547,518.97 9.62
526 - 550 2,358 130,254,803.97 14.65
551 - 575 2,207 119,283,575.93 13.41
576 - 600 2,207 114,810,855.60 12.91
601 - 625 2,210 107,625,506.05 12.10
626 - 650 1,813 84,678,496.10 9.52
651 - 675 1,982 102,878,691.81 11.57
676 - 700 1,104 56,596,102.38 6.36
701 - 725 541 26,225,863.53 2.95
726 - 750 266 13,282,119.13 1.49
751 - 775 165 8,279,351.70 0.93
776 - 800 70 3,137,353.81 0.35
801 - 825 14 519,807.61 0.06
- -------------------------------------------- ----------------- -------------------------- -------------------------
TOTAL 17,080 $889,185,900.18 100.00%
================= ========================== =========================
S-18
REMAINING TERM TO STATED MATURITY OF THE MORTGAGE LOANS
PERCENTAGE OF
MORTGAGE LOANS
REMAINING TERM NUMBER AGGREGATE BY AGGREGATE
TO STATED MATURITY (MONTHS) OF LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -------------------------------------------- ----------------- -------------------------- -------------------------
13 - 24 17 $143,159.01 0.02%
25 - 36 26 328,251.41 0.04
37 - 48 58 1,133,294.55 0.13
49 - 60 28 453,776.15 0.05
61 - 72 32 821,777.92 0.09
73 - 84 174 4,038,527.22 0.45
85 - 96 302 6,910,363.24 0.78
97 - 108 457 11,054,126.69 1.24
109 - 120 69 1,923,149.74 0.22
121 - 132 20 1,092,284.80 0.12
133 - 144 1,110 54,363,538.15 6.11
145 - 156 3,014 158,437,733.20 17.82
157 - 168 4,521 234,259,027.98 26.35
169 - 180 404 22,168,030.96 2.49
181 - 192 4 275,951.87 0.03
193 - 204 490 21,618,313.25 2.43
205 - 216 1,106 49,319,856.72 5.55
217 - 228 1,912 78,389,720.37 8.82
229 - 240 242 9,760,893.60 1.10
253 - 264 14 855,243.81 0.10
265 - 276 140 7,640,453.22 0.86
277 - 288 105 4,226,555.61 0.48
289 - 300 2 127,201.64 0.01
301 - 312 4 247,165.67 0.03
313 - 324 281 20,877,631.12 2.35
325 - 336 1,012 77,640,319.31 8.73
337 - 348 1,360 107,484,123.88 12.09
349 - 360 176 13,595,429.09 1.53
- -------------------------------------------- ----------------- -------------------------- -------------------------
TOTAL 17,080 $889,185,900.18 100.00%
================= ========================== =========================
S-19
ORIGINAL TERM TO STATED MATURITY OF THE MORTGAGE LOANS
PERCENTAGE OF
MORTGAGE LOANS
ORIGINAL TERM NUMBER AGGREGATE BY AGGREGATE
TO STATED MATURITY (MONTHS) OF LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -------------------------------------------- ----------------- -------------------------- -------------------------
49 - 60 88 $1,337,561.70 0.15%
61 - 72 10 143,140.10 0.02
73 - 84 58 1,287,779.43 0.14
85 - 96 15 411,330.71 0.05
97 - 108 4 117,495.07 0.01
109 - 120 966 22,855,818.60 2.57
121 - 132 3 153,132.70 0.02
133 - 144 24 681,062.38 0.08
145 - 156 2 56,435.03 0.01
157 - 168 2 164,887.99 0.02
169 - 180 9,058 469,825,805.14 52.84
181 - 192 1 41,521.15 0.00*
193 - 204 2 122,830.40 0.01
229 - 240 3,753 159,292,976.43 17.91
289 - 300 261 12,849,454.28 1.45
337 - 348 1 29,351.74 0.00*
349 - 360 2,832 219,815,317.33 24.72
- -------------------------------------------- ----------------- -------------------------- -------------------------
TOTAL 17,080 $889,185,900.18 100.00%
================= ========================== =========================
*Less than 0.01%
S-20
TYPES OF MORTGAGED PROPERTIES OF THE MORTGAGE LOANS
PERCENTAGE OF
MORTGAGE LOANS
NUMBER AGGREGATE BY AGGREGATE
PROPERTY TYPE OF LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -------------------------------------------- ----------------- -------------------------- -------------------------
Single Family - Detached 15,909 $838,680,941.38 94.32%
Mobile Home 750 30,611,300.97 3.44
Townhouse 193 8,959,873.70 1.01
Condo 122 5,891,530.73 0.66
Other 106 5,042,253.40 0.57
- -------------------------------------------- ----------------- -------------------------- -------------------------
TOTAL 17,080 $889,185,900.18 100.00%
================= ========================== =========================
S-21
PAYMENTS ON THE LOANS
The loans, other than balloon loans, will generally provide for a
schedule of payments which will be, if timely paid, sufficient to amortize fully
the principal balance of the related loan on or before its maturity date.
Interest with respect to the loans will accrue on either an actuarial interest
method or a simple interest method.
The actuarial interest method provides that interest is charged and
payments are due as of a scheduled day of each month which is fixed at the time
of origination. Scheduled monthly payments on such loans received either earlier
or later (other than delinquent) than the scheduled due dates thereof will not
affect the amortization schedule or the relative application of such payments to
principal and interest.
The simple interest method provides for the amortization of the amount
of each loan over a series of equal monthly payments. However, unlike the
monthly payment under the actuarial interest method, each monthly payment
consists of an installment of interest which is calculated on the basis of the
outstanding principal balance at the stated interest rate and based upon the
period elapsed since the preceding payment of principal was made, using the
method permitted by applicable law. As payments are received under the loan, the
amount received is applied first to interest accrued to the date of payment and
the balance, if any, is applied to reduce the unpaid principal balance.
Accordingly, if a borrower pays a fixed monthly installment on such a loan
before its scheduled due date, the portion of the payment allocable to interest
for the period since the preceding payment was made will be less than it would
have been had the payment been made as scheduled, and the portion of the payment
applied to reduce the unpaid principal balance will be correspondingly greater.
Conversely, if a borrower pays a fixed monthly installment on the loan after its
scheduled due date, the portion of the payment allocable to interest for the
period since the preceding payment was made will be greater than it would be had
the payment been made as scheduled, and the portion of the payment applied to
reduce the unpaid principal balance will be correspondingly reduced. In
addition, a late charge may be imposed with respect to the past due amount. This
will not affect the total amount of principal to be received by the
certificateholders over the life of the transaction, but it may affect the
weighted average lives of the certificates.
The amount of interest payable to the certificateholders on each
distribution date will not be affected by interest accruing on the loans based
on the simple interest method. On each distribution date, the certificateholders
are entitled to interest on the actual number of days from the last distribution
date (or, in the case of the first distribution date, from the closing date) to
but not including the upcoming distribution date at the applicable pass-through
rate on the outstanding principal balances of the applicable class of
certificates immediately prior to such distribution date. The servicer is
required to remit to the certificate administrator the excess, if any, of the
amount of interest the certificateholders are entitled to receive on each
distribution date over the interest collected on the loans during the related
collection period and available to pay interest on the certificates. See "The
Pooling and Servicing Agreement--Monthly Advances" and "--Compensating Interest"
herein.
Similarly, the compensation payable to the transaction parties will not
be affected by interest accruing on the loans based on the simple interest
S-22
method. The transaction parties are entitled to receive a fee based on the
principal balance of the loans, not upon the portion of a monthly payment
allocable to interest. See "The Pooling and Servicing Agreement--Servicing and
Other Compensation and Payment of Expenses" herein.
YIELD, MATURITY AND PREPAYMENT CONSIDERATIONS
Because the loans will bear fixed interest rates, when the level of
prevailing interest rates for similar loans significantly declines, the rate of
prepayment of such loans is likely to increase, although the prepayment rate is
influenced by a number of other factors, including general economic conditions
and homeowner mobility. Similarly, when the level of interest rates for similar
loans significantly rises, the rate of prepayment of such loans may decrease. No
prediction can be made as to the prepayment rate that the loans will actually
experience.
Generally, junior priority mortgage loans have smaller average
principal balances than first priority mortgage loans and are not viewed by
borrowers as permanent financing. Accordingly, the loans included in the trust
that are secured by junior liens may experience a higher rate of prepayment than
traditional first priority mortgage loans. In addition, any future limitations
on the right of borrowers to deduct interest payments on mortgage loans for
Federal income tax purposes may result in a higher rate of prepayment of such
junior loans. The obligation of the servicer to enforce the "due-on-sale"
provisions of the loans may also increase prepayments. The prepayment experience
of the loans may be affected by a wide variety of factors, including general and
local economic conditions, mortgage market interest rates, the availability of
alternative financing and homeowner mobility.
Unscheduled payments, delinquencies, purchases of defective loans and
defaulted loans and defaults on the loans will affect the amount of funds
available to make distributions on each distribution date. In addition, the
servicer may, at its option, on any date on which the then outstanding aggregate
principal balance of the loans is less than or equal to 10% of the aggregate
principal balance as of the cut-off date of the loans delivered to the trust on
the closing date, purchase from the trust all of the loans and any other assets
in the trust at a price equal to the sum of:
(1) 100% of the outstanding aggregate principal balances of the loans,
including those evidenced by any mortgaged property title to which has
been acquired in foreclosure or by deed in lien of foreclosure (an "REO
property"), and
(2) interest on the loans for the actual number of days from the last
distribution date to but not including the upcoming distribution date
at the then applicable weighted average loan interest rate.
However, because the loans may prepay, the weighted average life of the
certificates on the date on which the outstanding aggregate principal balances
of the loans will be less than or equal to 10% of the related original principal
balance cannot be determined.
Approximately 38.90% of the loans, by cut-off date principal balance,
are "balloon loans" that provide for a stated maturity of less than the period
of time of the corresponding amortization schedule. As a result, upon the
maturity of a balloon loan, the borrower will be required to make a final
S-23
payment which will be substantially larger than such borrower's previous monthly
payments. Each loan other than a balloon loan is fully amortizing in accordance
with its terms. The loans may be prepaid at any time, subject to applicable
prepayment penalties. In general, when the level of prevailing interest rates
for similar loans significantly declines, the rate of prepayment is likely to
increase, although the prepayment rate is influenced by a number of other
factors, including general economic conditions and prepayment penalties.
Prepayments, liquidations and purchases of the loans will result in
distributions to certificateholders of amounts which would otherwise be
distributed over the remaining terms of the loans.
If prepayments of principal are received on the loans at a rate greater
than that assumed by an investor, the yield will be increased on certificates
purchased by that investor at a price less than par, i.e., the principal balance
of a certificate at the time of its purchase. Similarly, if prepayments of
principal are received on the loans at a rate greater than that assumed by an
investor, the yield will be decreased on certificates purchased at a price
greater than par. The effect on an investor's yield of principal prepayments on
the loans occurring at a rate that is faster (or slower) than the rate
anticipated by the investor in the period immediately following the issuance of
the applicable class of certificates may not be offset by a subsequent like
reduction (or increase) in the rate of principal payments. The weighted average
lives of the certificates will also be affected by the amount and timing of
delinquencies and defaults on the loans and the liquidations of defaulted loans.
Delinquencies will generally slow the rate of payment of principal to the
certificateholders since the servicer is not obligated to advance for delinquent
payments of principal. However, this effect will be offset to the extent that
lump sum recoveries on defaulted loans result in principal payments on the loans
faster than otherwise scheduled.
As described herein, certain classes of certificates will be entitled
to receive payments of principal prior to other classes of certificates. As a
result, the classes of certificates receiving payments of principal first will
immediately be affected by the prepayment rate on the loans. However, the timing
of commencement of principal distributions and the weighted average lives of
each class of certificates will be affected by the prepayment rate experienced
both before and after the commencement of principal distributions on any such
class.
The loans are either "simple interest" or "actuarial method" loans. If
a payment is received on a loan which is a "simple interest" loan later than
scheduled, a smaller portion of such payment will be applied to principal and a
greater portion will be applied to interest than would have been the case had
the payment been received on the scheduled due date, resulting in such loan
having a longer weighted average life than would have been the case had the
payment been made as scheduled. Conversely, if a payment on a loan is received
earlier than scheduled, more of such payment will be applied to principal and
less to interest than would have been the case had the payment been received on
its scheduled due date, resulting in such loan having a shorter weighted average
life than would have been the case had the payment been made as scheduled.
If less than one month's interest is collected on a loan during a
collection period, whether due to prepayment in full or a curtailment, the
servicer is obligated to pay compensating interest with respect to the loan, but
only to the extent of the aggregate servicing fee for the related distribution
date. To the extent any shortfalls exceed the amount of compensating interest
that the servicer is obligated to pay, and are not otherwise covered by credit
support, the yield on the certificates will be adversely affected. Any shortfall
S-24
in collections of interest resulting from the early receipt of a scheduled
payment will not be covered by compensating interest, but will be covered by
monthly advances.
The pass-through rate on the class A-2 certificates will be adjusted by
reference to changes in the level of one-month LIBOR, subject to the effects of
the pool cap and the fixed cap.
The pool cap on a distribution date will depend, in part, on the
weighted average of the then current loan interest rates of the loans. If the
loans bearing higher loan interest rates were to prepay, the weighted average
loan interest rate of the loans and, consequently, the applicable pool cap would
be lower than otherwise would be the case.
The final maturity date for each class of offered certificates is set
forth on the cover page of this prospectus supplement.
The final maturity date for the class M-1, class M-2 and class B-1
certificates is the distribution date following the latest date upon which a
loan matures plus 12 months. The weighted average lives of the certificates are
likely to be shorter than would be the case if payments actually made on the
loans conformed to the foregoing assumptions, and the final distribution dates
with respect to each class of certificates could occur significantly earlier
than the final maturity dates because the servicer may purchase all of the loans
under the limited circumstances described in this prospectus supplement. In
addition, prepayments are likely to occur on the loans, which also would shorten
the weighted average life of the certificates.
"Weighted average life" refers to the average amount of time that will
elapse from the date of issuance of a security until each dollar of principal of
such security will be repaid to the investor. The weighted average lives of the
certificates will be influenced by the priorities established in the pooling and
servicing agreement, and by the rate at which principal payments on the loans
are paid, which may be in the form of scheduled amortization or prepayments.
The following tables have been prepared assuming that the pool is
comprised of loans having the following characteristics:
S-25
ASSUMED MORTGAGE LOAN CHARACTERISTICS
Gross Original Original Remaining Remaining
Assumed Cut-Off Mortgage Term of Balloon Term to Balloon
Date Principal Interest Amortization Term Maturity Term Amortization
Balance ($) Rate (%) (months) (months) (months) (months) Method
- --------- -------------------- ------------- -------------- ------------- ------------- ------------- -------------
1 345,925,853.14 11.284 360 180 337 157 LEVEL
2 1,112,572.19 11.644 60 n/a 37 n/a LEVEL
3 24,716,054.47 11.550 118 n/a 94 n/a LEVEL
4 125,308,913.12 11.510 180 n/a 155 n/a LEVEL
5 159,428,383.91 11.418 240 n/a 217 n/a LEVEL
6 12,849,454.28 11.568 300 n/a 274 n/a LEVEL
7 219,844,669.07 10.997 360 n/a 337 n/a LEVEL
S-26
The following tables also have been prepared assuming:
o all distributions with respect to the certificates will be made at
the scheduled time as described below under "Description of the
Certificates--Distributions on the Certificates,"
o distributions on the certificates are received in cash on the 25th
day of each month, commencing in January 2002,
o prepayments represent payment in full of individual loans and are
received on the last day of each month (commencing in December
2001) and include 30 days' interest thereon at the applicable loan
interest rate,
o the servicing fee for each loan will be 0.548% per annum of the
unpaid balance of the loans,
o The certificate administrator and custodian will receive aggregate
fees for each loan equal to 0.018% per annum of the principal
balance thereof,
o no delinquencies or defaults in payments by borrowers of principal
and interest on the loans are experienced,
o no right of optional termination is exercised except as noted
below,
o the offered certificates are purchased on the closing date,
o with respect to the class A-2 certificates only, that one-month
LIBOR remains constant at 1.93125%,
o that the pass-through rate for the class A-1 certificates is
1.970%,
o the targeted overcollateralization amount is initially set at the
highest level specified by the pooling and servicing agreement and
thereafter decreases in accordance with the provisions of the
pooling and servicing agreement.
Prepayments on loans are commonly measured relative to a prepayment
standard or model. The model used in this prospectus supplement is a prepayment
assumption which represents an assumed constant prepayment rate ("CPR") each
month relative to the then outstanding principal balance of a pool of mortgage
loans for the life of such mortgage loans. The prepayment assumption used to
price the related certificates assumes a CPR each month of 28% per annum of the
then outstanding principal balance of the loans. As used in the table below, 0%
CPR assumes prepayment rates equal to 0% per annum of the then outstanding
principal balance of the loans, i.e. no prepayments on the mortgage loans having
the characteristics described below.
Neither the prepayment assumption nor any other prepayment model or
assumption purports to be an historical description of prepayment experience or
S-27
a prediction of the anticipated rate of prepayment of any pool of mortgage
loans, including the loans included in the trust. Variations in the actual
prepayment experience and the balance of the loans that prepay may increase or
decrease each weighted average life shown in the following tables. Such
variations may occur even if the average prepayment experience of all such loans
equals any of the specified percentages of CPR.
S-28
PERCENTAGE OF ORIGINAL PRINCIPAL BALANCE OUTSTANDING
CLASS A-1
---------------------------------------------------------------------------------------
CPR ASSUMPTION
----------- ------------ ------------ ------------ -------------- -------------
Distribution Date 0% 21% 25% 28% 30% 35%
----------- ------------ ------------ ------------ -------------- -------------
Initial Balance 100% 100% 100% 100% 100% 100%
December 25, 2002 76 0 0 0 0 0
December 25, 2003 49 0 0 0 0 0
December 25, 2004 19 0 0 0 0 0
December 25, 2005 0 0 0 0 0 0
Weighted Average Life(1)
to Maturity (years) 1.938 0.159 0.142 0.128 0.119 0.111
Weighted Average Life(1)
to Call (years) 1.938 0.159 0.142 0.128 0.119 0.111
- ----------------------------
(1) The weighted average life of any class of certificates is determined by (i)
multiplying the assumed net reduction, if any, in the certificate principal
balance on each distribution date of such class of certificates by the
number of years from the date of issuance of the certificates to the
related distribution date, (ii) summing the results and (iii) dividing the
sum by the aggregate amount of the assumed net reduction in the certificate
principal balance of such class of certificates.
S-29
PERCENTAGE OF ORIGINAL PRINCIPAL BALANCE OUTSTANDING
CLASS A-2 AND CLASS A-3
------------------------------------------------------------------------------------------------
CPR ASSUMPTION
------------ --------------- -------------- -------------- --------------- ---------------
Distribution Date 0% 21% 25% 28% 30% 35%
------------ --------------- -------------- -------------- --------------- ---------------
Initial Balance 100% 100% 100% 100% 100% 100%
December 25, 2002 100 78 72 68 66 59
December 25, 2003 100 54 46 40 36 27
December 25, 2004 100 35 26 20 16 7
December 25, 2005 99 29 23 20 16 7
December 25, 2006 96 22 17 14 12 7
December 25, 2007 92 17 13 10 8 5
December 25, 2008 89 13 9 7 6 3
December 25, 2009 84 10 7 5 4 2
December 25, 2010 80 8 5 3 3 1
December 25, 2011 76 6 3 2 2 1
December 25, 2012 71 4 2 2 1 *
December 25, 2013 65 3 2 1 1 0
December 25, 2014 59 2 1 1 * 0
December 25, 2015 23 1 * 0 0 0
December 25, 2016 21 * 0 0 0 0
December 25, 2017 19 * 0 0 0 0
December 25, 2018 17 0 0 0 0 0
December 25, 2019 14 0 0 0 0 0
December 25, 2020 13 0 0 0 0 0
December 25, 2021 12 0 0 0 0 0
December 25, 2022 11 0 0 0 0 0
December 25, 2023 10 0 0 0 0 0
December 25, 2024 9 0 0 0 0 0
December 25, 2025 7 0 0 0 0 0
December 25, 2026 6 0 0 0 0 0
December 25, 2027 4 0 0 0 0 0
December 25, 2028 2 0 0 0 0 0
December 25, 2029 0 0 0 0 0 0
Weighted Average Life(1)
to Maturity (years) 13.207 3.377 2.816 2.460 2.242 1.738
Weighted Average Life(1)
to Call (years) 13.016 3.161 2.608 2.261 2.058 1.582
- ---------------------------------------------
* Less than 0.5% but greater than 0.
(1) The weighted average life of any class of certificates is determined by (i)
multiplying the assumed net reduction, if any, in the certificate principal
balance on each distribution date of such class of certificates by the
number of years from the date of issuance of the certificates to the
related distribution date, (ii) summing the results and (iii) dividing the
sum by the aggregate amount of the assumed net reduction in the certificate
principal balance of such class of certificates.
S-30
PERCENTAGE OF ORIGINAL PRINCIPAL BALANCE OUTSTANDING
CLASS M-1
------------------------------------------------------------------------------------------------
CPR ASSUMPTION
------------- --------------- --------------- -------------- -------------- --------------
Distribution Date 0% 21% 25% 28% 30% 35%
------------- --------------- --------------- -------------- -------------- --------------
Initial Balance 100% 100% 100% 100% 100% 100%
December 25, 2002 100 100 100 100 100 100
December 25, 2003 100 100 100 100 100 100
December 25, 2004 100 100 100 100 100 100
December 25, 2005 100 73 59 50 66 100
December 25, 2006 100 56 43 35 31 37
December 25, 2007 100 43 31 25 21 13
December 25, 2008 100 33 23 17 14 8
December 25, 2009 100 25 17 12 10 5
December 25, 2010 100 19 12 8 6 3
December 25, 2011 100 14 9 6 4 0
December 25, 2012 100 11 6 4 2 0
December 25, 2013 100 8 4 1 0 0
December 25, 2014 100 6 2 0 0 0
December 25, 2015 58 0 0 0 0 0
December 25, 2016 53 0 0 0 0 0
December 25, 2017 48 0 0 0 0 0
December 25, 2018 43 0 0 0 0 0
December 25, 2019 36 0 0 0 0 0
December 25, 2020 34 0 0 0 0 0
December 25, 2021 31 0 0 0 0 0
December 25, 2022 29 0 0 0 0 0
December 25, 2023 25 0 0 0 0 0
December 25, 2024 22 0 0 0 0 0
December 25, 2025 19 0 0 0 0 0
December 25, 2026 15 0 0 0 0 0
December 25, 2027 11 0 0 0 0 0
December 25, 2028 6 0 0 0 0 0
December 25, 2029 0 0 0 0 0 0
Weighted Average Life(1)
to Maturity (years) 17.662 6.355 5.596 5.231 5.093 5.147
Weighted Average Life(1)
to Call (years) 17.187 5.850 5.077 4.756 4.661 4.764
- ---------------------------
(1) The weighted average life of any class of certificates is determined by (i)
multiplying the assumed net reduction, if any, in the certificate principal
balance on each distribution date of such class of certificates by the
number of years from the date of issuance of the certificates to the
related distribution date, (ii) summing the results and (iii) dividing the
sum by the aggregate amount of the assumed net reduction in the certificate
principal balance of such class of certificates.
S-31
PERCENTAGE OF ORIGINAL PRINCIPAL BALANCE OUTSTANDING
CLASS M-2
-------------------------------------------------------------------------------------------
CPR ASSUMPTION
------------ --------------- -------------- ------------ --------------- ------------
Distribution Date 0% 21% 25% 28% 30% 35%
------------ --------------- -------------- ------------ --------------- ------------
Initial Balance 100% 100% 100% 100% 100% 100%
December 25, 2002 100 100 100 100 100 100
December 25, 2003 100 100 100 100 100 100
December 25, 2004 100 100 100 100 100 100
December 25, 2005 100 73 59 50 45 40
December 25, 2006 100 56 43 35 31 21
December 25, 2007 100 43 31 25 21 13
December 25, 2008 100 33 23 17 14 8
December 25, 2009 100 25 17 12 10 5
December 25, 2010 100 19 12 8 6 0
December 25, 2011 100 14 9 6 3 0
December 25, 2012 100 11 6 2 0 0
December 25, 2013 100 8 3 0 0 0
December 25, 2014 100 6 0 0 0 0
December 25, 2015 58 0 0 0 0 0
December 25, 2016 53 0 0 0 0 0
December 25, 2017 48 0 0 0 0 0
December 25, 2018 43 0 0 0 0 0
December 25, 2019 36 0 0 0 0 0
December 25, 2020 34 0 0 0 0 0
December 25, 2021 31 0 0 0 0 0
December 25, 2022 29 0 0 0 0 0
December 25, 2023 25 0 0 0 0 0
December 25, 2024 22 0 0 0 0 0
December 25, 2025 19 0 0 0 0 0
December 25, 2026 15 0 0 0 0 0
December 25, 2027 11 0 0 0 0 0
December 25, 2028 6 0 0 0 0 0
December 25, 2029 0 0 0 0 0 0
Weighted Average Life(1)
to Maturity (years) 17.654 6.345 5.505 5.055 4.836 4.535
Weighted Average Life(1)
to Call (years) 17.187 5.845 5.016 4.614 4.437 4.193
- --------------------------
(1) The weighted average life of any class of certificates is determined by (i)
multiplying the assumed net reduction, if any, in the certificate principal
balance on each distribution date of such class of certificates by the
number of years from the date of issuance of the certificates to the
related distribution date, (ii) summing the results and (iii) dividing the
sum by the aggregate amount of the assumed net reduction in the certificate
principal balance of such class of certificates.
S-32
PERCENTAGE OF ORIGINAL PRINCIPAL BALANCE OUTSTANDING
CLASS B-1
-------------------------------------------------------------------------------------------------
CPR ASSUMPTION
------------- --------------- -------------- -------------- --------------- ---------------
Distribution Date 0% 21% 25% 28% 30% 35%
------------- --------------- -------------- -------------- --------------- ---------------
Initial Balance 100% 100% 100% 100% 100% 100%
December 25, 2002 100 100 100 100 100 100
December 25, 2003 100 100 100 100 100 100
December 25, 2004 100 100 100 100 100 100
December 25, 2005 100 73 59 50 45 33
December 25, 2006 100 56 43 35 31 21
December 25, 2007 100 43 31 25 21 13
December 25, 2008 100 33 23 17 14 8
December 25, 2009 100 25 17 12 10 *
December 25, 2010 100 19 12 8 3 0
December 25, 2011 100 14 8 1 0 0
December 25, 2012 100 11 2 0 0 0
December 25, 2013 100 7 0 0 0 0
December 25, 2014 100 2 0 0 0 0
December 25, 2015 58 0 0 0 0 0
December 25, 2016 53 0 0 0 0 0
December 25, 2017 48 0 0 0 0 0
December 25, 2018 43 0 0 0 0 0
December 25, 2019 36 0 0 0 0 0
December 25, 2020 34 0 0 0 0 0
December 25, 2021 31 0 0 0 0 0
December 25, 2022 29 0 0 0 0 0
December 25, 2023 25 0 0 0 0 0
December 25, 2024 22 0 0 0 0 0
December 25, 2025 19 0 0 0 0 0
December 25, 2026 15 0 0 0 0 0
December 25, 2027 11 0 0 0 0 0
December 25, 2028 2 0 0 0 0 0
December 25, 2029 0 0 0 0 0 0
Weighted Average Life(1)
to Maturity (years) 17.627 6.314 5.404 4.922 4.674 4.253
Weighted Average Life(1)
to Call (years) 17.187 5.841 4.986 4.547 4.336 3.965
- --------------------------------------------
* Less than 0.5% but greater than 0.
(1) The weighted average life of any class of certificates is determined by (i)
multiplying the assumed net reduction, if any, in the certificate principal
balance on each distribution date of such class of certificates by the
number of years from the date of issuance of the certificates to the
related distribution date, (ii) summing the results and (iii) dividing the
sum by the aggregate amount of the assumed net reduction in the certificate
principal balance of such class of certificates.
S-33
THE SERVICER
HomEq Servicing Corporation will act as the servicer of the loans.
HomEq Servicing Corporation, successor by merger to TMS Mortgage, Inc.,
is a New Jersey corporation. HomEq Servicing Corporation is headquartered in
North Highlands, California, and is a wholly owned subsidiary of The Money Store
Inc. On June 30, 1998, The Money Store Inc. became a wholly-owned subsidiary of
First Union National Bank, the principal banking subsidiary of Wachovia
Corporation. Wachovia Corporation is also the ultimate parent of First Union
Securities, Inc. See "Risk Factors--Our Parent's Insolvency May Result In Others
Owning the Trust's Assets."
Prior to June 23, 2000, TMS Mortgage, Inc. and its subsidiaries were
engaged in the business of originating, purchasing, selling and servicing home
equity and home improvement loans. On June 26, 2000, TMS Mortgage, Inc. and its
subsidiaries stopped accepting applications for home equity and home improvement
loans and after August 31, 2000 ceased originating and purchasing home equity
and home improvement loans. On November 1, 2000, TMS Mortgage, Inc. merged with,
and changed its name to, HomEq Servicing Corporation.
Currently, HomEq Servicing Corporation and its subsidiaries service the
home equity and home improvement mortgage loans which it and its subsidiaries
previously originated or purchased. In addition, HomEq Servicing Corporation and
its subsidiaries service a home equity mortgage loan portfolio of approximately
$11 billion for First Union National Bank and its affiliates. On February 8,
2001, S&P announced that HomEq Servicing Corporation had been added to its
select servicer list. HomEq Servicing Corporation is now a select residential
subprime servicer, a select alternative residential mortgage servicer, and a
select residential special servicer. To be included on the select servicer list
S&P has deemed that HomEq Servicing Corporation has met the criteria for
attaining at least an average ranking with an outlook of stable. Inclusion on
the list reflects that a firm is, at the very least, performing its duties in an
effective and controlled manner, and is in general compliance with investor,
regulatory, or agency requirements.
In addition, on December 19, 2001, Fitch, Inc. assigned to HomEq
Servicing Corporation its "RPS2-" residential primary servicer ratings for
subprime and Alt-A products, which was based upon the company's ability to
service, collect and liquidate those assets, and its "RSS2-" residential special
servicer rating, which reflects the company's ability to manage and liquidate
non-performing residential mortgage loans and REO assets. Fitch has reviewed the
company's servicing operation and believes that it has "developed a solid
servicing infrastructure through restructuring its servicing sites, retaining
key personnel, hiring experienced managers and staff, strategic utilization of
vendors and implementing advanced technology." Fitch, Inc. rates residential
primary, master and special servicers on a scale of 1 to 5, with 1 being the
highest rating level, and further differentiates these rate levels with plus (+)
and minus (-) as well as the flat ratings.
For the years ended December 31, 1998, 1999 and 2000, HomEq Servicing
Corporation (which includes its predecessor TMS Mortgage, Inc.), and its
S-34
subsidiaries serviced approximately $13.4 billion, $12.6 billion and $10.7
billion of mortgage loans, respectively. Of those mortgage loans, approximately
82.84%, 78.76% and 71.62%, respectively, by principal amount were home equity
loans and approximately 17.16%, 21.24% and 28.38%, respectively, by principal
amount were home improvement loans (including Title I loans guaranteed by the
FHA). The business strategy of HomEq Servicing Corporation is to provide a
mortgage loan servicing platform for the outstanding portfolio of HomEq
Servicing Corporation, as well as to provide mortgage loan servicing functions
to other areas of Wachovia Corporation and to unaffiliated third parties.
DELINQUENCY EXPERIENCE
The following table sets forth the delinquency and charge-off
experience of HomEq Servicing Corporation (which includes its predecessor TMS
Mortgage, Inc.), with respect to its portfolio of home equity loans as of the
dates indicated. There can be no assurance, and no representation is made, that
the delinquency and charge-off experience with respect to the loans included in
the trust will be similar to that reflected in the table below.
DELINQUENCIES AND CHARGE-OFFS
(DOLLARS IN THOUSANDS)
-------------------------------------------------------
FOR THE PERIOD FOR THE PERIOD FOR THE PERIOD
ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1999(1) 2000(2) 2001(2)
------- ------- -------
30 days past due(3)............................ 2.22% 2.64% 2.45%
60 days past due(3)............................ 1.11% 0.99% 1.04%
90+ days past due( 3).......................... 6.50% 3.99% 3.85%
Loans in the serviced loan portfolio(4)........ $9,550,452 $18,324,494 $17,549,928
Loans charged-off, net......................... $190,424 $295,735 $181,642
Loans charged-off, net as a percentage of the 1.99% 1.61% 1.04%
serviced loan portfolio(5).....................
- ----------------------
(1) Includes only home equity loans originated by TMS Mortgage, Inc. and
its subsidiaries.
(2) HomEq started servicing the First Union National Bank of Delaware
portfolio as of December 2000. Includes home equity loans originated
by both TMS Mortgage, Inc. and First Union National Bank of Delaware.
(3) The delinquency percentages are calculated based upon the aggregate
principal balances of the loans which are delinquent by the number of
days indicated divided by the total aggregate principal balances of
the loans contained in HomeEq Servicing Corporation's total serviced
loan portfolio.
S-35
(4) Amounts shown are the aggregate principal balances of the loans in
HomeEq Servicing Corporation's total serviced loan portfolio as of
the last day of the indicated period (excluding high loan-to-value
loans and home improvement loans).
(5) The percentages of loans charged-off are calculated based upon the
dollar amount of charge-offs divided by the dollar amount of the
principal portion of the loans indicated in HomeEq Servicing
Corporation's total serviced loan portfolio.
CERTAIN LITIGATION
Because of the nature of the business which the predecessor entity to
HomEq Servicing Corporation, TMS Mortgage, Inc., and its affiliates were
involved in, including the collection of numerous accounts, the validity of
liens and compliance with state and federal lending laws, as well as HomEq
Servicing Corporations continuing operations as a mortgage loan servicer, HomEq
Servicing Corporation and its affiliates are subject to claims and legal actions
in the ordinary course of their business. It is impossible to estimate with
certainty the ultimate legal and financial liability with respect to these
claims, especially claims arising from actions taken by TMS Mortgage Inc. and
its affiliates. HomeEq Servicing Corporation will continue to aggressively
defend against all liabilities asserted from time to time in order to limit the
potential monetary damages that may have a material adverse effect on the
financial condition of HomeEq Servicing Corporation or its affiliates.
THE ORIGINATOR
The originator, First Union National Bank of Delaware ("FUNB
Delaware"), is a national bank subsidiary of the holding company Wachovia
Corporation. Prior to June 26, 2000, the loans were originated by FUNB Delaware
under the name First Union Home Equity Bank, National Association. Wachovia
Corporation was created through the September 1, 2001 merger of First Union
Corporation and Wachovia Corporation. The mortgage lending activities of FUNB
Delaware consist primarily of originating and purchasing mortgage loans. These
mortgage loans are primarily secured by one- to four-family residential
properties, including single-family detached homes, condominiums, single-family
attached homes, and manufactured homes. It has been FUNB Delaware's policy
generally not to make mortgage loans secured by cooperative residences,
residential properties in commercially-zoned areas, or other categories of
properties that management believes have demonstrated relatively high levels of
risk. The majority of Mortgage Loans are to borrowers who own a single-family
detached home.
The following is a description of the origination, underwriting, and
other procedures used by FUNB Delaware in connection with its Mortgage Loan
program.
MORTGAGE LOAN ORIGINATION
FUNB Delaware originates and purchases mortgage loans through three
loan delivery channels. These delivery channels are called, broker,
correspondent, and Equity Direct.
The broker channel originates through lending relationships with
independent brokers. Broker channel account executives located in various states
contact brokers to secure loan applications. Brokers participating in this
program must satisfy certain requirements established by FUNB Delaware
S-36
pertaining to experience, and various licenses and approvals. Brokers submit
loan applications for review and approval to a loan-processing unit, Sales
Support Center (SSC), in Charlotte, North Carolina. The loan applications are
under the direction of management, underwritten and structured by SSC personnel,
who evaluate and process the loan application of a prospective borrower. The
loans are closed in the name of First Union National Bank of Delaware.
The correspondent channel purchases loans through relationships with
various lenders or mortgage bankers. These relationships are established by
account executives, who offer loan products to specific geographic regions.
These loans are closed in the name of the originating lender, and subsequently
presented to FUNB Delaware for review and potential purchase. Every loan
submitted by a correspondent lender is reviewed by an underwriter. Each loan is
also reviewed by the loan purchasing department to verify that adequate loan
documentation exists in the loan file.
The third loan delivery channel for FUNB Delaware is called Equity
Direct. Equity Direct secures loan applications directly from consumers through
pre-approved direct mail campaigns and Internet sources. The entire application
and approval process for this channel is conducted by telephone. Equity Direct
loan processors evaluate and process loan applications of prospective borrowers
based on information obtained from the borrower.
The following is a brief description of the general underwriting
standards used by FUNB Delaware. Supervision of all FUNB Delaware underwriting
and administrative functions are conducted from its headquarters in Wilmington,
Delaware and Charlotte, North Carolina. The underwriting process is intended to
assess both the prospective borrower's ability to repay and the adequacy of the
real property security as collateral for the loan granted.
The FUNB Delaware objective in originating and underwriting mortgage
loans is to provide loans to borrowers with satisfactory income and credit
histories deemed sufficient to demonstrate the ability to repay their loan. The
primary underwriting policy is to analyze the applicant's creditworthiness.
Creditworthiness is assessed by examination of a number of factors, which
include calculating a debt-to-income ratio obtained by dividing a borrower's
fixed monthly debt by the borrower's gross monthly income. Fixed monthly debt
generally includes (1) the monthly payment under the related prior mortgages,
(2) the monthly payment on the loan applied for and (3) other installment debt,
including, for revolving debt, the required monthly payment thereon or if no
such payment is specified, 3% of the balance as of the date of calculation.
Fixed monthly debt does not include any debt (other than revolving credit debt)
described above that matures within less than 6 months of the date of
calculation. Creditworthiness is also assessed by examining the applicant's
credit history through standard credit reporting bureaus, and by checking the
applicant's payment history with respect to the first mortgage, if any, on the
property.
The second underwriting policy for mortgage loans is a determination of
the Combined Loan-to-Value Ratio. Combined Loan-to-Value Ratio guidelines are
established depending on the type of loan. Generally, FUNB Delaware confirms the
value of the property by appraisals performed by independent appraisers. If an
S-37
appraisal is not required to be obtained for a Mortgage Loan, the value of the
related mortgaged property, as represented by the borrower, may be evaluated
through other methods such as a drive-by appraisal, an automated valuation
method (AVM) assessment or tax assessments. All Combined Loan-to-Value Ratios
are determined prior to approval of the loans.
FUNB Delaware uses several procedures to verify information obtained
from an applicant. The applicant's outstanding balance and payment history on
any senior mortgage may be verified by calling the senior mortgage lender. FUNB
Delaware may rely upon information provided by the applicant, such as a recent
statement from the senior lender and verification of payment, such as canceled
checks, or upon information provided by national credit bureaus.
To verify an applicant's employment status, FUNB Delaware may obtain
recent tax returns or other tax forms (e.g., W-2 forms) or current pay stubs,
may telephone the applicant's employer or obtain written verification from the
employer.
FUNB Delaware will not close a mortgage loan prior to receiving
evidence that the property securing the loan is insured. It is a requirement
that the insurance carrier name FUNB Delaware as a loss payee under the
insurance policy.
In August 1999, Wachovia Corporation undertook a strategic initiative
to align consumer lending underwriting criteria between FUNB Delaware, First
Union National Bank, First Union Mortgage Finance, and The Money Store. The
objective of this strategic initiative was to ensure similarly situated
customers coming to Wachovia Corporation through like delivery channels would
receive similar underwriting consideration. This alignment initiative resulted
in significantly revised underwriting criteria related to, but not limited to,
credit grade, borrower bankruptcy and foreclosure treatment, derogatory credit
considerations, and acceptable collateral valuation methods.
DESCRIPTION OF THE CERTIFICATES
The certificates will be issued pursuant to a pooling and servicing
agreement dated as of November 30, 2001 among the depositor, the transferor,
trustee, the certificate administrator and the custodian. A copy of the pooling
and servicing agreement will be included as an exhibit to a Current Report on
Form 8-K to be filed by the depositor on behalf of the trust. The following
summaries describe material provisions of the certificates, but do not purport
to be complete and are subject to, and are qualified in their entirety by
reference to, all of the provisions of the certificates and the pooling and
servicing agreement. Terms used in this prospectus supplement and not otherwise
defined will have the meanings set forth in the pooling and servicing agreement.
See "The Pooling and Servicing Agreement" in this prospectus supplement.
DESIGNATIONS
Class A Certificates
o Class A-1 Certificates
o Class A-2 Certificates
S-38
o Class A-3 Certificates
Class M Certificates
o Class M-1 Certificates
o Class M-2 Certificates
Class B Certificates
o Class B-1 Certificates
o Class B-2 Certificates
Offered Certificates
o Class A-1 Certificates
o Class A-2 Certificates
o Class A-3 Certificates
o Class M-1 Certificates
o Class M-2 Certificates
o Class B-1 Certificates
Non-Offered Certificates
o Class B-2 Certificates
o Class X Certificates
o Class R Certificates
Underwritten Certificates
o Class A-1 Certificates
o Class A-2 Certificates
o Class B-1 Certificates
The certificates represent beneficial interests in the trust only and
will not represent obligations of the depositor, the originator, the seller, the
transferor, the trustee, the certificate administrator, the custodian or any of
their respective affiliates. The offered certificates will be issued in
book-entry form in minimum denominations of $25,000 original principal amount
and integral multiples of $1,000 in excess of $25,000.
Definitive certificates, if issued, will be transferable and
exchangeable at the corporate trust office of the certificate administrator or,
at the election of the certificate administrator, at the office of a certificate
registrar appointed by the certificate administrator. No service charge will be
made for any registration of exchange or transfer, but the trustee may require
payment of a sum sufficient to cover any tax or other governmental charge.
S-39
The assets of the trust will consist of:
o the loans;
o payments received on the loans after the cut-off date;
o with respect to the class A-2 certificates only, a cap agreement
and related supplemental interest payments;
o all rights under any insurance policy covering a loan or the
related mortgaged property; and
o property and any proceeds thereof acquired by foreclosure of a
loan, deed in lieu of foreclosure or a comparable conversion.
DISTRIBUTIONS ON THE CERTIFICATES
On the 25th day of each month or, if the 25th day is not a business
day, the first business day immediately following, commencing in January 2002,
until the class principal balance of each class of certificates has been reduced
to zero, the certificate administrator (or a paying agent selected by the
certificate administrator that meets the criteria specified in the pooling and
servicing agreement) will be required to distribute to the persons in whose name
a certificate is registered, on the related record date, the holder's percentage
interest multiplied by the amount available to be paid to the respective class
of certificates for the applicable distribution date. The record date with
respect to each distribution date is at the close of business on the last day of
the month immediately preceding the month of the related distribution date,
except that with respect to the class A-1 and class A-2 certificates, the record
date with respect to each distribution date is the business day immediately
prior to such distribution date. A "business day" is any day other than a
Saturday or Sunday or a day on which banking institutions in the States of
California, New York or North Carolina are authorized or obligated by law or
executive order to be closed. For so long as the offered certificates are in
book-entry form with DTC, the only "Holder" of the Certificates will be Cede &
Co. See "--Book-Entry Certificates" in this section.
Distributions with respect to the certificates will be payable, after
payment of particular fees and other amounts pursuant to the pooling and
servicing agreement, generally from the following amounts:
o receipts on the loans; and
o monthly advances and payments of compensating interest by the
servicer for the loans.
Current Interest
On each distribution date, to the extent of available funds as further
described herein, the holders of each class of certificates will receive an
amount equal to the interest accrued at the applicable pass-through rate during
S-40
the related interest accrual period on the certificate principal balance of such
certificate, minus each class' interest percentage of Relief Act shortfalls for
such distribution date.
Interest with respect to the class A-1 and class A-2 certificates will
accrue on the basis of a 360-day year consisting of the actual number of days
elapsed since interest was last paid or in the case of the first distribution
date, from the closing date. Interest with respect to the other offered
certificates will accrue on the basis of a 360-day year consisting of twelve
30-day months.
The amount of interest each class of certificates is entitled to
receive on each distribution date at the related pass-through rate is referred
to as the "current interest" for the class.
Each class of certificates will bear interest for each interest accrual
period at a pass-through rate equal to the lesser of:
o the applicable pass-through rate as noted on the front cover of
this prospectus supplement; provided, however, that for each
distribution date after the optional termination date, the margin
relating to the class A-2 certificates will double and the fixed
coupon for the other offered certificates, other than the class A-1
certificates, will increase by 50 basis points; and
o the then applicable pool cap (or, in the case of the class A-2
certificates, the lesser of the pool cap and the fixed cap).
If on a particular distribution date, the remaining interest remittance
amount is less than the current interest for that class of certificates, the
amount of the shortfall, together with interest on the shortfall at the
applicable pass-through rate to the extent permitted by law will be carried
forward and distributed as described below. Interest shortfall carryforward
amounts do not include any supplemental interest.
If on any distribution date, the pass-through rate for the class A-2
certificates has been reduced by operation of the fixed cap, such class will be
entitled to receive a supplemental interest payment to be paid from the cap
agreement in an amount equal to the excess of the class A-2 certificate current
interest calculated at the pass-through rate without regard to the fixed cap,
over the amount payable to the holders of the class A-2 certificates in respect
of current interest on such distribution date. The strike price under the cap
agreement is equal to 5.10%, and the notional balance thereof will initially be
equal to the principal balance of the class A-2 certificates and will decline
over time as set forth in Annex B.
INTEREST ALLOCATIONS
The certificate administrator will apply that portion of the available
funds, which represents the Interest Remittance Amount for that distribution
date to the payment of any administrative fees of the trust which are due on
that distribution date, the trustee will then apply the remaining Interest
Remittance Amount to the payment of interest then due on the certificates in the
following order of priority:
S-41
(i) first, concurrently, to the holders of the class A-1, class A-2 and
class A-3 certificates, the current interest and any interest shortfall
carryforward amount for each such class;
(ii) second, to the holders of the class M-1 certificates, the current
interest and any interest shortfall carryforward amount for such class;
(iii) third, to the holders of the class M-2 certificates, the current
interest and any interest shortfall carryforward amount for such class;
(iv) fourth, to the holders of the class B-1 certificates, the current
interest and any interest shortfall carryforward amount for such class; and
(v) fifth, to the holders of the class B-2 certificates, the current
interest and any interest shortfall carryforward amount for such class; and
(vi) sixth, any remaining Interest Remittance Amount will be applied as
described below under "--Application of Monthly Excess Cashflow."
PRINCIPAL ALLOCATIONS
On each distribution date (a) prior to the Stepdown Date or (b) on
which a Trigger Event is in effect, the holders of each class of certificates
shall be entitled to receive distributions in respect of principal to the extent
of the Principal Remittance Amount in the following amounts and order of
priority:
(i) first, to the holders of the class A-1 certificates, the entire
amount of the Principal Distribution Amount, until the certificate balance of
the class A-1 certificates has been reduced to zero;
(ii) second, concurrently, to the holders of the class A-2 and class
A-3 certificates, the remaining Principal Distribution Amount, until the
certificate balances of the class A-2 and class A-3 certificates have been
reduced to zero, such payment to be made pro rata between such classes on the
basis of the certificate principal balances of such classes immediately prior to
such distribution date;
(iii) third, if the certificate balance of the class A certificates has
been reduced to zero, to the holders of the class M-1 certificates, the
remaining Principal Distribution Amount until the certificate balance of the
class M-1 certificates has been reduced to zero;
(iv) fourth, if the certificate balances of the class A and class M-1
certificates have been reduced to zero, to the holders of the class M-2
certificates, the remaining Principal Distribution Amount until the certificate
balance of the class M-2 certificates has been reduced to zero;
(v) fifth, if the certificate balances of the class A and class M
certificates have been reduced to zero, to the holders of the class B-1
certificates, the remaining Principal Distribution Amount until the certificate
balance of the class B-1 certificates has been reduced to zero;
S-42
(vi) sixth, if the certificate balances of the class A, class M and
class B-1 certificates have been reduced to zero, to the holders of the class
B-2 certificates, the remaining Principal Distribution Amount until the
certificate balance of the class B-2 certificates has been reduced to zero; and
(vii) seventh, any remaining Principal Distribution Amount will be
applied as described Under "--Application of Monthly Excess Cashflow."
On each distribution date (a) on or after the Stepdown Date and (b) on
which a Trigger Event is not in effect, the holders of each class of
certificates shall be entitled to receive distributions in respect of principal
to the extent of the Principal Remittance Amount in the following amounts and
order of priority:
(i) first, the appropriate percentage of the Principal Distribution
Amount so as to maintain the credit enhancement levels applicable to the class A
certificates,
(a) to the holders of the class A-1 certificates, until the
principal balance of the class A-1 certificates is reduced to zero; and
(b) to the holders of the class A-2 and class A-3 certificates,
such payment to be made pro rata between such classes on the basis of
the principal balances of such classes immediately prior to such
distribution date, until the principal balances of the class A-2 and
class A-3 certificates are reduced to zero;
(ii) second, to the holders of the class M-1 certificates, the
appropriate percentage of the Principal Distribution Amount so as to maintain
the credit enhancement levels applicable to the class M-1 certificates;
(iii) third, to the holders of the class M-2 certificates, the
appropriate percentage of the Principal Distribution Amount so as to maintain
the credit enhancement levels applicable to the class M-2 certificates;
(iv) fourth, to the holders of the class B-1 certificates, the
appropriate percentage of the Principal Distribution Amount so as to maintain
the credit enhancement levels applicable to the class B-1 certificates;
(v) fifth, to the holders of the class B-2 certificates, the
appropriate percentage of the Principal Distribution Amount so as to maintain
the credit enhancement levels applicable to the class B-2 certificates; and
(vi) sixth, any remaining Principal Distribution Amount will be applied
as described under "-- Application of Monthly Excess Cashflow."
APPLICATION OF MONTHLY EXCESS CASH FLOW
On each distribution date, the holders of each class of certificates
will be entitled to receive distributions to the extent of excess Interest
Remittance Amounts and Principal Remittance Amounts in the following order of
priority:
S-43
(i) to the class A certificates, any unpaid interest shortfall
carryforward amounts for those classes, such payment to be made pro rata among
these classes on the basis of the shortfalls for each class;
(ii) to fund the Accelerated Principal Distribution Amount, if any;
(iii) to the class M-1 certificates, any unpaid interest shortfalls for
that class;
(iv) to the class M-1 certificates, any unpaid Applied Realized Loss
Amount for that class;
(v) to the class M-2 certificates, any unpaid interest shortfalls for
that class;
(vi) to the class M-2 certificates, any unpaid Applied Realized Loss
Amount for that class;
(vii) to the class B-1 certificates, any unpaid interest shortfalls for
that class;
(viii) to the class B-1 certificates, any unpaid Applied Realized Loss
Amount for that class;
(ix) to the class B-2 certificates, any unpaid interest shortfalls for
that class;
(x) to the class B-2 certificates, any unpaid Applied Realized Loss
Amount for that class; and
(xi) any remainder, to the holders of the class X and class R
certificates.
GLOSSARY
Set forth below are the definitions of principal terms used in this
prospectus supplement to help describe the flow of funds on the certificates.
Accelerated Principal Distribution Amount: For any distribution date,
the lesser of:
(1) the Overcollateralization Deficiency Amount for the
distribution date, calculated for this purpose without giving
effect to payment of the Accelerated Principal Distribution
Amount and prior to taking into account the Applied Realized
Loss Amount for the applicable distribution date; and
(2) the remaining Interest Remittance Amount set forth in item
(vi) under "Interest Allocations" above.
Applied Realized Loss Amount: For each distribution date, after taking
into account all realized losses experienced during the preceding collection
period on loans and after taking into account all distributions of principal
with respect to the certificates, an amount equal to the excess, if any, of:
o the aggregate class principal balance of the certificates, over
S-44
o the aggregate principal balance of the loans as of the end of the
related collection period.
Available Funds: For each distribution date, all amounts received on
the trust assets during the related collection period or advanced by the
servicer in respect of amounts due on the loans during such collection period,
less the servicing fee and reimbursement of the servicer.
Collection Period: With respect to any distribution date means the
period from the second day of the calendar month preceding the month in which
such distribution date occurs through the first day of the month in which such
distribution date occurs.
Credit Enhancement Levels: With respect to distributions of principal,
the credit enhancement levels are as described below:
Class Approximate Target Credit
Enhancement
A-1, A-2, A-3 42.00%
M-1 29.50%
M-2 19.50%
B-1 11.50%
B-2 2.00%
Determination Date: For each month the later of:
o the third business day preceding the distribution date occurring in
that month; and
o the seventh business day of that month.
Excess Proceeds: With respect to any liquidated loan, the excess, if
any, of:
o the total net liquidation proceeds received on that loan, over
o the principal balance of the loan as of the date it became a
liquidated loan plus 30 days interest on the loan.
Interest Carry Forward Amount: For any class of certificates and any
distribution date the sum of (a) the excess, if any, of the current interest and
any Interest Carry Forward Amount for the prior distribution date, over the
amount in respect of interest actually distributed on such class on such
distribution date and (b) interest on such excess at the applicable pass-through
rate (x) with respect to the offered certificates (other than the class A-1 and
class A-2 certificates) on the basis of a 360-day year consisting of twelve
30-day months and (y) with respect to the class A-1 and class A-2 certificates,
S-45
on the basis of the actual number of days elapsed since the prior distribution
date.
Interest Remittance Amount: For any distribution date is that portion
of Available Funds allocable to interest collected or advanced during the
related collection period, less servicing fees and trust administrative fees and
expenses.
A "liquidated loan" is a defaulted loan as to which all amounts that
the servicer reasonably expects to recover on account of the loan have been
received.
Liquidation Proceeds: Cash, including insurance proceeds, proceeds of
any foreclosed property, revenues received with respect to the conservation and
disposition of a foreclosed property, and any other amounts received in
connection with the liquidation of defaulted loans, whether through trustee's
sale, foreclosure sale or otherwise.
A "London banking day" is any business day on which dealings in
deposits in United States dollars are transacted in the London interbank market.
Net Liquidation Proceeds: Liquidation proceeds less:
o any reimbursements to the servicer, and
o amounts required to be released to the related obligor pursuant to
applicable law.
Optional Servicer Termination Date: The first distribution date on
which the aggregate outstanding principal balance of the loans is less than or
equal to 10% of the original principal balance.
Overcollateralization Amount: For any distribution date, the excess,
if any, of:
(1) the aggregate principal balance of the loans as of the last day of
the related collection period, over
(2) the aggregate class principal balances of the certificates, after
taking into account all distributions of principal on that
distribution date.
Overcollateralization Deficiency Amount: For any distribution date,
the excess, if any, of:
(1) the targeted overcollateralization amount for that distribution
date, over
(2) the then current overcollateralization amount after giving effect
to all payments previously made to the certificates on that
distribution date.
Overcollateralization Release Amount: With respect to any distribution
date on or after the Stepdown Date on which a Trigger Event is not in effect,
the lesser of (x) the Principal Remittance Amount for such distribution date and
(y) the excess, if any, of (i) the overcollateralization amount of such
distribution date, assuming that 100% of the Principal Remittance Amount is
S-46
applied as a principal payment on the certificates on such distribution date,
over (ii) the Targeted Overcollateralization Amount for such distribution date.
With respect to any distribution date on which a Trigger Event is in effect or
prior to the Stepdown Date, the overcollateralization release amount will be
zero.
Percentage Interest: With respect to any certificate, the fraction,
expressed as a percentage, the numerator of which is the original denomination
represented by that certificate and the denominator of which is the original
aggregate class principal balance of the respective class of certificates. With
respect to a class of certificates, the fraction, expressed as a percentage, the
numerator of which is the original class principal balance of that class of
certificates and the denominator of which is the original aggregate class
principal balance of all classes of certificates.
Prepayment Period: With respect to any distribution date means the
calendar month preceding the month which such distribution date occurs.
Pool Cap: As to any distribution, the weighted average of the net
mortgage interest rates (for each mortgage loan, the applicable interest rate
less the sum of the servicing fee the certificate administrator fee, trustee fee
and the document custodian collection fee), weighted on the basis of the
mortgage loan balances as of the first day of the related collection period.
Principal Distribution Amount: For each Distribution Date, the sum of
(i) the Principal Remittance Amount minus the Overcollateralization Release
Amount, if any, and (ii) the Accelerated Principal Distribution Amount.
Principal Remittance Amount: For each distribution date, the sum (less
certain amounts available for reimbursement of servicing advances and certain
other reimbursable expenses), without duplication with respect to the mortgage
loans and the immediately preceding collection period, of
(1) each scheduled payment of principal received by the
servicer on or prior to the determination date, including
any advances with respect thereto,
(2) all full and partial principal prepayments received by
the servicer during the related prepayment period,
(3) the principal portion of all insurance proceeds, released
mortgaged property proceeds and net liquidation proceeds
received by the servicer during the related prepayment
period,
(4) that portion of the purchase price for any loan purchased
by the servicer during the related prepayment period or
the depositor which represents principal,
(5) any substitution adjustments, received on or prior to the
previous determination date and not yet distributed, and
S-47
(6) any proceeds representing principal received by or on
behalf of the trustee in connection with the liquidation
or termination of the trust.
Realized Loss: With respect to each liquidated loan, generally, an
amount (not less than zero or greater than the related outstanding principal
balance as of the date of the final liquidation) equal to the outstanding
principal balance of the loan as of the date of such liquidation, minus the net
liquidation proceeds relating to such liquidated loan (such net liquidation
proceeds to be applied first to the principal balance of the liquidated loan and
then to interest thereon).
Senior Enhancement Percentage: For any distribution date is the
percentage obtained by dividing (x) the sum of (i) the aggregate certificate
principal balance of the class M and class B certificates and (ii) the
overcollateralization amount, in each case before taking into account the
distribution of the Principal Distribution Amount on such distribution date by
(y) the aggregate principal balance of the mortgage loans as of the last day of
the related collection period.
Senior Specified Enhancement Percentage: On any date of determination
thereof means approximately 42.00%.
Shortfall Amounts: The sum of all amounts paid to the certificates with
respect to all related:
o Interest Shortfall Carryforward Amounts for the class M-1, class
M-2, class B-1 and class B-2 certificates; and
o Applied Realized Loss Amounts.
Sixty-Day Delinquency Ratio: As of any distribution date and with
respect to the loans, a fraction, expressed as a percentage, the numerator of
which is the aggregate of the outstanding principal balances of all loans that
were delinquent 60 days or more as of the end of the related collection period
(including loans in respect of which the related borrower is in bankruptcy, the
related real estate is in the process of foreclosure or has been foreclosed upon
but is still in inventory), and the denominator of which is the sum of the
principal balances of all the loans as of the end of the related collection
period.
Stepdown Date: Means the later to occur of:
(A) the earlier to occur of (i) the distribution date in
January 2005, and (ii) the distribution date on which
the aggregate certificate principal balance of the
Class A-1, Class A-2 and Class A-3 Certificates is
reduced to zero;
(B) the first distribution date on which the senior
enhancement percentage after taking into account
distributions of principal to the certificates on
such distribution date, is greater than or equal to
the senior specified enhancement percentage; and
(C) the distribution date when the collateral balance is
equal to or less than 50% of the original collateral
balance.
S-48
Targeted Overcollateralization Amount: As of the distribution date, (x)
prior to the Stepdown Date, approximately 1.00% of the initial balance of the
mortgage loans and (y) on and after the Stepdown Date, the greater of (A)
approximately 2.00% of the balance of the mortgage loans as of the last day of
the related collection period and (B) approximately 0.50% of the initial balance
of the mortgage loans.
Trigger Event: On a distribution date if (i) the Sixty-Day Delinquency
Ratio equals or exceeds 35% of the Senior Enhancement Percentage; or (ii) if the
aggregate amount of realized losses incurred since the cut-off date through the
last day of the related collection period divided by the initial pool balance
exceeds the applicable percentages set forth below with respect to such
distribution date.
DISTRIBUTION DATE PERCENTAGE PERCENTAGE
---------------------------- ----------
January 25, 2005 to December 26, 2005 3.25%
January 25, 2006 to December 26, 2006 4.25%
January 25, 2007 to December 26, 2007 5.00%
January 25, 2008 and thereafter 5.25%
Upon the occurrence and during the continuance of a trigger event, the
targeted overcollateralization amount will equal the targeted
overcollateralization amount as of the immediately preceding distribution date
and the targeted overcollateralization amount shall never exceed the then
aggregate principal balance of the mortgage loans.
REALIZED LOSSES
General
To the extent that realized losses are experienced, such losses will
reduce the aggregate outstanding balance of the loans. Since the
overcollateralization amount is the excess, if any, of the aggregate principal
balances of the loans over the aggregate class principal balances of the
certificates, realized losses will in the first instance reduce the
overcollateralization amount.
The pooling and servicing agreement requires that the
overcollateralization amount be initially increased to, and thereafter
maintained at, the targeted overcollateralization amount. This increase and
subsequent maintenance is intended to be accomplished by the application of
excess spread to fund accelerated principal distribution amounts. These
accelerated principal distribution amounts, since they are funded from interest
collections on the loans but are distributed as principal on the certificates,
will increase the related overcollateralization amount.
Application of Excess Spread
The weighted average loan interest rate is expected to be higher than
the weighted average of the pass-through rates on the certificates, plus
transaction costs, thus generating excess interest collections which, in the
absence of losses, will not be necessary to fund interest distributions on the
certificates. This excess interest will be applied to the extent available, to
make accelerated payments of principal to the class or classes then entitled to
S-49
receive distributions of principal. This application will cause the aggregate
class principal balance of the certificates to amortize more rapidly than the
loans, resulting in overcollateralization.
If on any distribution date, after taking into account all realized
losses experienced during the prior interest accrual period and the distribution
of principal, including the accelerated principal distribution amount, with
respect to the certificates on the applicable distribution date, the aggregate
class principal balance of the certificates exceeds the aggregate balance of the
loans as of the end of the related collection period, then the class principal
balance of the certificates will be reduced, (i.e. "written down") so that the
level of the overcollateralization amount is zero, rather than negative. This
negative level is an "applied realized loss amount" which will be applied as a
reduction in the class principal balance of the class B-2, class B-1, class M-2
and class M-1 certificates in reverse order of seniority. The agreement does not
permit the "write down" of the class principal balance of the class A-1, class
A-2 or class A-3 certificates.
Once the class principal balance of a class of certificates has been
"written down," the amount of the write down will no longer bear interest, nor
will this amount thereafter be "reinstated" or "written up," although the amount
of this write down may, on future distribution dates, be paid to holders of the
certificates which experienced the write down, in direct order of seniority.
OVERCOLLATERALIZATION
On the closing date, the aggregate principal balances of the underlying
loans will exceed the aggregate class principal balances of the certificates by
approximately 1.00%. For any distribution date, the excess, if any, of the
aggregate principal balance of the mortgage loans as of the last day of the
immediately preceding collection period over the aggregate principal balance of
the offered certificates represents the overcollateralization amount. Also,
excess spread will be applied to pay principal on the certificates. If losses
are realized on the loans and the other forms of credit enhancement have been
exhausted, the certificates will not be allocated any losses unless the
overcollateralization is eliminated.
SUBORDINATION
Certain classes of certificates are senior in right of payment to
other, subordinated classes. The certificates rank in the following order of
priority, from most senior to most subordinated: class A-1, class A-2 and class
A-3, class M-1, class M-2, class B-1, class B-2, class X and class R. This
subordination will be effected through the priority of payments described above
in "--Flow of Funds."
CREDIT ENHANCEMENT DOES NOT APPLY TO PREPAYMENT AND CERTAIN OTHER RISKS
In general, the protection afforded by the credit enhancement is
protection for credit risk and not for prepayment risk and does not apply to the
supplemental interest.
S-50
REPORTS TO CERTIFICATEHOLDERS
On each distribution date, the certificate administrator will be
required to make available to each certificateholder, which will be Cede & Co.,
as registered holder of each class of offered certificates and the nominee of
DTC, unless and until definitive certificates are issued, a statement prepared
by the certificate administrator, based in part on information provided by the
servicer, which generally will set forth, among other things:
(1) the amount being distributed to the certificates on the
applicable distribution date, in the aggregate and by component
and listed separately for the portions relating to each class of
certificates;
(2) the principal distribution amount for the applicable distribution
date, in the aggregate and listed separately by component;
(3) the class current interest requirements for each class of
certificates for the applicable distribution date;
(4) with respect to the class A-2 certificates, LIBOR for the
applicable distribution date;
(5) the pass-through rate for each class of certificates for the
applicable distribution date and if the pass-through rate was
based on the applicable pool cap, what it would be if based on
the pass-through rate as noted on the front cover of this
prospectus supplement;
(6) the pool cap for the loans for the applicable distribution date;
(7) with respect to the class A-2 certificates, the amount of the
distribution, if any, allocable to supplemental interest and the
amount of any unpaid supplemental interest for all prior
distribution dates after giving effect to this distribution;
(8) the overcollateralization amount and the targeted
overcollateralization amount for the applicable distribution
date;
(9) the amount of any applied realized loss amount, realized loss
amount and unpaid applied realized loss amounts for each class as
of the close of the applicable distribution date;
(10) the class principal balances for each class of certificates after
giving effect to the distributions of principal on each class of
certificates on the applicable distribution date;
(11) the number and aggregate principal balances of loans delinquent
(a) 31 to 59 days,
(b) 60 days to 89 days and
S-51
(c) 90 days or more as of the end of the related collection
period;
(12) the number and aggregate principal balances of all loans in
foreclosure or other similar proceedings and the number and
aggregate principal balance of all loans relating to any REO
properties; and
(13) the number and aggregate principal balances of defaulted loans
repurchased at the option of the servicer.
In the case of information furnished pursuant to clauses (1) through
(3) above, the amounts will be expressed as a dollar amount per certificates
with a $25,000 principal denomination.
The certificate administrator will make the statement to
certificateholders available each month via the certificate administrator's
internet website. The certificate administrator's internet website will
initially be located at "www.firstlinkabs.com". Assistance in using the website
can be obtained by calling the certificate administrator's customer service desk
at (781) 768-0000. Parties that are unable to use the above distribution method
are entitled to have a paper copy mailed to them via first class mail by calling
the customer service desk and indicating such.
Within 90 days after the end of each calendar year, the certificate
administrator, upon request, will be required to make available to each person
who at any time was a holder of certificates during the applicable year, a
statement prepared by the certificate administrator containing the information
set forth in clauses (1) through (3) above aggregated for the applicable
calendar year or, in the case of each person who was a holder of a certificate
for a portion of the applicable calendar year, setting forth the information for
each month of the applicable calendar year, or such other information as is
reasonably requested by a holder of certificates and available to the
certificate administrator, which is required in the preparation of such holder's
tax returns.
All reports prepared by the certificate administrator and forwarded to
the trustee will be based upon statements supplied to the certificate
administrator by the servicer.
BOOK-ENTRY CERTIFICATES
The offered certificates will be book-entry certificates. Persons
acquiring beneficial ownership interests in the offered certificates will hold
their certificates through DTC in the United States, or Clearstream, Luxembourg
or Euroclear (in Europe) if they are participants of these systems, or
indirectly through organizations which are participants in these systems. The
book-entry certificates will be issued in one or more certificates which equal
the aggregate principal balance of the offered certificates and will initially
be registered in the name of Cede & Co., the nominees of DTC. Clearstream,
Luxembourg and Euroclear will hold omnibus positions on behalf of their
participants through customers' securities accounts in Clearstream, Luxembourg's
and Euroclear's name on the books of its respective relevant depositary which in
turn will hold positions in customers' securities accounts in such relevant
depositary's name on the books of DTC. Citibank N.A. will act as depositary for
Clearstream, Luxembourg and JP Morgan Chase will act as depositary for
Euroclear. Investors may hold beneficial interests in the book-entry
S-52
certificates in minimum denominations representing original principal balances
of $25,000 and integral multiples of $1,000 in excess of $25,000. Except as
described below, no person acquiring a book-entry certificate will be entitled
to receive a physical certificate representing the offered certificates. Unless
and until definitive certificates are issued, it is anticipated that the only
"certificateholder" of the offered certificates will be Cede & Co., as nominee
of DTC.
The beneficial owner's ownership of a book-entry certificate will be
recorded on the records of the brokerage firm, bank, thrift institution or other
financial intermediary that maintains the beneficial owner's account for this
purpose. In turn, the financial intermediary's ownership of the book-entry
certificate will be recorded on the records of DTC, or of a participating firm
that acts as agent for the financial intermediary, whose interest will in turn
be recorded on the records of DTC, if the beneficial owner's financial
intermediary is not a DTC participant and on the records of Clearstream,
Luxembourg or Euroclear, as appropriate.
Certificate owners will receive all distributions of principal of, and
interest on, the offered certificates from the certificate administrator through
DTC and DTC participants. While the offered certificates are outstanding, except
under the circumstances described below, under the rules, regulations and
procedures creating and affecting DTC and its operations, DTC is required to
make book-entry transfers among participants on whose behalf it acts with
respect to the offered certificates and is required to receive and transmit
distributions of principal of, and interest on, the offered certificates.
Participants and indirect participants with whom certificate owners have
accounts with respect to certificates are similarly required to make book-entry
transfers and receive and transmit distributions on behalf of their respective
certificate owners. Accordingly, although certificate owners will not possess
certificates, the rules provide a mechanism by which certificate owners will
receive distributions and will be able to transfer their interest.
Certificate owners will not receive or be entitled to receive
certificates representing their respective interests in the offered
certificates, except under the limited circumstances described below. Unless and
until definitive certificates are issued, certificate owners who are not
participants may transfer ownership of certificates only through participants
and indirect participants by instructing the participants and indirect
participants to transfer certificates, by book-entry transfer, through DTC for
the account of the purchasers of the offered certificates, which account is
maintained with their respective participants. Under the rules and in accordance
with DTC's normal procedures, transfers of ownership of 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 certificate 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. These credits or any
transactions in the securities settled during processing will be reported to the
relevant Euroclear or Clearstream, Luxembourg participants on the applicable
business day. Cash received in Clearstream, Luxembourg or Euroclear as a result
of sales of securities by or through a Clearstream, Luxembourg participant or
Euroclear participant to a DTC participant will be received with value on the
DTC settlement date but will be available in the relevant Clearstream,
S-53
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 offered certificates, see "Global Clearance, Settlement and Tax
Documentation Procedures--Certain U.S. Federal Income Tax Documentation
Requirements" in Annex A to this prospectus supplement.
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 DTC rules on behalf of the relevant European
international clearing system by the relevant depositary; however, cross market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in the 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.
Clearstream Banking, societe anonyme, Luxembourg, formerly Cedelbank,
has advised that it is incorporated under the laws of the Grand Duchy of
Luxembourg as a professional depositary. Clearstream, Luxembourg holds
securities for its participating organizations. Clearstream, Luxembourg
facilitates the clearance and settlement of securities transactions between
Clearstream, Luxembourg participants through electronic book-entry changes in
accounts of Clearstream, Luxembourg participants, eliminating the need for
physical movement of certificates. Clearstream, Luxembourg provides to
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
depositary, Clearstream, Luxembourg is subject to regulation by the Luxembourg
Commission for the Supervision of the Financial Sector. Clearstream, Luxembourg
participants are recognized financial institutions around the world, including
the underwriter, 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
S-54
relationship with a Clearstream, Luxembourg participant, either directly or
indirectly.
Distributions, to the extent received by the relevant depositary for
Clearstream, Luxembourg, with respect to the offered certificates held
beneficially through Clearstream, Luxembourg will be credited to cash accounts
of Clearstream, Luxembourg participants in accordance with its rules and
procedures.
Euroclear has advised that it was created in 1968 to hold securities
for its participants and to clear and settle transactions between Euroclear
participants through simultaneous electronic book-entry delivery against
payment, eliminating the need for physical movement of certificates and
eliminating any risk from lack of simultaneous transfers of securities and cash.
Euroclear provides various other services, including securities lending and
borrowing and interfaces with domestic markets in several countries. Euroclear
is operated by Euroclear Bank S.A./NV, 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 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 and may include the underwriter. 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 has advised us that it is licensed by the
Belgian Banking and Finance Commission to carry out banking activities on a
global basis. As a Belgian bank, it is regulated and examined by the Belgian
Banking Commission.
Securities clearance accounts and cash accounts with 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 certificates to
specific securities clearance accounts. The Euroclear operator acts under the
Terms and Conditions only on behalf of Euroclear participants and has no record
of or relationship with persons holding through Euroclear participants.
Distributions, to the extent received by the relevant depositary for
Euroclear, with respect to certificates held beneficially through Euroclear will
be credited to the cash accounts of Euroclear Participants in accordance with
the terms and conditions.
Distributions on the book-entry certificates will be made on each
distribution date by the certificate administrator to DTC. DTC will be
responsible for crediting the amount of these payments to the accounts of the
applicable DTC participants in accordance with DTC's normal procedures. Each DTC
participant will be responsible for disbursing these payments to the beneficial
owners of the book-entry certificates that it represents and to each financial
intermediary for which it acts as agent. Each financial intermediary will be
S-55
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 the
payments will be forwarded by the certificate administrator to Cede.
Distributions 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. These
distributions will be subject to tax reporting in accordance with relevant
United States tax laws and regulations. Because DTC can only act on behalf of
financial intermediaries, the ability of a beneficial owner to pledge book-entry
certificates to persons or entities that do not participate in the Depository
system, or otherwise take actions in respect of book-entry certificates, may be
limited due to the lack of physical certificates for the book-entry
certificates. In addition, issuance of the book-entry certificates in book-entry
form may reduce the liquidity of the offered certificates in the secondary
market since some potential investors may be unwilling to purchase certificates
for which they cannot obtain physical certificates.
Monthly and annual reports on the trust will be provided to Cede & Co.,
as nominee of DTC, and may be made available by Cede & Co. to beneficial owners
upon request, in accordance with the rules, regulations and procedures creating
and affecting the depository, and to the financial intermediaries to whose DTC
accounts the book-entry certificates of the beneficial owners are credited.
DTC has advised the certificate administrator that, unless and until
definitive certificates are issued, DTC will take any action permitted to be
taken by the holders of the book-entry certificates under the pooling and
servicing 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 these actions are taken on behalf of financial intermediaries
whose holdings include the 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 pooling and servicing 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 these actions on its behalf through DTC. DTC
may take actions, at the direction of the related participants, with respect to
some certificates which conflict with actions taken with respect to other
certificates.
Definitive certificates will be issued to beneficial owners of the
book-entry certificates, or their nominees, rather than to DTC, only if:
(1) DTC or the representative advises the certificate administrator
in writing that DTC is no longer willing, qualified or able to
discharge properly its responsibilities as nominee and depository
with respect to the book-entry certificates and the servicer or
the trustee is unable to locate a qualified successor, or
S-56
(2) the representative, at its sole option, with the consent of the
trustee, elects to terminate a book-entry system through DTC.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the certificate administrator will be required to notify
all beneficial owners of the occurrence of the event and the availability
through DTC of definitive certificates. Upon surrender by DTC of the global
certificate or certificates representing the book-entry certificates and
instructions for re-registration, the trustee will issue definitive
certificates, and thereafter the trustee will recognize the holders of the
definitive certificates and certificateholders under the pooling and servicing
agreement.
Although DTC, Clearstream, Luxembourg and Euroclear have agreed to the
foregoing procedures in order to facilitate transfers of certificates among
participants of DTC, Clearstream, Luxembourg and Euroclear, they are under no
obligation to perform or continue to perform these procedures and the procedures
may be discontinued at any time.
None of the originator, the seller, the servicer, the trustee or the
certificate administrator will have any responsibility for any aspect of the
records relating to or payments made on account of beneficial ownership
interests of the book-entry certificates held by Cede & Co., as nominee for DTC,
or for maintaining, supervising or reviewing any records relating to beneficial
ownership interests.
THE POOLING AND SERVICING AGREEMENT
The following summary describes some of the terms of the pooling and
servicing agreement. A form of the pooling and servicing agreement has been
filed as an exhibit to the registration statement of which this prospectus
supplement and the attached prospectus form a part. A copy of the pooling and
servicing agreement will be filed with the Securities and Exchange Commission
following the issuance of the certificates. This summary does not purport to be
complete and is subject to, and qualified in its entirety by reference to, all
the provisions of the pooling and servicing agreement. The following summary
supplements, and to the extent inconsistent with the description of the general
terms replaces, the description of the general terms and provisions of the
pooling and servicing agreement set forth under the heading "The Agreements" in
the prospectus.
ASSIGNMENT OF THE LOANS
Immediately prior to the closing date, First Union National Bank owned
the mortgage loans. First Union National Bank at the time of the issuance of the
certificates, will sell and assign the loans to the transferor, who will in turn
transfer them to the depositor, who will transfer them to the trust. Each loan
will be identified in a schedule delivered to the trustee and First Union
National Bank, as custodian.
With respect to each loan, the originator and First Union National Bank
will deliver to the custodian the mortgages, the mortgage notes and the other
loan documents; although so long as First Union National Bank's long-term
unsecured debt is rated at least "A3" by Moody's and "A-" by S&P and no other
assignment event (as defined in the pooling and servicing agreement) shall have
occurred and be continuing, the custodian shall be entitled to maintain
possession of such trustee's loan file as custodian. In the event that the
S-57
long-term unsecured debt rating of First Union National Bank does not satisfy
the above-described standards or another assignment event has occurred and is
continuing, the custodian shall no longer be the custodian for the loans and
will cause, at its expense, within 30 days after the occurrence of an assignment
event, each of the trustee's loan files in its possession pertaining to the
loans to be delivered to the trustee or the trustee's bailee. In such capacity,
the trustee shall be entitled to a fee, payable from the trust in accordance
with the pooling and servicing agreement.
The custodian will review the loan files in its possession relating to
the loans within the period specified in the pooling and servicing agreement and
notify the trustee of any material defect discovered in the review.
Notwithstanding the foregoing, the custodian shall perform the review required
by the Agreement as to the assignments of mortgages and endorsements of the
related mortgage note within 150 days from the closing date. If any document
required to be included in any trustee's loan file does not bear manual
signatures, has not been received or is unrelated to the applicable loan, and
this defect is not cured as provided in the pooling and servicing agreement
following receipt of notification of the defect by the representative from the
certificate administrator, the representative will be required either to
repurchase or to replace the affected loan in the manner set forth in the
prospectus under the caption "The Agreements--Assignment of Primary Assets."
PAYMENTS ON THE LOANS
The agreement requires the servicer to establish and maintain one or
more principal and interest accounts at one or more designated depository
institutions. A designated depository institution is an entity which is an
institution whose deposits are insured by either the Bank Insurance Fund, or any
successor or the Savings Association Insurance Fund, or any successor
administered by the Federal Deposit Insurance Corporation and any successor, the
unsecured and uncollateralized long-term debt obligations of which shall be
rated "AA-" or better by S&P and "A2" or better by Moody's, and in the highest
short-term rating category by S&P and Moody's, and which is either:
o a federal savings association duly organized, validly existing
and in good standing under the federal banking laws,
o an institution duly organized, validly existing and in good
standing under the applicable banking laws of any state,
o a national banking association duly organized, validly existing
and in good standing under the federal banking laws, or
a principal subsidiary of a bank holding company, in each case acting
or designated by the servicer as the depository institution for the principal
and interest account. The principal and interest account may be held with First
Union National Bank and its affiliates, and First Union National Bank may
commingle the cash with its other funds for specified periods, for so long as:
o the servicer remains an affiliate of First Union National Bank,
S-58
o no event of default under the pooling and servicing agreement
shall have occurred and be continuing, and
o First Union National Bank maintains a short-term rating of at
least "A-1" by S&P and "P-1" by Moody's and for five business
days following any reduction, suspension, termination or
withdrawal of either rating.
All funds in the principal and interest account are required to be
held:
o uninvested, up to the limits insured by the Federal Deposit
Insurance Corporation, or
o invested in permitted instruments, which are specified in the
pooling and servicing agreement and will be limited to
investments that meet the criteria of S&P and Moody's as being
consistent with their respective then-current ratings of the
offered certificates.
Any investment earnings on funds held in the principal and interest
account are for the account of the servicer.
The servicer is required to deposit in the applicable principal and
interest account, within 24 hours of receipt:
o all payments received after the cut-off date on account of
interest on the related loans, net of the servicing fee and other
servicing compensation payable to the servicer as permitted by
the pooling and servicing agreement,
o all payments received after the cut-off date on account of
principal on the related loans,
o any amounts paid in connection with the repurchase of a related
loan and the amount of any adjustment for substituted loans, and
o the amount of any losses incurred in connection with investments
in permitted instruments.
No later than each determination date, the servicer will withdraw from
the applicable principal and interest account and remit to the certificate
administrator for deposit in the applicable certificate account, the available
remittance amount for the related distribution date that is net of compensating
interest and monthly advances and certain amounts reimbursable to the trustee,
the custodian and the certificate administrator under the pooling and servicing
agreement.
Not later than the close of business on each determination date, the
servicer also will remit to the certificate administrator for deposit in the
applicable certificate account any monthly advance and/or compensating interest
payments for the upcoming distribution date.
S-59
The servicer is required to pay all reasonable and customary
"out-of-pocket" costs and expenses incurred in the performance of its servicing
obligations, including, but not limited to, the cost of:
o the preservation, restoration and protection of the mortgaged
property or other collateral,
o any enforcement or judicial proceedings, including foreclosures,
and
o the management and liquidation of mortgaged property acquired in
satisfaction of the related mortgage.
Each expenditure will constitute a "servicing advance." The servicer is
obligated to make the servicing advances incurred in the performance of its
servicing obligations. The servicer may recover servicing advances from future
collections on the loans. The servicer is not required to make servicing
advances on any loan which it determines, in good faith, would be nonrecoverable
from amounts received in respect of the related loan.
MONTHLY ADVANCES
The servicer is required to remit to the certificate administrator no
later than each determination date for deposit in the applicable certificate
account scheduled principal and interest (net of the servicing fee) for any
delinquent mortgage loan that is an actuarial loan. The servicer is not required
to make monthly advances which it determines, in good faith, would be
nonrecoverable from amounts received in respect of the related loan.
Monthly advances are reimbursable in the first instance from late
collections of principal, interest, liquidation proceeds, insurance proceeds and
released mortgaged property proceeds collected with respect to the related loan
as to which the monthly advances were made. The servicer's right to
reimbursement for advances in excess of the related amounts is limited to late
collections of principal and interest received on the loans generally; provided,
however, that the servicer's right to reimbursement is subordinate to the rights
of the certificateholders. Monthly advances are intended to provide sufficient
funds for the payment of the interest to the certificateholders at the then
applicable pass-through rates, plus an additional amount, if any, required to
pay the fees and expenses of the transaction parties. The servicer is also not
required to make advances to compensate for reductions in payments due to
bankruptcy proceedings or the application of the Soldiers' and Sailors' Civil
Relief Act of 1940, as amended. Additionally, the servicer is not required to
make advances on simple interest loans.
COMPENSATING INTEREST
The servicer is required to make payments of compensating interest to
the trust in respect to prepaid mortgage loans. For any distribution date,
compensating interest is an amount equal to the interest at the mortgage
interest rate for such mortgage loan on the amount of such principal prepayment
for the number of days commencing on the date on which the principal prepayment
is applied and ending on the last day of the prior calendar month, subject to a
cap of the servicing fee earned in such month. The servicer will not be required
to make payments of compensating interest in excess of the servicing fee. The
S-60
servicer will not cover a prepayment interest shortfall on any mortgage loan
that is subject to the Soldiers' and Sailors' Civil Relief Act of 1940, as
amended.
CALCULATION OF LIBOR
The certificate administrator will determine LIBOR commencing on the
second LIBOR business day preceding each distribution date, or in the case of
the first interest accrual period, two business days prior to the closing date,
which appears on Telerate Page 3750 as of 11:00 a.m., London time, on such LIBOR
determination date. If the rate does not appear on Telerate Page 3750, the rate
for that day will be determined on the basis of the rates at which deposits in
U.S. dollars, having the one month index maturity and in a principal amount of
not less than U.S. $1,000,000, are offered at approximately 11:00 a.m., London
time, on the LIBOR determination date to prime banks in the London interbank
market by the reference banks. The certificate administrator will request the
principal London office of each reference bank to provide a quotation of its
rate. If at least two quotations are provided, the rate for that day will be the
arithmetic mean of the quotations. If fewer than two quotations are provided,
the rate for that day will be the arithmetic mean of the rates quoted by major
banks in New York City, selected by the certificate administrator, at
approximately 11:00 a.m., New York City time, on the LIBOR determination date
for loans in U.S. dollars to leading European banks having the one-month index
maturity and in a principal amount equal to an amount of not less than U.S.
$1,000,000; provided that if the banks selected as aforesaid are not quoting as
mentioned in this sentence, LIBOR in effect for the applicable interest accrual
period will be LIBOR in effect for the previous interest accrual period.
The establishment of LIBOR on each LIBOR determination date by the
certificate administrator and the certificate administrator's calculation of the
rate of interest applicable to the certificates for the related distribution
date shall, in the absence of manifest error, be final and binding. Each rate of
interest may be obtained by telephoning the certificate administrator at (704)
383-9568.
A LIBOR business day is a day which is both a business day and a day on
which dealings in dollar-denominated deposits are transacted in the London
interbank market.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The servicer is entitled to a servicing fee of 0.50% per annum of the
unpaid principal balance of each loan which is secured by a first lien, and
0.75% per annum of the unpaid principal balance of each loan which is secured by
a junior lien, (the weighted average servicing fee is approximately 0.548% per
annum of the unpaid principal balance of the loans as of the cut-off date)
calculated and paid monthly from the interest portion of monthly payments,
liquidation proceeds and other proceeds collected. See "The
Agreements--Servicing and Other Compensation and Payment of Expenses" in the
Prospectus.
S-61
REMOVAL AND RESIGNATION OF SERVICER
The holders of a majority in interest of the aggregate class principal
balance of the certificates, by notice in writing to the servicer, may, pursuant
to the pooling and servicing agreement, remove the servicer upon the occurrence
of any of the following events of default.
(1) (A) the failure by the servicer to make any required
servicing advance, to the extent this failure
materially or adversely affects the interests of the
certificateholders;
(B) the failure by the servicer to make any required
monthly advance;
(C) the failure by the servicer to remit any compensating
interest;
(D) any failure by the servicer to remit to
certificateholders, or to the certificate
administrator for the benefit of the
certificateholders, any payment required to be made
under the terms of the pooling and servicing
agreement which continues unremedied, in the case of
the events described in clauses (1)(A) and (1)(C) for
30 days, after the date upon which written notice of
the failure, requiring the same to be remedied, shall
have been given to the servicer by the trustee or to
the servicer and the trustee by any
certificateholder; or
(2) failure by the servicer or the representative duly to observe
or perform, in any material respect, any other covenants,
obligations or agreements of the servicer or the
representative, as set forth in the pooling and servicing
agreement, which failure continues unremedied for a period of
60 days after the date on which written notice of the failure,
requiring the same to be remedied, shall have been given to
the servicer or the representative, as the case may be, by the
trustee or to the servicer or the representative, as the case
may be, and the trustee by any certificateholder; or
(3) a decree or order of a court or agency or supervisory
authority having jurisdiction for the appointment of a
conservator or receiver or liquidator in any insolvency,
readjustment of debt, marshaling of assets and liabilities or
similar proceedings, or for the winding-up or liquidation of
its affairs, shall have been entered against the servicer and
the decree or order shall have remained in force, undischarged
or unstayed for a period of 60 days; or
(4) the servicer shall consent to the appointment of a conservator
or receiver or liquidator in any insolvency, readjustment of
debt, marshaling of assets and liabilities or similar
proceedings of or relating to the servicer or of or relating
to all or substantially all of the servicer's property; or
(5) the servicer shall admit in writing its inability to pay its
debts as they become due, file a petition to take advantage of
any applicable insolvency or reorganization statute, make an
assignment for the benefit of its creditors, or voluntarily
suspend payment of its obligations.
S-62
The servicer may not assign the pooling and servicing agreement nor
resign from the obligations and duties imposed by the pooling and servicing
agreement on it except by mutual consent of the servicer, the trustee and the
majority certificateholders, or upon the determination that the servicer's
duties under the pooling and servicing agreement are no longer permissible under
applicable law or administrative determination and the incapacity cannot be
cured by the servicer. No resignation shall become effective until a successor
has assumed the servicer's responsibilities and obligations in accordance with
the pooling and servicing agreement.
Upon removal or resignation of the servicer and otherwise in accordance
with the pooling and servicing agreement, the certificate administrator will be
the successor servicer. If, however, the certificate administrator is unable or
unwilling to act as successor servicer, the certificate administrator may
appoint, or petition a court of competent jurisdiction to appoint, any
established mortgage loan servicing institution acceptable to S&P and Moody's
having a net worth of not less than $15,000,000 as the successor servicer in the
assumption of all or any part of the responsibilities, duties or liabilities of
the servicer.
Additionally, at any time prior to the occurrence of an event of
default, the initial holder of the class X certificates may require the servicer
to appoint a sub-servicer for one or more specific loans, or replace HomEq
Servicing Corporation as servicer with an entity named by such certificateholder
that is satisfactory to S&P and Moody's and has been designated at least a
select servicer by S&P. Any successor servicer will be required to assume all of
the rights and obligations of the servicer under the pooling and servicing
agreement and will be entitled to receive the servicing fee and other servicing
compensation as permitted by the pooling and servicing agreement. In the event
of a transfer of more than 50% of the class X certificates by the initial holder
to subsequent class X certificateholders, or the upon occurrence of an event of
default, the holder of the class X certificates will no longer have this right
and any replacement servicer will be appointed as described above.
TERMINATION; PURCHASE OF LOANS
The trust will terminate upon distribution to the certificateholders of
amounts due them following the earlier to occur of
o the final payment or other liquidation of the last loan remaining
in the trust or the disposition of all REO property,
o the optional purchase of the assets of the trust by the servicer,
as described below or
o the occurrence of a "qualified liquidation" of the trust, as
permitted by the REMIC provisions of the code as described below;
provided, however, that in no event will the trust terminate later
than twenty-one years after the death of the last survivor of the
person named in the pooling and servicing agreement.
Subject to provisions in the pooling and servicing agreement concerning
adopting a plan of complete liquidation, on any date on which the aggregate
principal balances of the loans are less than or equal to 10% of the original
principal balance the servicer may, at its option, purchase, on any succeeding
S-63
distribution date, all of the loans and any related REO Properties at a price
equal to the termination price relating to the trust.
Following a final determination by the Internal Revenue Service or by a
court of competent jurisdiction, in either case from which no appeal is taken
within the permitted time for such appeal, or if any appeal is taken, following
a final determination of such appeal from which no further appeal can be taken,
to the effect that the REMIC does not and will no longer qualify as a REMIC
pursuant to Section 860D of the Code, at any time on or after the date which is
30 calendar days following such final determination the majority
certificateholders may direct the trustee on behalf of the trust to adopt a
"plan of complete liquidation" (within the meaning of Section 860F(a)(4)(B)(i)
of the Code) with respect to the related REMIC. Upon receipt of such direction
by the applicable majority certificateholders (as defined in the pooling and
servicing agreement) the certificate administrator will notify the holders of
the class R certificates of such election to liquidate. The holders of a
majority of the percentage interest of the class R certificates then outstanding
may, within 60 days from the date of receipt of the termination notice, at their
option, purchase from the trust all the loans and all property theretofore
acquired by foreclosure, deed in lieu of foreclosure, or otherwise in respect of
any loan then remaining in the REMIC at a purchase price equal to the
termination price of the trust.
If, during a purchase option period, the holders of the class R
certificates have not exercised the option described in the immediately
preceding paragraph, then upon the expiration of the purchase option period in
the event that the majority certificateholders have given the trustee the
direction described above, the trustee is required to sell the applicable loans
and such other property in the related REMIC and distribute the proceeds of the
liquidation of such REMIC, each in accordance with the plan of complete
liquidation, such that, if so directed, the liquidation of such REMIC and the
distribution of the proceeds of the liquidation occur no later than the close of
the 60th day, or such later day as the majority certificateholders shall permit
or direct in writing, after the expiration of the purchase option period.
Following a final determination, the holders of a majority of the
percentage interest of the class R certificates then outstanding may, at their
option and upon delivery to the trustee and certificate administrator of an
opinion of nationally recognized tax counsel selected by the holders of such
class R certificates, which opinion shall be reasonably satisfactory in form and
substance to the majority certificateholders, that the effect of the final
determination is to increase substantially the probability that the gross income
of the related REMIC will be subject to federal taxation, purchase from the
trust all loans and all property theretofore acquired by foreclosure, deed in
lieu of foreclosure, or otherwise in respect of any loan then remaining in the
related REMIC at a purchase price equal to the termination price of the trust.
The foregoing opinion shall be deemed satisfactory unless the majority
certificateholders give the holders of a majority of percentage interests in the
class R certificates notice that such opinion is not satisfactory within thirty
days after receipt of such opinion.
If the trust were to lose its qualification as a REMIC, it might be
taxable as a grantor trust, a partnership, or an association taxable as a
corporation. If the trust is treated as a grantor trust or a partnership, such
trust would not be subject to a separate entity level tax, and it is not
expected that the tax treatment of the investors would be materially different
from the tax treatment if the REMIC election of such trust had not been revoked.
However, if the trust were
S-64
treated as an association taxable as a corporation it would be subject to
Federal income taxes at corporate rates on its net income. Moreover,
distributions on the certificates would probably not be deductible in computing
such trust's taxable income, and all or part of the distributions to the holders
of such certificates would probably be treated as dividend income to the
holders. Such an entity level tax could result in reduced distributions to the
holders of the certificates and such certificateholders could also be liable for
a share of such a tax. Any such corporate level tax would be borne first by the
holders of the class R certificates from amounts otherwise distributable to such
holders. Any remaining corporate level tax would be borne by holders of all
classes of certificates pro rata in proportion to the outstanding principal
balances of such classes.
THE TRUSTEE
Citibank, N.A. will be the trustee under the pooling and servicing
agreement. The trustee is a national banking corporation. The trustee will have
the duties, responsibilities and requirements as set forth in the pooling and
servicing agreement. The trustee and any of its affiliates may hold certificates
in its own name or as pledgees. For the purpose of meeting the legal
requirements of some jurisdictions, the servicer and the trustee acting jointly,
or in some instances, the trustee acting alone, will have the power to appoint
co-trustees or separate trustees of all or any part of the trust. In the event
of an appointment, all rights, powers, duties and obligations conferred or
imposed upon the trustee by the pooling and servicing agreement will be
conferred or imposed upon the trustee and the separate trustee or co-trustee,
jointly, or, in any jurisdiction in which the trustee will be incompetent or
unqualified to perform particular acts, singly upon the separate trustee or
co-trustee, which will exercise and perform these rights, powers, duties and
obligations solely at the direction of the trustee, as applicable.
The trustee's corporate trust office is located, for certificate
transfer purposes, at 111 Wall St., New York, New York 10005, Attn: Corporate
Trust Services - RAFC Asset-Backed Trust 2001-1. Offered certificates may be
surrendered at the corporate trustee office or at any other address as the
trustee may designate from time to time. The originator, the seller, the
depositor, the servicer, the certificate administrator, and their respective
affiliates may have other banking relationships with the trustee and its
affiliates in the ordinary course of their business.
The trustee may resign at any time, in which event the certificate
administrator will be obligated to appoint a successor to the trustee. The
certificate administrator may also remove the trustee if it ceases to be
eligible to continue in that capacity under the pooling and servicing agreement,
becomes legally unable to act or becomes insolvent. In these circumstances, the
certificate administrator will be obligated to appoint a successor trustee. Any
resignation or removal of the trustee and appointment of a successor to the
trustee will not become effective until acceptance of the appointment by the
successor.
THE CERTIFICATE ADMINISTRATOR
First Union National Bank, a national banking association headquartered
in Charlotte, North Carolina, will perform some of the administrative functions
S-65
on behalf of the trust, as set forth in the pooling and servicing agreement. The
certificate administrator will be paid a fee for its services as set forth in
the pooling and servicing agreement.
THE CUSTODIAN
First Union National Bank will be the custodian of the loans. In this
capacity, it will retain the files relating to the loans and will hold the files
in a segregated area maintained initially at the representative's offices
located in Sacramento, California. The custodian will be paid a fee for its
services as set forth in the pooling and servicing agreement. See "Risk
Factors--Our Parent's Insolvency May Result In Others Owning the Trust's Assets"
in this prospectus supplement.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion of certain material federal income tax
consequences of the purchase, ownership and disposition of the certificates is
to be considered only in connection with "Material Federal Income Tax
Consequences" in the accompanying prospectus. The discussion in this prospectus
supplement and in the accompanying prospectus is based upon laws, regulations,
rulings and decisions now in effect, all of which are subject to change. The
discussion below and in the accompanying prospectus does not purport to deal
with all federal tax consequences applicable to all categories of investors,
some of which may be subject to special rules. 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
certificates.
One or more elections will be made to treat certain assets of the trust
as one or more REMICs for federal income tax purposes. Dewey Ballantine LLP, as
special tax counsel, will deliver its opinion that, assuming compliance with the
Pooling and Servicing Agreement, the trust will be treated as one or more REMICs
for federal income tax purposes. Except as discussed below under "The Class A-2
Certificates," each of the offered certificates will be designated as a "regular
interest" in a REMIC. Each of the class R interests will be designated as the
sole "residual interest" in a REMIC. The class R certificate is a "REMIC
Residual Certificate" for purposes of the Prospectus.
Except as discussed below under "The Class A-2 Certificates," the
offered certificates possess certain special tax attributes by virtue of the
REMIC provisions of the Code. See "Material Federal Income Tax
Consequences--REMIC Securities" in the Prospectus.
The offered certificates will be treated as debt instruments for
federal income tax purposes. Beneficial owners of the certificates will be
required to report income on such certificates in accordance with the accrual
method of accounting. It is not anticipated that the certificates will be issued
with original issue discount. See "Material Federal Income Tax Consequences --
Discount and Premium -- Original Issue Discount" in the Prospectus. The
prepayment assumption for calculating original issue discount is 28% CPR. See
"Prepayment and Yield Considerations" herein.
The Class A-2 Certificates
S-66
Holders of the class A-2 certificates will be treated for federal
income tax purposes as owning two separate investments: (i) a REMIC regular
interest, and (ii) the right to receive supplemental interest payments.
Holders of the class A-2 certificates must allocate the purchase price of
their certificates between these two investments based on their relative fair
market values.
For purposes of calculating accruals of original issue discount, if
any, with respect to the class A-2 certificates, the purchase price allocated
to the REMIC regular interest portion of the holder's investment will be the
issue price of the class A-2 certificate.
If, on any distribution date, the pass-through rate for the class A-2
certificates has been reduced by operation of the fixed cap, holders of class
A-2 certificates will be entitled to receive a supplemental interest payment, to
be paid from the cap agreement that is held by the trust. Each supplemental
interest payment will be an amount equal to the excess of the class A-2
certificate current interest calculated at the pass-through rate without regard
to the pool cap, over the amount actually paid to the holders of class A-2
certificates in respect of current interest on such distribution date.
The proper federal income tax treatment of the right to receive
supplemental interest payments is not clear, and special tax counsel cannot make
a reliable estimation of the degree of certainty of treatment among several
possible treatments and unknown other treatments the Internal Revenue Service
may apply. Special tax counsel believes that a likely treatment of the right to
receive supplemental interest payments is as a notional principal contract. The
Trust intends to treat the right to receive supplemental interest payments as a
notional principal contract for federal income tax purposes. Treasury
Regulations under section 446 of the Code relating to notional principal
contracts provide that taxpayers, regardless of their method of accounting,
generally must recognize the ratable daily portion of a periodic payment for the
taxable year to which that portion relates. Assuming treatment as a notional
principal contract, supplemental interest payments will be periodic payments.
Income with respect to periodic payments under a notional principal contract for
a taxable year should constitute ordinary income. The purchase price allocated
to the right to receive the supplemental interest payments will be treated as a
non-periodic payment under these regulations. This non-periodic payment may be
amortized using several methods, including the level payment method described in
these regulations.
Alternative federal income tax characterization of the right to receive
supplemental interest payments is possible, including treatment as indebtedness
or as an interest in a partnership. Foreign holders of the class A-2
certificates may be subject to withholding in respect of supplemental interest
payments in the event that such payments are treated as indebtedness or as an
interest in a partnership. The amount, timing, and character of the income and
deductions for an owner of the right to receive supplemental interest payments
would differ if the right to receive Supplemental Interest were held to
constitute indebtedness or an interest in a partnership, but for most investors
in most circumstances, those differences would not be material. Because the
Trust will treat the right to receive supplemental interest payments as a
notional principal contract, the Trustee will not attempt to satisfy the tax
reporting requirements that would apply under these alternative
characterizations of the right to receive supplemental interest payments.
Investors that are foreign persons should consult their own tax advisors in
S-67
determining the federal, state, local and other tax consequences to them of the
purchase, ownership and disposition of the class A-2 certificates.
STATE TAX CONSIDERATIONS
Potential certificateholders should consider the state and local income
tax consequences of the purchase, ownership and disposition of the certificates.
State and local income tax laws may differ substantially from the corresponding
federal laws and this discussion does not purport to describe any aspect to the
income tax laws of any state or locality. Therefore, potential
certificateholders should consult their own tax advisors with respect to the
various state and local tax consequences of an investment in the certificates.
ERISA CONSIDERATIONS
The Employment Retirement Income Security Act of 1974, as amended,
imposes certain requirements on employee benefit plans and collective investment
funds and separate accounts in which such plans or arrangements are invested to
which it applies and on those persons who are fiduciaries with respect to such
benefit plans. Certain employee benefit plans, such as governmental plans (as
defined in Section 3(32) of ERISA) and certain church plans (as defined in
Section 3(33) of ERISA), are not subject to ERISA. In accordance with ERISA's
general fiduciary standards, before investing in an offered certificate a
benefit plan fiduciary should determine whether such an investment is permitted
under the governing benefit plan instruments and is appropriate for the benefit
plan in view of its overall investment policy and the composition and
diversification of its portfolio.
In addition, benefit plans subject to ERISA, individual retirement
accounts and certain types of Keogh plans not subject to ERISA but subject to
Section 4975 of the Code and entities in which such plans or accounts are
invested are prohibited from engaging in a broad range of transactions involving
Plan assets and persons having certain specified relationships to a Plan
("parties in interest" and "disqualified persons"). Such transactions are
treated as "prohibited transactions" under Sections 406 and 407 of ERISA and
excise taxes are imposed upon such persons by Section 4975 of the code. The
originator, the certificate administrator, the underwriters, the trustee, the
custodian, and the servicer and certain of their affiliates might be considered
"parties in interest" or "disqualified persons" with respect to a plan. If so,
the acquisition, or holding or transfer of offered certificates by or on behalf
of such plan could be considered to give rise to a "prohibited transaction"
within the meaning of ERISA and the code unless an exemption is available.
Furthermore, if an investing plan's assets were deemed to include an interest in
the loans and any other assets of the trust and not merely an interest in the
related offered certificates, transactions occurring in the servicing of the
loans might constitute prohibited transactions unless an administrative
exemption applies. One exemption which may be applicable to the acquisition and
holding of the offered certificates or to the servicing of the loans is noted
below.
The Department of Labor has issued a regulation (29 C.F.R. Section
2510.3-101) concerning the definition of what constitutes the assets of a plan,
which provides that, as a general rule, the underlying assets and properties of
corporations, partnerships, trusts and certain other entities in which a plan
makes an "equity" investment will be deemed for purposes of ERISA to be assets
S-68
of the investing plan unless certain exceptions apply. Thus, a plan fiduciary
considering an investment in offered certificates should also consider whether
such an investment might constitute or give rise to a prohibited transaction
under ERISA or the code.
The DOL has granted administrative exemptions to a number of
underwriters and their affiliates, including Wachovia Corporation, the ultimate
parent of First Union Securities, Inc. (Prohibited Transaction Exemption 96-22,
as amended by PTE 97-34 and as recently further amended by PTE 2000-58), from
certain of the prohibited transaction rules of ERISA with respect to the initial
purchase, the holding and the subsequent resale in the secondary market by plans
of pass-through certificates representing a beneficial undivided ownership
interest in the assets of a trust that consist of certain receivables, loans and
other obligations such as the loans, that meet the conditions and requirements
of the exemption, which may be applicable to the offered certificates if
Wachovia Corporation or any of its affiliates (including First Union Securities,
Inc.) is either the sole underwriter or the manager or co-manager of the
underwriting syndicate, or a selling or placement agent. The conditions which
must be satisfied for the exemption to apply to the purchase, holding and
transfer of the offered certificates which are backed by fully-secured loans are
the following:
(1) The acquisition of the offered certificates by a plan is on
terms (including the price for the offered certificates) that
are at least as favorable to the plan as they would be in an
arm's length transaction with an unrelated party.
(2) The offered certificates acquired by the plan have received a
rating at the time of such acquisition that is in one of the
four highest generic rating categories from any of Moody's or
S&P and the investment pool consists only of assets of the
type enumerated in the exemption, and which have been included
in other investment pools; certificates evidencing interests
in such other investment pools have been rated in one of the
four highest generic rating categories by an authorized rating
agency for at least one year prior to a plan's acquisition of
certificates; and certificates evidencing interests in such
other investment pools have been purchased by investors other
than plans for at least one year prior to a plan's acquisition
of the offered certificates.
(3) The sum of all payments made to the underwriters in connection
with the distribution of the offered certificates represents
not more than reasonable compensation for distributing the
offered certificates. The sum of all payments made to and
retained by the originator and the seller pursuant to the sale
of the loans to the trust represents not more than the fair
market value of such loans. The sum of all payments made to
and retained by the servicer or any other servicer represents
not more than reasonable compensation for such services under
the pooling and servicing agreement and reimbursement of the
servicer's reasonable expenses in connection therewith.
(4) The trustee must not be an affiliate of any member of the
restricted group as defined below.
S-69
In addition, it is a condition that the plan investing in the
underwritten certificates is an "accredited investor" as defined in Rule
501(a)(1) of Regulation D under the Securities Act. Any plan investor purchasing
underwritten certificates will be deemed to have represented, by virtue of such
purchase, that it is an accredited investor.
No exemption is provided from the restrictions of ERISA for the
acquisition or holding of an offered certificate on behalf of an "excluded plan"
by any person who is a fiduciary with respect to the assets of such excluded
plan. For purposes of the exemption, an excluded plan is a plan sponsored by any
member of the restricted group, which consists of the depositor, the
underwriters, the trustee, the servicer, any other servicers, any obligor with
respect to loans included in the trust constituting more than 5% of the
aggregate unamortized principal balance of the assets in such trust and any
affiliate of such parties. In addition, the exemption provides relief from
certain self-dealing/conflict of interest prohibited transactions that may occur
when a plan fiduciary causes a plan to acquire underwritten certificates and the
fiduciary (or its affiliate) is an obligor on any loan held in the trust
provided that, among other requirements:
(1) such fiduciary (or its affiliate) is an obligor with respect to 5%
or less of the fair market value of the loans contained in the
trust;
(2) the Plan's investment in the offered certificates does not exceed
25% of all of the underwritten certificates of such class
outstanding at the time of the plan's acquisition and after the
plan's acquisition of such underwritten certificates, no more than
25% of the assets over which the fiduciary has investment authority
are invested in securities of a trust containing assets which are
sold or serviced by the same entity and
(3) in the case of initial issuance (but not secondary market
transactions), at least 50% of each class of certificates, and at
least 50% of the aggregate interests in the trust, are acquired by
persons independent of the restricted group.
It is expected that the exemption should apply to the acquisition and
holding of the offered certificates by plans and that the conditions of the
exemption other than those within the control of the investors should be met.
However, as the rating requirement applies at the time of acquisition of an
underwritten certificate by a plan at both initial offering and in secondary
market transactions, a plan investor purchasing a class B-1 certificate must
satisfy itself that the rating of such certificates at the date of acquisition
is at least "BBB-".
Any plan that acquires a class A-2 certificate will have acquired, for
purposes of ERISA, two separate investments: (i) the class A-2 certificate
exclusive of any interest in the interest rate cap agreements and related
supplement interest payments, and (ii) a separate interest relating solely to
the interest rate cap agreements and related supplemental interest payments (the
"cap agreement interest"). The exemption does not apply to the acquisition,
holding or resale of the cap agreement interest. Accordingly, the acquisition of
the cap agreement interest could result in a prohibited transaction unless
another administrative exemption to ERISA's prohibited transaction rules is
applicable. One or more alternative exemptions may be available with respect to
certain prohibited transaction rules of ERISA that might apply in connection
with the initial purchase, holding and resale of the cap agreement interest,
including, but not limited to: (i) Prohibited Transaction Class Exemption
S-70
("PTCE") 91-38, regarding investments by bank collective investment funds; (ii)
PTCE 90-1, regarding investments by insurance company pooled separate accounts;
(iii) PTCE 84-14, regarding transactions negotiated by qualified professional
asset managers; (iv) PTCE 96-23, regarding transactions negotiated by in-house
asset managers or (v) PTCE 75-1, Part II, regarding principal transactions by
broker-dealers. It is believed that the conditions of the PTCE 75-1, Part II
will be met with respect to the acquisition of the cap agreement interest by a
plan, so long as the underwriter is not a fiduciary with respect to the plan
(and is not a party in interest with respect to the plan by reason of being a
participating employer or affiliate thereof). Before purchasing class A-2
certificates based on an administrative exemption (or exemptions), a fiduciary
of a plan should determine whether the conditions of such exemption (or
exemptions) would be met and whether the scope of the relief provided by such
exemption (or exemptions) would cover all acts that might be construed as
prohibited transactions.
Before purchasing an offered certificate in reliance on the exemption,
a fiduciary of a plan should confirm that all applicable requirements would be
satisfied. Any plan fiduciary considering the purchase of an offered certificate
should consult with its counsel with respect to the potential applicability of
ERISA and the code to such investment. Moreover, each plan fiduciary should
determine whether, under the general fiduciary standards of investment prudence
and diversification, an investment in the underwritten 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. Special caution
ought to be exercised before a plan purchases an offered certificate in such
circumstances. See "ERISA Considerations" in the prospectus.
LEGAL INVESTMENT
There may be restrictions on the ability of particular investors,
including depository institutions, either to purchase the offered certificates
or to purchase offered certificates representing more than a specified
percentage of the investor's assets. In addition, the offered certificates will
not be mortgage related securities for purposes of the Secondary Mortgage Market
Enhancement Act of 1984. Investors should consult their own legal advisors in
determining whether and to what extent the offered certificates constitute legal
investments for the investors.
UNDERWRITING
Subject to the terms and conditions set forth in the underwriting
agreement for the sale of the underwritten certificates, dated December 19,
2001, the depositor, on behalf of the originator, has agreed to sell and the
underwriters have agreed to purchase the principal amount of each class of
underwritten certificates set forth below its name.
FIRST UNION LOOP CAPITAL UTENDAHL CAPITAL
SECURITIES, INC. MARKETS LLP PARTNERS, L.P. TOTAL
--------- ---------------- ------------- ---------------- ------------
Class A-1 $53,351,000 -- -- $53,351,000
Class A-2 77,000,000 4,000,000 4,000,000 85,000,000
Class B-1 35,567,000 -- -- 35,567,000
Total $165,918,000 $4,000,000 $4,000,000 $173,918,000
========== ========== ============
S-71
The depositor has been advised by the underwriters that they propose
initially to offer the underwritten certificates to the public from time to time
in negotiated transactions or otherwise, at varying prices to be determined at
the time of sale. This prospectus supplement and the prospectus may be used by
them in connection with offers and sales related to market-making transactions.
They may act as principal or agent in the transactions.
First Union Securities, Inc. is an indirect, wholly-owned subsidiary of
Wachovia Corporation. Wachovia Corporation conducts its investment banking,
institutional, and capital markets businesses through its various bank,
broker-dealer and nonbank subsidiaries under the trade name of Wachovia
Securities. Any references to Wachovia Securities, however, do not include
Wachovia Securities, Inc., member NASD/SIPC, a separate broker-dealer subsidiary
of Wachovia Corporation and sister affiliate of First Union Securities, Inc.
The depositor has agreed to indemnify the underwriters against specific
liabilities, including liabilities under the Securities Act of 1933, as amended.
The underwriters may provide investment banking and other services for
the depositor for which it will receive additional compensation.
The class A-3, class M-1, and class M-2 certificates will be
transferred to First Union National Bank on the closing date. Wachovia
Securities has agreed to solicit offers for the purchase of these securities on
a best efforts basis at prices to be determined at the time of sale.
The depositor, the originator, and First Union National Bank are
affiliates of Wachovia Securities. Wachovia Securities or agents and their
associates may be customers of, including borrowers from, engage in transactions
with, and/or perform services for the depositor, its affiliates and the trustee
in the ordinary course of business.
S-72
RATINGS
It is a condition to their issuance that the offered certificates be
rated by Standard and Poor's Rating Service, a division of The McGraw-Hill
Companies, Inc. ("S&P") and Moody's Investors Service, Inc. ("Moody's") as
follows:
CLASS S&P Moody's
- ----- --- -------
Class A-1................................. A-1+ P-1
Class A-2.................................. AAA Aaa
Class A-3.................................. AAA Aaa
Class M-1.................................. AA Aa2
Class M-2.................................. A A2
Class B-1.................................. BBB Baa2
A security rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time. No person
is obligated to maintain the rating on any class of the offered certificates. In
general, the ratings of the offered certificates address credit risk and do not
address the likelihood or the rate of principal prepayments. The ratings of the
offered certificates by S&P and Moody's do not reflect the likelihood of payment
of any supplemental interest.
LEGAL MATTERS
Some of the legal matters relating to the originator and the seller
will be passed upon by Bruce Hurwitz, Esq., counsel to the originator and the
seller. Some legal matters relating to the validity of the issuance of the
certificates will be passed upon for the underwriters by Dewey Ballantine LLP,
New York, New York. Dewey Ballantine LLP also will render opinions relating to
the material federal income tax consequences associated with the purchase,
ownership and disposition of the certificates.
S-73
ANNEX A
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION
PROCEDURES
Except in certain limited circumstances, the globally offered
certificates will be available only in book-entry form. Investors in the global
securities may hold such global securities through any of The Depository Trust
Company, Clearstream, Luxembourg or Euroclear. The global securities will be
tradable as home market instruments in both the European and U.S. domestic
markets. Initial settlement and all secondary trades will settle in same-day
funds.
Secondary market trading between investors holding global securities
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 Eurobond practice (i.e., seven calendar day
settlement).
Secondary market trading between investors holding global securities
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations and prior asset-backed securities 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 European depositaries of
Clearstream, Luxembourg and Euroclear (in such capacity) and as DTC
participants.
Non-U.S. holders (as described below) of global securities will be
subject to U.S. withholding taxes unless such holders meet certain requirements
and deliver appropriate U.S. tax documents to the securities clearing
organizations or their participants.
INITIAL SETTLEMENT
All global securities will be held in book-entry form by DTC in the
name of Cede & Co. as nominee of DTC. Investors' interests in the global
securities will be represented through financial institutions acting on their
behalf as direct and indirect participants in DTC. As a result, Clearstream,
Luxembourg and Euroclear will hold positions on behalf of their participants
through their respective European depositaries, which in turn will hold such
positions in accounts as DTC participants.
Investors electing to hold their global securities through DTC will
follow DTC settlement practice. Investor securities custody accounts will be
credited with their holdings against payment in same-day funds on the settlement
date.
Investors electing to hold their global securities through Clearstream,
Luxembourg or Euroclear accounts will follow the settlement procedures
applicable to conventional Eurobonds, except that there will be no temporary
global security and no "lock-up" or restricted period. global securities will be
credited to the securities custody accounts on the settlement date against
payment in same-day funds.
S-74
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
asset-backed Securities 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 eurobonds in same-day funds.
Trading Between DTC Seller And Clearstream, Luxembourg Or Euroclear
Participants. When Global Securities 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,
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 European
depositary, as the case may be, to receive the global securities against
payment. Payment will include interest accrued on the global securities from and
including the last coupon payment date to and excluding the settlement date, on
the basis of the actual number of days in that accrual period and a year assumed
to consist of 360 days. For transactions settling on the 31st of the month,
payment will include interest accrued to and excluding the first day of the
following month. Payment will then be made by the respective depositary of the
DTC participant's account against delivery of the global securities. After
settlement has been completed, the global securities will be credited to the
respective clearing system and by the clearing system, in accordance with its
usual procedures, to the Clearstream, 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
securities will accrue from, the value date (which would be the preceding day
when settlement occurred in New York.) If settlement is not completed on the
intended value date (i.e., the trade fails), the Clearstream, Luxembourg, or
Euroclear cash debt will be valued instead as of the actual settlement date.
Clearstream, Luxembourg 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 securities are credited
to their accounts one day later.
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
S-75
participants or Euroclear participants purchasing global securities would incur
overdraft charges for one day, assuming they cleared the overdraft when the
global securities were credited to their accounts. However, interest on the
global securities would accrue from the value date. Therefore, in many cases the
investment income on the global securities earned during that one-day period may
substantially reduce or offset the amount of such overdraft charges, although
this result will depend on each Clearstream, 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 securities
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 securities are to be transferred by the
respective clearing system, through the respective depositary, to a DTC
participant. The seller will send instructions to Clearstream, 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 depositary, as appropriate,
to deliver the global securities to the DTC participant's account against
payment. Payment will include interest accrued on the Global Securities from and
including the last coupon payment date to and excluding the settlement date, on
the basis of the actual number of days in that accrual period and a year assumed
to consist of 360 days. For transactions settling on the 31st of the month,
payment will include interest accrued to and excluding the first day of the
following month. The payment will then be reflected in the account of the
Clearstream, Luxembourg participant or Euroclear participant the following day,
and receipt of the cash proceeds in the Clearstream, Luxembourg participant's or
Euroclear participant's account would be back-valued to the value date (which
would be the preceding day, when settlement occurred in New York). 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 securities from DTC participants for delivery to
Clearstream, Luxembourg participants or Euroclear participants should note that
these trades would automatically fail on the sale side unless affirmative action
were taken. At least three techniques should be readily available to eliminate
this potential problem:
(A) borrowing through Clearstream, 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;
S-76
(B) borrowing the global securities in the U.S. from a DTC
participant no later than one day prior to settlement, which
would give the global securities sufficient time to be
reflected in their Clearstream, 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 participant or
Euroclear participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of global securities holding securities through
Clearstream, Luxembourg or Euroclear (or through DTC if the holder has an
address outside the U.S. ) will be subject to the 30% (or in some cases 31%)
U.S. withholding tax that generally applies to payments of interest on
registered debt issued by U.S. persons, unless (1) each clearing system, bank or
other financial institution that holds customers' securities in the ordinary
course of its trade or business in the chain of intermediaries between the
beneficial owner and the U.S. entity required to withhold tax complies with
applicable certification requirements and (2) the beneficial owner takes one of
the following steps to obtain an exemption or reduced tax rate:
Exemption for non-U.S. persons (Form W-8 BEN). Beneficial owners of
global securities that are non-U.S. persons can obtain a complete exemption from
the withholding tax by filing a signed Form W-8 BEN. If the information shown on
Form W-8 BEN changes, a new Form W-8 BEN must be filed within 30 days of the
change.
Exemption for non-U.S. persons with effectively connected income (Form
W-8ECI). A non-U.S. person, including a non-U.S. corporation or bank with a U.S.
branch, for which the interest income is effectively connected with its conduct
of a trade or business in the United States, can obtain an exemption from the
withholding tax by filing Form W-8ECI.
Exemption or reduced rate for non-U.S. persons resident in treaty
countries (Form W-8 BEN). Non-U.S. persons that are beneficial owners residing
in a country that has a tax treaty with the United States can obtain an
exemption or reduced tax rate (depending on the treaty terms) by filing Form W-8
BEN.
Exemption for U.S. persons (Form W-9). U.S. persons can obtain a
complete exemption from the withholding tax by filing Form W-9.
U.S. Federal Income Tax Reporting Procedure. The global securities
holder files by submitting the appropriate form to the person through whom he
holds (e.g., the clearing agency, in the case of persons holding directly on the
books of the clearing agency). Forms W-8 BEN and W-8ECI are generally effective
for three calendar years.
S-77
U.S. Person. As used in this prospectus supplement the term "U.S.
person" means a beneficial owner of an offered certificate that is for United
States federal income tax purposes
o a citizen or resident of the United States,
o a corporation or partnership created or organized in or under the
laws of the United States or of any state thereof or the District
of Columbia,
o an estate the income of which is subject to United States federal
income taxation regardless of its source, or
o a trust if a court within the United States is able to exercise
primary supervision of the administration of the trust and one or
more United States persons have the authority to control all
substantial decisions of the trust.
As used in this prospectus supplement, the term "non-U.S. person" means
a beneficial owner of an offered certificate that is not a U.S. person.
This summary does not deal with all aspects of U.S. federal income tax
withholding that may be relevant to foreign holders of the global securities or
with the application of the extensive withholding regulations that are generally
effective with respect to payments made after December 31, 2000 which have
detailed rules regarding the determination of beneficial ownership. Investors
are advised to consult their own tax advisors for specific tax advice concerning
their holding and disposing of the global securities.
S-78
ANNEX B
NOTIONAL AMOUNT SCHEDULE FOR CAP AGREEMENT
Distribution Date Notional Amount Distribution Date Notional Amount
---------------------- ------------------- --------------------- -------------------
Initial Notional Amount $85,000,000.00 February 26, 2007 $21,923,245.30
January 25, 2002 85,000,000.00 March 26, 2007 21,515,845.30
February 25, 2002 85,000,000.00 April 25, 2007 21,115,464.25
March 25, 2002 84,922,537.71 May 25, 2007 20,721,984.67
April 25, 2002 83,021,973.73 June 25, 2007 20,335,291.00
May 28, 2002 81,153,467.52 July 25, 2007 19,955,269.59
June 25, 2002 79,316,487.06 August 27, 2007 19,581,808.69
July 25, 2002 77,510,509.07 September 25, 2007 19,214,798.39
August 26, 2002 75,735,018.92 October 25, 2007 18,854,130.58
September 25, 2002 73,989,510.45 November 26, 2007 18,499,698.98
October 25, 2002 72,273,485.85 December 26, 2007 18,151,399.03
November 25, 2002 70,586,455.51 January 25, 2008 17,809,127.92
December 26, 2002 68,927,937.91 February 25, 2008 17,472,784.55
January 27, 2003 67,297,459.46 March 25, 2008 17,142,269.47
February 25, 2003 65,694,554.36 April 25, 2008 16,817,484.89
March 25, 2003 64,118,764.53 May 27, 2008 16,498,334.65
April 25, 2003 62,569,639.42 June 25, 2008 16,184,724.16
May 27, 2003 61,046,735.91 July 25, 2008 15,876,560.42
June 25, 2003 59,549,618.19 August 25, 2008 15,573,751.95
July 25, 2003 58,077,857.65 September 25, 2008 15,276,208.79
August 25, 2003 56,631,032.75 October 27, 2008 14,983,842.49
September 25, 2003 55,208,728.87 November 25, 2008 14,696,566.04
October 27, 2003 53,810,538.28 December 26, 2008 14,414,293.88
November 25, 2003 52,436,059.94 January 26, 2009 14,136,941.88
December 26, 2003 51,084,899.45 February 25, 2009 13,864,427.29
January 26, 2004 49,756,668.89 March 25, 2009 13,596,668.73
February 25, 2004 48,450,986.78 April 27, 2009 13,333,586.18
March 25, 2004 47,167,477.89 May 26, 2009 13,075,100.95
April 26, 2004 45,905,773.21 June 25, 2009 12,821,135.63
May 25, 2004 44,665,509.82 July 27, 2009 12,571,614.13
June 25, 2004 43,446,330.79 August 25, 2009 12,326,461.59
July 26, 2004 42,247,885.07 September 25, 2009 12,085,604.41
August 25, 2004 41,069,827.40 October 26, 2009 11,848,970.19
September 27, 2004 39,911,818.25 November 25, 2009 11,622,813.47
October 25, 2004 38,773,523.66 December 28, 2009 11,400,590.91
November 26, 2004 37,654,615.20 January 25, 2010 11,182,236.40
December 27, 2004 36,554,769.87 February 25, 2010 10,967,684.92
January 25, 2005 35,473,669.99 March 25, 2010 10,756,872.53
February 25, 2005 34,413,462.98 April 26, 2010 10,549,736.35
March 25, 2005 33,532,777.35 May 25, 2010 10,346,214.53
April 25, 2005 32,926,516.92 June 25, 2010 10,146,246.26
May 25, 2005 32,330,596.59 July 26, 2010 9,949,771.74
June 27, 2005 31,744,843.99 August 25, 2010 9,756,732.14
July 25, 2005 31,169,089.57 September 27, 2010 9,567,069.62
August 25, 2005 30,603,166.59 October 25, 2010 9,380,727.32
September 26, 2005 30,046,911.07 November 26, 2010 9,197,649.28
October 25, 2005 29,500,161.72 December 27, 2010 9,017,780.50
November 25, 2005 28,962,759.93 January 25, 2011 8,841,066.88
December 27, 2005 28,434,549.71 February 25, 2011 8,667,455.23
January 25, 2006 27,915,377.64 March 25, 2011 8,496,893.23
February 27, 2006 27,405,092.84 April 25, 2011 8,329,329.42
March 27, 2006 26,903,546.93 May 25, 2011 8,164,713.22
April 25, 2006 26,410,593.96 June 27, 2011 8,002,994.87
May 25, 2006 25,926,090.43 July 25, 2011 7,844,125.45
June 26, 2006 25,449,895.16 August 25, 2011 7,688,056.83
July 25, 2006 24,981,869.35 September 26, 2011 7,534,741.70
August 25, 2006 24,521,876.48 October 25, 2011 7,384,133.53
September 25, 2006 24,069,782.27 November 25, 2011 7,236,186.56
October 25, 2006 23,625,454.68 December 27, 2011 7,090,855.79
November 27, 2006 23,188,763.86 January 25, 2012 6,948,096.97
December 26, 2006 22,759,582.07 February 27, 2012 6,807,866.60
January 25, 2007 22,337,783.73 March 26, 2012 0
S-79