Prospectus Supplement dated October 30, 2002 (To Prospectus dated
September 25, 2001)
$1,000,000,000
Mortgage Loan Asset Backed Certificates,
[GRAPHIC OMITTED] Series 2002-3
Saxon Asset Securities Trust 2002-3
Principal and interest payable monthly, beginning in December 2002
Saxon Mortgage, Inc. Saxon Asset Securities Company
Seller and Master Servicer Depositor
The trust will issue:
o nine classes of senior certificates; and
o six classes of subordinated certificates.
For a description of the certificates offered by this prospectus
supplement, see "Offered Certificates" in this prospectus supplement.
----------------
The assets of the trust will include two groups of mortgage loans
secured by one-to-four family residential properties. One group will consist of
first lien, fixed rate mortgage loans. The second group will consist of first
lien, adjustable rate mortgage loans. The trust will also hold cash for the
purchase of subsequent mortgage loans on or before February 7, 2003.
The mortgage loans were or will be originated or acquired in accordance
with underwriting guidelines that are not as restrictive as federal agency
guidelines. As a result, the mortgage loans may experience higher rates of
delinquency, foreclosure and bankruptcy than if they had been underwritten in
accordance with more restrictive standards.
----------------
An investment in the offered certificates involves significant risks.
You should carefully consider the risk factors beginning on page S-7 of this
prospectus supplement and page 3 of the prospectus.
----------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or passed upon the
accuracy or adequacy of this prospectus supplement or prospectus. Any
representation to the contrary is a criminal offense.
The underwriters will offer the certificates offered by this prospectus
supplement from time to time at varying prices to be determined at the time of
sale. The certificates will be available for delivery to investors in book-entry
form through the facilities of The Depository Trust Company, or upon request
through Clearstream and the Euroclear System on or about November 8, 2002.
JPMORGAN
CREDIT SUISSE FIRST BOSTON
RBS GREENWICH CAPITAL
WACHOVIA SECURITIES
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED
IN THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS
The offered certificates are described in two separate documents that
progressively provide more detail: (1) the accompanying prospectus, which
provides general information, some of which may not apply to a particular series
of certificates, and (2) this prospectus supplement, which describes the
specific terms of your certificates. Investors can find a glossary of certain
significant defined terms at the end of this prospectus supplement.
This prospectus supplement does not contain complete information about
the offering of these securities. We suggest that you read both this prospectus
supplement and the prospectus in full. We cannot sell these securities to you
unless you have received both this prospectus supplement and the prospectus.
If information varies between this prospectus supplement and the
prospectus, you should rely on the information in this prospectus supplement.
You should rely only on the information contained or incorporated by
reference in this prospectus supplement and the accompanying prospectus. No one
has been authorized to provide you with different information.
We are not offering the certificates in any state where the offer is
not permitted. We do not claim the accuracy of the information in this
prospectus supplement and the accompanying prospectus as of any date other than
the dates stated on their cover pages.
Dealers will deliver a prospectus supplement and prospectus when acting
as underwriters of the certificates and with respect to their unsold allotments
or subscriptions. In addition, all dealers selling the offered certificates,
whether or not participating in this offering, may be required to deliver a
prospectus supplement and prospectus until 90 days after the date of the
prospectus supplement.
This prospectus supplement and the accompanying prospectus contain
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933. Specifically, forward-looking statements, together with related
qualifying language and assumptions, are found in the materials, including
tables, under the headings "Risk Factors" and "Prepayment and Yield
Considerations." Forward-looking statements are also found in other places
throughout this prospectus supplement and the prospectus, and may be identified
by accompanying language, including "expects," "intends," "anticipates,"
"estimates" or analogous expressions, or by qualifying language or assumptions.
These statements involve known and unknown risks, uncertainties and other
important factors that could cause the actual results or performance to differ
materially from the forward-looking statements. These risks, uncertainties and
other factors include, among others, general economic and business conditions,
competition, changes in political, social and economic conditions, regulatory
initiatives and compliance with governmental regulations, customer preference
and various other matters, many of which are beyond the depositor's control.
These forward-looking statements speak only as of the date of this prospectus
supplement. The depositor expressly disclaims any obligation or undertaking to
distribute any updates or revisions to any forward-looking statements to reflect
changes in the depositor's expectations with regard to those statements or any
change in events, conditions or circumstances on which any forward-looking
statement is based.
TABLE OF CONTENTS
Prospectus Supplement
---------------------
OFFERED CERTIFICATES..........................S-2
SUMMARY OF TERMS..............................S-3
RISK FACTORS..................................S-7
THE MORTGAGE LOAN POOL.......................S-14
PREPAYMENT AND YIELD CONSIDERATIONS..........S-25
DESCRIPTION OF THE OFFERED CERTIFICATES......S-38
THE AGREEMENT................................S-47
MATERIAL FEDERAL INCOME TAX CONSEQUENCES.....S-51
ERISA CONSIDERATIONS.........................S-54
RATINGS......................................S-55
LEGAL INVESTMENT CONSIDERATIONS..............S-55
USE OF PROCEEDS..............................S-55
LEGAL MATTERS................................S-56
UNDERWRITING.................................S-56
GLOSSARY.....................................S-57
Appendix A: Pool Information..................A-1
Prospectus
----------
Important Notice About Information
Presented in this Prospectus and
the Prospectus Supplement.......................2
Risk Factors....................................3
Description of the Certificates.................9
Registration of the Offered
Securities.....................................10
Maturity, Prepayment and Yield
Considerations.................................23
The Trusts.....................................25
Credit Enhancement.............................35
Origination of Mortgage Loans..................42
Servicing of Mortgage Loans....................44
The Agreement..................................54
Material Legal Aspects of
Mortgage Loans.................................58
The Depositor..................................69
Use of Proceeds................................70
Material Federal Income Tax
Consequences...................................70
State and Local Tax Considerations.............98
ERISA Considerations...........................98
Legal Investment Matters......................105
Plan of Distribution..........................106
Available Information.........................107
Incorporation of Certain Documents
by Reference..................................108
S-1
OFFERED CERTIFICATES
The trust will issue the following classes of certificates that are
being offered by this prospectus supplement and the accompanying prospectus.
Initial Final
Certificate Scheduled
Principal Ratings Distribution
Class(1) Balance Coupon Moody's/S&P Date(5) Type
- ----------- --------------- --------------------- --------------- ------------------ ----------------------------
AF-1(2) $87,300,000 0.160% plus LIBOR Aaa/AAA June 2017 Variable Rate Sequential
AF-2(2) 43,800,000 3.208 Aaa/AAA August 2020 Fixed Rate Sequential
AF-3(2) 38,100,000 3.737 Aaa/AAA August 2024 Fixed Rate Sequential
AF-4(2) 28,700,000 4.601 Aaa/AAA January 2028 Fixed Rate Sequential
AF-5(2) 28,900,000 5.527 Aaa/AAA July 2031 Fixed Rate Sequential
AF-6(2) 25,200,000 4.907 Aaa/AAA May 2031 Fixed Rate Lockout
AV(2) 588,000,000 0.40% plus LIBOR Aaa/AAA December 2032 Variable Rate
A-IO(3) Notional 5.00% Aaa/AAA May 2005 Fixed Rate IO
S(4) Notional (6) Aaa/AAA December 2032 Inverse IO
M-1(2) 57,500,000 0.750% plus LIBOR Aa2/AA December 2032 Variable Rate Mezzanine
M-2(2) 55,000,000 1.725% plus LIBOR A2/A December 2032 Variable Rate Mezzanine
B(2) 47,500,000 2.650% plus LIBOR Baa2/BBB December 2032 Variable Rate
Subordinate
- --------------------------------------
(1) Each class of certificates that includes the letter "F" in its designation
is referred to herein as a Group I Certificate and the Class AV
Certificates are referred to herein as Group II Certificates.
(2) These pass-through rates are subject to a cap. After the clean-up call
date, the pass-through rates on the Class AF-5 and Class AF-6 Certificates
will increase by 0.50% and the spread over one month LIBOR for the Class
AV, Class M-1, Class M-2 and Class B Certificates will increase to 0.800%,
1.125%, 2.5875% and 3.975%, respectively.
(3) This class will not receive any principal payments; instead, interest will
accrue on two separate components, the A-IO-I Component and the A-IO-II
Component, as further described in this prospectus supplement.
(4) This class will not receive any principal payments; instead, interest will
accrue on two separate components, the S-I Component and the S-II
Component, as further described in this prospectus supplement.
(5) Calculated as described herein under "Prepayment and Yield Considerations."
The actual final distribution date of the offered certificates may be
substantially earlier or later than the final scheduled distribution date.
(6) The variable rate for the Class S Certificates will equal the greater of
(i) the Class S Strike Rate minus LIBOR for the related accrual period and
(ii) zero.
S-2
SUMMARY OF TERMS
This summary highlights selected information from this document. It
does not contain all the information that you need to consider in making your
investment decision. To understand the terms of the offered certificates and the
characteristics of the underlying mortgage loans, read carefully the entire
prospectus supplement and the accompanying prospectus.
o This summary provides an overview of structural provisions,
calculations, cash flows and other information to aid your
understanding and is qualified by the full description of the
structural provisions, calculations, cash flows and other
information in this prospectus supplement and the accompanying
prospectus.
The Trust
The issuer of the certificates is Saxon Asset Securities Trust 2002-3.
The trust was created for the sole purpose of issuing the certificates. The
certificates represent individual ownership interests in the trust and are not
the obligation of any other entity. Neither the certificates nor the mortgage
loans will be insured by any governmental agency or instrumentality.
Seller
Saxon Mortgage, Inc., the parent of the depositor.
Depositor
Saxon Asset Securities Company.
Master Servicer
Saxon Mortgage, Inc.
Servicer
Saxon Mortgage Services, Inc., an affiliate of the seller and the
depositor.
Trustee and Calculation Agent
Deutsche Bank Trust Company Americas.
Cut-off Date
As of the close of business on November 1, 2002 for the mortgage loans
to be sold to the trust on the closing date.
Statistical Cut-off Date
The statistical information relating to the mortgage loan pool
contained herein is provided as of November 1, 2002. Such date is referred to
hereinafter as the "statistical cut-off date."
Closing Date
On or about November 8, 2002.
Offered Certificates
As described in this prospectus supplement, the trust will be divided
into two groups, group I and group II, respectively. The mortgage loans in group
I bear interest at fixed rates and the mortgage loans in group II bear interest
at adjustable rates. In general, the trust will distribute collections on the
mortgage loans in group I to the group I senior certificates and collections on
mortgage loans in group II to the group II senior certificates.
The subordinate certificates, the Class A-IO and Class S Certificates
will be entitled to distributions from both mortgage loan groups.
S-3
Distribution Date
The trust will make distributions on the 25th day of each month, or if
that day is not a business day, the next business day. The first distribution
date will be December 26, 2002.
Pass-Through Rates
The pass-through rates on the group I senior certificates (other than
the Class AF-1 Certificates), and on the Class A-IO Certificates are fixed as
described herein and are shown on page S-2. The pass-through rates for the group
I senior certificates will be capped as described in this prospectus supplement.
The pass-through rates on the group II senior certificates and the
Class AF-1, Class M-1, Class M-2 and Class B Certificates adjust on each
distribution date, based on the value of one month LIBOR. The pass-through rates
for the group II senior certificates and the Class AF-1, Class M-1, Class M-2
and Class B Certificates will be subject to a cap described in this prospectus
supplement.
Whenever a pass-through rate for a certificate is capped, any shortfall
in interest on that certificate resulting from the application of the cap will
be carried over to subsequent distribution dates and, to the extent available,
will be paid from excess interest as more fully described in this prospectus
supplement.
The Class A-IO and Class S Certificates will not receive any principal
payments but instead be entitled to distributions of interest. Each of the Class
A-IO and Class S Certificates will consist of two separate components as
described in this prospectus supplement. The Class A-IO Certificates will not be
entitled to distributions of any kind after the distribution date in May 2005.
Similarly, no interest will be distributable on the S-II Component of the Class
S Certificates following the distribution date in November 2005.
Interest Distributions
On each distribution date, the trust will distribute interest, to the
extent collected, in the following order:
o out of collections from the related loan group, all interest due the
related senior certificates and the related component of the Class A-IO and
Class S Certificates;
o in combination with such remaining amounts from the other mortgage loan
group, to the payment of the subordinate certificates in the order of
priority described in this prospectus supplement; and
o any remaining amounts will be applied as described under "Excess Interest"
below.
Excess Interest and Pledged Prepayment Penalty Cashflow
On each distribution date, the trust generally will apply a specified
percentage of prepayment penalties collected from a group ("pledged prepayment
penalties") to pay any interest shortfall resulting from application of a cap on
the pass-through rate of the related certificates.
Additionally, on each distribution date, the trust will distribute any
remaining pledged prepayment penalties and any excess interest in the following
order:
o for the first four distribution dates only, to the certificates, in order
of seniority, any interest shortfall resulting from application of a cap;
S-4
o to the certificates, as an extra principal distribution, but only to the
limited extent described in this prospectus supplement;
o to the subordinate certificates, in order of seniority, the amount of
unpaid interest for prior distribution dates (excluding any shortfall
resulting from application of a cap) and amounts in repayment of any
realized losses previously allocated to those certificates;
o to the certificates, in order of seniority, any interest shortfall
resulting from application of a cap;
o to specified classes of certificates to the extent of any remaining losses
allocated thereto; and
o to the Class C and Class R Certificates, any remainder.
Principal Distributions
On each distribution date, the trust will distribute principal
collected for a group to the related certificates as described under
"Description of the Offered Certificates--Distributions" herein.
The Class A-IO and Class S Certificates are not entitled to
distributions of principal.
Credit Enhancement
Credit enhancement refers to various mechanisms that are intended to
protect owners of classes of certificates against losses due to defaults on the
mortgage loans.
The certificates have the benefit of the following types of credit
enhancement:
o the use of excess interest (including available pledged prepayment
penalties) to distribute principal to a limited extent to create
overcollateralization, to pay interest shortfalls due certificates and to
reimburse certificates for losses;
o the subordination of distributions on the subordinate certificates to the
required distributions on more senior certificates; and
o the allocation of realized losses on the mortgage loans first to the
subordinate certificates.
Mortgage Loans
On the closing date, in addition to amounts on deposit in the
pre-funding account, the assets of the trust will consist of mortgage loans with
an aggregate principal balance as of the cut-off date of approximately
$700,081,517. The mortgage loans in the trust were or will be originated or
acquired in accordance with the seller's program for non-conforming credits. We
refer you to "Risk Factors - Non-conforming underwriting standards" in this
prospectus supplement for additional information.
The mortgage loans in the trust have been separated into two groups,
each containing mortgage loans secured by one-to-four family residential
properties:
o Group I consists of first lien, fixed rate mortgage loans.
o Group II consists of first lien, adjustable rate mortgage loans.
Pre-Funding Feature
The trust may purchase additional mortgage loans on or before February
7, 2003 for inclusion in any group of loans. At the closing, the trustee will
hold in trust, from the proceeds of the sale of the offered certificates,
approximately $89,067,322 which may be applied to the purchase of subsequent
fixed rate mortgage loans for inclusion in group I and approximately
S-5
$210,851,160 which may be applied to the purchase of subsequent adjustable rate
mortgage loans for inclusion in group II. Pre-funding account funds allocated to
one group may not be used to purchase mortgage loans in another group. If those
funds are not completely used on or before February 7, 2003, any remaining
pre-funding amounts will be distributed as principal prepayments on the group I
certificates, to the extent the remaining funds had been allocated for the
purchase of group I fixed rate mortgage loans and distributed as principal
prepayments on the group II certificates, to the extent the remaining funds had
been allocated to the purchase of group II adjustable rate mortgage loans. This
distribution will be made on the distribution date immediately following the end
of the pre-funding period.
Optional Termination
The master servicer has the right to exercise a clean-up call on any
distribution date on which the sum of the aggregate principal balance of the
mortgage loans has declined to less than 10% of the sum of the aggregate
principal balance of the mortgage loans as of the cut-off date and the amount
initially deposited in the pre-funding account. Exercise of this clean-up call
will result in the early retirement of your certificates.
Realized Losses
If (1) the trust disposes of a mortgage loan for less than its
scheduled principal balance plus accrued interest, reimbursement of liquidation
expenses, and servicer advances, or (2) the servicer determines that a
delinquent mortgage loan constitutes a "nonrecoverable mortgage loan" as
described herein, the trust will incur a realized loss.
If on any distribution date, the aggregate certificate principal
balance of the certificates exceeds the aggregate principal balance of the
mortgage loans, the trust will generally reduce the certificate principal
balances of the subordinate certificates in reverse order of seniority,
beginning with the Class B Certificates, then the Class M-2 Certificates, then
the Class M-1 Certificates, except that the certificate principal balances of
the Class A Certificates will not be reduced on account of realized losses.
After a reduction, the holders of any of these certificates will generally only
be entitled to distributions of both principal and interest on the reduced
certificate principal balance of their certificates.
Private Certificates
The Class P, Class C and Class R certificates are not being offered by
this prospectus supplement or the accompanying prospectus. The Class C and Class
R Certificates represent the most junior ownership interests in the assets of
the trust.
Denominations
The trust will issue the offered certificates in book-entry form in
minimum denominations of $25,000, in the case of the Class A Certificates, and
$100,000, in the case of the Class M-1, Class M-2 and Class B Certificates, in
original principal amount and integral multiples of $1,000 in excess thereof.
The trust will issue the Class A-IO and Class S Certificates in book-entry form
in minimum denominations of $1,000,000, in original notional amount and integral
multiples of $1,000 in excess thereof.
S-6
RISK FACTORS
You should consider the following risk factors and the information set
forth under "Risk Factors" in the accompanying prospectus before you purchase
any of the offered certificates. Statistical information with respect to the
mortgage loans set forth in this "Risk Factors" section is given as of the
statistical cut-off date, unless otherwise specified.
Mortgage interest rates may Generally, the pass-through rates on the Class
limit pass-through rates of AF-1 Certificates, the group II senior
certain classes certificates and the subordinate certificates
adjust monthly based upon one month LIBOR.
However, the group II mortgage interest rates
adjust periodically based upon various indices
beginning at a specified period after
origination and the group I mortgage loans
have fixed rates.
o In a rising interest rate environment,
the pass-through rates on the Class AF-1
Certificates, the group II senior
certificates and the subordinate
certificates may rise before the interest
rates on the related adjustable rate
mortgage loans, and may rise above the
fixed rates on the related fixed rate
mortgage loans, as applicable.
o One month LIBOR may respond to economic
and market factors that differ from those
affecting the other indices. It could
rise while the other indices are stable
or are falling. Even if they move in the
same direction, one month LIBOR may rise
more rapidly than the other indices in a
rising interest rate environment or fall
less rapidly in a declining interest rate
environment.
In any of these interest rate environments,
the pass-through rates on the Class AF-1
Certificates, the group II senior certificates
and the subordinate certificates may be
limited by application of the applicable Net
WAC Cap. The Net WAC Caps are described in
this prospectus supplement and are calculated
on the basis of the related mortgage loans.
If, on any distribution date, the pass-through
rate on the Class AF-1 Certificates, the group
II senior certificates or any subordinate
certificate is so limited, a "Cap Carryover
Amount" will result. This amount will
generally equal the excess of interest that
would have been distributable absent
application of the cap over interest
calculated at the capped rate. On any
distribution date, the trust will repay any
Cap Carryover Amounts to the extent of amounts
in the Basis Risk Reserve Fund available for
such purpose. There can be no assurance that
such amounts will be sufficient to repay such
Cap Carryover Amounts. The ratings on the
certificates do not represent an assessment of
the likelihood of the distribution of any Cap
Carryover Amount.
S-7
o The otherwise fixed pass-through rates of
the remaining group I senior certificates
are similarly capped at the Group I Net
WAC Cap, which is calculated based on the
net mortgage rates of the mortgage loans
in group I. To the extent mortgage loans
in group I bearing net interest rates
above the pass-through rates of those
classes prepay (or are the subject of
defaults), the Group I Net WAC Cap will
be reduced and the pass-through rates of
those classes of certificates may be
capped, resulting in a Cap Carryover
Amount. On any distribution date, the
trust will repay any Cap Carryover
Amounts to the extent of amounts in the
Basis Risk Reserve Fund available for
such purpose. There can be no assurance
that such amounts will be sufficient to
repay such Cap Carryover Amounts. The
ratings on the certificates do not
represent an assessment of the likelihood
of the distribution of any Cap Carryover
Amounts.
Mechanics of the trust place Under the interest distribution mechanics of
risk of loss primarily on the trust:
subordinate certificates
o Class M-1 Certificates receive
distributions only after required
distributions to the Class A
Certificates;
o Class M-2 Certificates receive
distributions only after required
distributions to the Class A and Class
M-1 Certificates; and
o Class B Certificates receive
distributions only after required
distributions to the Class A, Class M-1
and Class M-2 Certificates.
If the trust does not have sufficient funds to
distribute interest to all classes of
certificates, the shortfall will be borne by
the certificates in reverse order of
seniority.
If the trust disposes of a mortgage loan at a
loss or the servicer determines a mortgage
loan to be nonrecoverable, the aggregate
certificate principal balance of the
certificates may exceed the aggregate
principal balance of the mortgage loans. In
that event, the trust will generally reduce
the certificate principal balances of the
Class B Certificates, and then the remaining
classes in reverse order of seniority,
provided that the certificate principal
balances of the senior certificates will not
be so reduced.
S-8
Investors in the subordinate certificates are
urged to consider that the performance of such
certificates will be affected by the payment
experience of both mortgage loan groups, since
distributions on such certificates are
determined on the basis of both loan groups.
You should fully consider the subordination
risks associated with an investment in the
Class M-1, Class M-2 or Class B Certificates.
These include the possibility that you may not
fully recover your initial investment as a
result of losses on the mortgage loans.
Owners of Class A-IO and The Class A-IO and Class S Certificates are
Class S Certificates may not entitled to distributions of interest only
recover their initial and are not entitled to distributions of
investments principal. In addition, interest is calculated
on the Class A-IO Certificates and S-II
Component of the Class S Certificates on the
basis of a notional balance which is reduced
to zero after the thirtieth and thirty-sixth
distribution date, respectively, after the
closing date. Following such date, the Class
A-IO Certificates will not be entitled to
further distributions of interest and the
Class S Certificates will only be entitled to
distribution of interest based on the notional
balance of the S-I Component.
The yield to investors in the Class A-IO and
Class S Certificates will be sensitive to high
rates of principal payments (including
prepayments) on the mortgage loans, which
could affect the ability of investors in such
class to recover their initial investments.
See "Prepayment and Yield Considerations --
The Class A-IO and Class S Certificates."
Changes in LIBOR may The amount of interest distributable on the
reduce the yield on the Class S Class S Certificates is calculated by
Certificates reference to the excess of a specified rate
over one month LIBOR. If LIBOR equals or
exceeds LIBOR as of the interest determination
date for the first accrual period, the
pass-through rate on this class will be zero.
See "Prepayment and Yield Considerations --
The Class A-IO and Class S Certificates."
Currently, LIBOR is at an historically low
level. There can be no assurance that LIBOR
will continue at its current level or decline.
S-9
Loan characteristics of the This prospectus supplement describes only the
final mortgage pool may vary mortgage loans to be sold to the trust on the
from the characteristics of the closing date. Subsequent mortgage loans to be
mortgage loans disclosed in purchased by the trust after the closing date
this prospectus supplement with amounts on deposit in the pre-funding
account may have characteristics that differ
from the mortgage loans described in this
prospectus supplement. However, each of the
subsequent mortgage loans must satisfy the
criteria described under "The Mortgage Loan
Pool -- Conveyance of Subsequent Mortgage
Loans" herein. The trust will file a current
report on Form 8-K after the termination of
the pre-funding period following the final
purchase of subsequent mortgage loans by the
trust. The current report on Form 8-K will
include the same type of information regarding
the subsequent mortgage loans that is included
in this prospectus supplement with respect to
the mortgage loans.
There is a risk of early The seller anticipates that the trust will use
prepayment of principal substantially all of the funds in the pre-
associated with the pre- funding account to purchase subsequent
funding account mortgage loans for the trust. However, if the
principal amount of eligible subsequent
mortgage loans available during the
pre-funding period is less than the full
pre-funded amount, the seller will not have
sufficient subsequent mortgage loans to sell
to the trust. This could result in a
prepayment of principal to holders of
certificates as described in this prospectus
supplement, which could adversely affect the
yield of such certificates to the extent they
were purchased at a premium. The seller does
not expect that a material amount of principal
prepayment will occur due to insufficient
amounts of subsequent mortgage loans.
Effect of Performance of The rating assigned to your class of
Mortgage Loans on Ratings of certificates will depend on the performance of
the Certificates the mortgage loans in both pools. Therefore,
since the subordinate certificates provide
credit support for the group I and group II
senior certificates, the poor performance of
one pool may affect the rating assigned to
your class notwithstanding the better
performance of the remaining pool.
S-10
The following characteristics of the mortgage loans may increase risk of loss:
Non-conforming underwriting As a general matter, the seller originated or
standards purchased or will originate or purchase the
mortgage loans in accordance with its mortgage
loan program for non-conforming credits --
mortgage loans that are ineligible for
purchase by Fannie Mae or Freddie Mac due to
credit characteristics that do not meet Fannie
Mae or Freddie Mac guidelines.
The mortgage loans are expected to experience
rates of delinquency, bankruptcy and loss that
are higher, perhaps significantly, than
mortgage loans originated under Fannie Mae or
Freddie Mac guidelines.
On October 29, 2002, approximately 0.89% of
the initial mortgage loans were delinquent.
Approximately 26.92% of the group I mortgage
loans and approximately 37.21% of the group II
mortgage loans had first monthly payments due
before October 1, 2002. Because only those
mortgage loans could have a monthly payment
delinquent 30 days or more, current
information about delinquencies may not be
representative of future experience.
Geographic concentration The mortgaged premises for approximately
16.11% of the group I mortgage loans and
approximately 26.10% of the group II mortgage
loans are located in California. An overall
decline in the residential real estate market,
or the occurrence of a natural disaster such
as an earthquake, in California could
adversely affect the values of the mortgaged
premises located in California and increase
the risk of loss on the related mortgage
loans.
Balloon loans Approximately 11.38% of the aggregate
scheduled principal balance of the group I
mortgage loans are "balloon loans" that
provide for the payment of the unamortized
principal balance in a single payment at
maturity. If the borrower is unable to repay
the loan at maturity or refinance the amount
owed, you may suffer a loss if the collateral
for the loan is insufficient and the other
forms of credit enhancement are insufficient
or unavailable to cover the loss.
S-11
Mortgage Loans with Interest- Approximately 3.13% of the group I mortgage
Only Payments loans provide for payment of interest at the
related mortgage interest rate, but no payment
of principal, for a period of five years
following the origination of the mortgage
loan. Following that five-year period, the
monthly payment with respect to each of these
mortgage loans will be increased to an amount
sufficient to amortize the principal balance
of the mortgage loan over the remaining term
and to pay interest at the mortgage interest
rate.
The presence of these mortgage loans in group
I will, absent other considerations, result in
longer weighted average lives of the related
certificates than would have been the case had
these loans not been included in the trust
fund. If you purchase such a certificate at a
discount, you should consider that the
extension of weighted average lives could
result in a lower yield than would be the case
if these mortgage loans provided for payment
of principal and interest on every payment
date. In addition, a borrower may view the
absence of any obligation to make a payment of
principal during the first five years of the
term of a mortgage loan as a disincentive to
prepayment.
If a recalculated monthly payment as described
above is substantially higher than a
borrower's previous interest-only monthly
payment, that loan may be subject to an
increased risk of delinquency and loss.
High loan-to-value ratios Mortgage loans with high loan-to-value ratios
increase risk of loss may present a greater risk of loss than
mortgages with loan-to-value ratios of 80% or
below. Approximately 37.74% of the group I
mortgage loans and 44.40% of the group II
mortgage loans based on aggregate cut-off date
principal balances had original loan-to-value
ratios in excess of 80%.
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Other legal considerations Federal and state laws, public policy and
general principles of equity relating to the
protection of consumers, unfair and deceptive
practices and debt collection practices:
o regulate interest rates and other charges
on mortgage loans;
o require certain disclosures to borrowers;
o require licensing of the seller and the
other originators; and
o regulate generally the origination,
servicing and collection process for the
mortgage loans.
Violations of these laws:
o may limit the ability of the trust to
collect on the mortgage loans;
o may entitle a borrower to rescind the
loan and/or obtain a refund of amounts
previously paid; and
o could result in liability for damages and
administrative enforcement against the
originator or the servicer of the
mortgage loans.
The seller has represented that all applicable
federal and state laws were or will be
complied with in connection with the
origination of the mortgage loans that are or
will be part of the trust. If there is a
material and adverse breach of this
representation, the seller must repurchase any
affected mortgage loan or substitute a new
complying mortgage loan.
Limitations on hazard Standard hazard insurance policies do not
insurance insure against physical damage arising from
earth movement, including earthquakes,
landslides and mudflows. The occurrence of
natural disasters may result in increased
losses on mortgage loans relating to mortgaged
property affected by such natural disasters.
Insolvency of seller could cause The seller believes that the transfers of the
payment delays mortgage loans by the seller to the depositor
and by the depositor to the trust constitute
sales by the seller to the depositor and by
the depositor to the trust and that,
accordingly, the mortgage loans will not be
part of the assets of the seller or the
depositor in the event of an insolvency
proceeding. Nevertheless, a bankruptcy trustee
or a creditor may argue that the transfers
were pledges in connection with a borrowing
rather than true sales. Even if this argument
proves unsuccessful, delays in distributions
could result.
S-13
Terror Attacks and Military The effects that the terrorist attacks in the
Action United States, possible future attacks and
other incidents and related military action
may have on the performance of the mortgage
loans or on the values of the mortgaged
properties cannot be determined at this time.
Investors should consider the possible effects
on delinquency, default and prepayment
experience of the mortgage loans. Federal
agencies and non-government lenders have and
may continue to defer, reduce or forgive
payments and delay foreclosure proceedings in
respect of loans to borrowers affected in some
way by recent and possible future events. In
addition, activation of a substantial number
of U.S. military reservists or members of the
National Guard may significantly increase the
proportion of loans whose interest rates are
reduced by application of the Soldiers' and
Sailors' Civil Relief Act of 1940. Interest
distributable to the holders of the related
senior certificates and subordinate
certificates will be reduced proportionately
by any reductions in the amount of interest
collectible as a result of application of the
Soldiers' and Sailors' Civil Relief Act of
1940. In addition, certain persons not covered
by the Soldiers' and Sailors' Civil Relief Act
of 1940 may be eligible for similar loan
payment relief under applicable state law. See
"Material Legal Aspects of Mortgage Loans -
Soldiers' and Sailors' Civil Relief Act of
1940" in the Prospectus.
THE MORTGAGE LOAN POOL
General
The statistical information in this prospectus supplement, including
the balances of the mortgage loans to be included in the trust as of the closing
date, is presented as of the statistical cut-off date. However, the balances of
mortgage loans to be sold to the trust on the closing date will be determined as
of the cut-off date. As a result of scheduled and unscheduled payments of
principal, the actual principal balance of the mortgage loans as of the closing
date will differ, perhaps significantly, from the scheduled principal balance of
the mortgage loans as of the statistical cut-off date.
On the closing date, in addition to amounts on deposit in the
pre-funding account, the assets of the trust will consist of mortgage loans with
an aggregate scheduled principal balance as of the cut-off date of approximately
$700,081,517. The seller originated or acquired or will originate or acquire all
the mortgage loans to be included in the trust in accordance with its mortgage
loan program as described in this prospectus supplement and in the accompanying
prospectus. As a general matter, the seller's mortgage loan program consists of
the origination, or purchase, and packaging of mortgage loans relating to
non-conforming credits. A non-conforming credit is a mortgage loan which is
ineligible for purchase by Fannie Mae or Freddie Mac due to credit
characteristics that do not meet Fannie Mae or Freddie Mac guidelines. Mortgage
loans originated or purchased under the seller's mortgage loan program are
likely to
S-14
experience rates of delinquency, bankruptcy and loss that are higher than
mortgage loans originated under Fannie Mae or Freddie Mac guidelines.
Characteristics of the Mortgage Loans
The mortgaged premises consist of residential properties which may be
detached or attached:
o one-to-four family dwellings;
o condominium units;
o townhouses;
o manufactured housing; and
o units in a planned unit development.
The mortgaged premises may be owner-occupied or non-owner-occupied
investment properties. Owner-occupied properties include second and vacation
homes. The mortgage loans are or will be secured by first mortgages on the
mortgaged premises.
Except where otherwise specifically indicated, statistical information
presented with respect to the mortgage loans included in this prospectus
supplement is derived solely from the mortgage loans as of November 1, 2002, the
statistical cut-off date; no information is included, therefore, with respect to
subsequent mortgage loans to be purchased by the trust after the closing date.
Whenever reference is made to the characteristics of the mortgage loans or to a
percentage of the mortgage loans, the reference is based on the scheduled
principal balances of those mortgage loans. The trust may purchase subsequent
mortgage loans after the closing date until February 7, 2003. See "-Conveyance
of Subsequent Mortgage Loans" herein. The characteristics of the mortgage loans
as a whole will change at the closing date and upon the acquisition of
subsequent mortgage loans. See "-Additional Information" herein.
The mortgage loans satisfy certain criteria including:
o a remaining term to stated maturity of no more than 360 months;
and
o a mortgage interest rate of at least 8.60% and 8.56% with respect
to group I and group II, respectively.
None of the mortgage loans had an original loan-to-value ratio in
excess of 100.00%. In addition, approximately 91.50% of the mortgage loans were
originated less than six months prior to the statistical cut-off date. Each
mortgage loan in the trust will be assigned to one of the two groups comprising
fixed rate mortgage loans, in the case of group I and adjustable rate mortgage
loans, in the case of group II. Subsequent mortgage loans to be purchased after
the closing date will be included in group I and group II and will be selected
using generally the same criteria used to select the mortgage loans. In
addition, generally the same representations and warranties will be made with
respect to those subsequent mortgage loans.
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Of the mortgage loans, 1,240 mortgage loans representing approximately
69.51% of the aggregate principal balance of the mortgage loans in group I as of
the statistical cut-off date and 2,630 mortgage loans representing approximately
83.50% of the aggregate principal balance of the mortgage loans in group II as
of the statistical cut-off date provide for the payment of prepayment penalties.
Prepayment penalties provide that if the borrower were to prepay the mortgage
loan in excess of a specified amount at any time from the origination of the
mortgage loan to a date set forth in the related note (the "Prepayment Penalty
Period"), the borrower would also have to pay a fee in addition to the amount
necessary to repay the mortgage loan. The Prepayment Penalty Period for the
mortgage loans varies from one to five years, depending on the terms set forth
in the related mortgage note. In some instances, applicable state laws limit the
amount of the prepayment penalty that a lender may charge. The specific
Prepayment Penalty Periods and the amounts of the prepayment penalties
applicable to the mortgage loans are set forth in more detail in the tables
entitled "Prepayment Penalty" in Appendix A hereto. A specified percentage of
prepayment penalties owed by borrowers will be distributed to holders of the
offered certificates to the extent and in the manner described under
"Description of the Offered Certificates -- Distribution of Interest."
All the mortgage loans in group II as of the statistical cut-off date
are subject to:
o periodic interest rate adjustment caps;
o lifetime interest rate ceilings; and
o lifetime interest rate floors.
Substantially all of the mortgage loans in group II had interest rates
which were not fully indexed as of the statistical cut-off date. This means the
mortgage interest rates did not equal the sum of the gross margin and the
applicable index as of that date. The group II mortgage loans have interest rate
factors that fall into the following categories:
o Six month LIBOR mortgage loans bear interest at a rate that
adjusts semiannually based on the London interbank offered rate
for six month United States Dollar deposits in the London market
based on quotations of major banks as published in The Wall
Street Journal;
o 2/28 LIBOR mortgage loans, 3/27 LIBOR mortgage loans and 5/25
LIBOR mortgage loans bear interest initially at a rate fixed at
origination for two, three and five years, respectively, and
thereafter at a rate that adjusts semiannually based on six month
LIBOR; and
o One Year CMT mortgage loans bear interest at a rate that adjusts
annually based on the weekly average yield on United States
Treasury Securities adjusted to a constant maturity of one year
as made available by the Federal Reserve Board.
It is expected that the subsequent mortgage loans included in group II will not
have materially different interest rate features.
S-16
Detailed information on the mortgage loans is included in Appendix A
hereto. Such information is approximate and is based solely on the aggregate
scheduled principal balance of the mortgage loans as of the statistical cut-off
date. This information does not include information about subsequent mortgage
loans to be purchased after the closing date. Totals may not add completely to
100% because of rounding. Each of the calculations represents a percentage of
the given group. Unless otherwise specified, all weighted averages are based
upon certain characteristics of the mortgage loans as of the statistical cut-off
date.
Conveyance of Subsequent Mortgage Loans
The trust may acquire with amounts on deposit in the pre-funding
account after the closing date approximately $89,067,322 in aggregate scheduled
principal balance of mortgage loans for addition to group I and approximately
$210,851,160 in aggregate scheduled principal balance for addition to group II.
Accordingly, the initial characteristics of the mortgage loan pool as a whole
and of group I and group II will change after the acquisition by the trust of
subsequent mortgage loans. The depositor has agreed to deliver subsequent
mortgage loans for inclusion in the trust that will not materially change the
initial characteristics of the group I or group II mortgage loans.
Certain mortgage loans conveyed to the trust were purchased by the
master servicer or its affiliates in connection with the exercise of one or more
clean-up calls with respect to one or more trusts previously established by the
depositor. Such mortgage loans may, therefore, have been originated under
underwriting guidelines that differ in certain respects from the underwriting
guidelines described herein.
The delivery of subsequent mortgage loans will be subject to the
following requirements:
o no such mortgage loan will be selected in a manner adverse to the
interests of certificateholders;
o the addition of such mortgage loans will not result in the
reduction, qualification or withdrawal of the then current
ratings of the certificates;
o each such mortgage loan will have been underwritten in accordance
with the seller's underwriting guidelines;
o no such mortgage loan may have a remaining term to maturity
exceeding 360 months;
o no such mortgage loan may have a loan-to-value ratio greater than
100%;
o no such mortgage loan may be a junior mortgage loan; and
o each such mortgage loan added to group I must be a fixed rate
mortgage loan and each such mortgage loan added to group II must
be an adjustable rate mortgage loan.
Following the purchase of all of the subsequent mortgage loans by the
trust, the pool of mortgage loans in the trust will have the following
characteristics as of their respective cut-off dates:
S-17
o a weighted average mortgage interest rate of at least 8.40% for
group I and, at least 8.45% for group II;
o a weighted average original loan-to-value ratio of not more than
79.00% for group I and not more than 80.00% for group II;
o no more than 80.00% of the principal balance of mortgage loans
for group I will be cash out refinancing loans;
o in the case of group I, at least 89.00% of the mortgage loans
(based on principal balance) will have credit grades of A- or
better and in the case of group II, at least 81.00% of the
mortgage loans (based on principal balance) will have credit
grades of A- or better;
o at least 75.00% of the mortgage loans (based on principal
balance) in group I will have been originated pursuant to a full
documentation program; and
o the weighted average credit score will be no less than 620 for
mortgage loans in group I and no less than 595 for mortgage loans
in group II.
Additional Information
The description in this prospectus supplement of the mortgage loans and
the mortgaged premises is based upon the pool of mortgage loans, as constituted
at the close of business on the statistical cut-off date, except where otherwise
specifically indicated. The pool of mortgage loans will include subsequent
mortgage loans to be acquired during the pre-funding period. In addition, the
depositor may remove mortgage loans included in the statistical pool prior to
closing:
o as a result of incomplete documentation or non-compliance with
representations and warranties or
o if the depositor believes that removal is necessary or
appropriate.
The depositor may substitute other mortgage loans subject to specified
terms and conditions set forth in the agreement creating the trust. The seller
believes that the information set forth in this prospectus supplement with
respect to group I and group II is representative of the characteristics of the
respective group as it will be constituted at the closing date.
The depositor will file a current report on Form 8-K with the
Commission, together with the agreement, within fifteen days after the initial
issuance of the offered certificates. The depositor will note the effect of any
changes in the pool in the current report on Form 8-K as a result of adding or
removing any mortgage loans. The depositor also intends to file additional yield
tables and other computational materials with the Commission in a current report
on Form 8-K. The underwriters of the offered certificates prepared the yield
tables and computational materials at the request of prospective investors,
based on assumptions provided by, and satisfying the special requirements of,
such prospective investors. Those tables and assumptions may be based on
assumptions that differ from the modeling assumptions used in preparing tables
S-18
set forth under the heading "Prepayment and Yield Considerations" herein.
Accordingly, those tables and other materials may not be relevant to or
appropriate for investors other than those specifically requesting them.
Underwriting Standards
The seller's underwriting philosophy is to analyze the overall
situation of the borrower and to take into account compensating factors which
may be used to offset certain areas of weakness. Specific compensating factors
include:
o loan-to-value ratio;
o mortgage payment history;
o disposable income;
o employment stability; and
o number of years at residence.
The seller underwrites each loan individually. The seller bases its
underwriting decision on the risk profile of the loan, even in instances where
the seller purchases a group of mortgage loans in bulk. In some of these bulk
purchases, the seller engages contract underwriters to underwrite individual
mortgage loans under the direct supervision of the seller's senior underwriting
staff.
The seller customarily employs underwriting guidelines to aid in
assessing:
o the borrower's ability and willingness to repay a loan according
to its terms; and
o whether the value of the property securing the loan will allow
the lender to recover its investment if a loan default occurs.
The seller has established classifications with respect to the credit
profile of the borrower. The terms of the loans and the maximum loan-to-value
ratios and debt-to-income ratios vary based on the classification of the
borrower. The seller generally offers borrowers with less favorable credit
ratings loans with higher interest rates and lower loan-to-value ratios than
borrowers with more favorable credit ratings.
The seller's underwriting standards are applied in accordance with
applicable federal and state laws and regulations and require a qualified
appraisal of the mortgaged property which conforms to Fannie Mae and Freddie Mac
standards. Each appraisal includes a market data analysis based on recent sales
of comparable homes in the area and a replacement cost analysis based on the
current cost of building a similar home. The appraisal may be no more than 180
days old on the day the loan is originated. In most instances, the seller will
also require a field review appraisal for properties that have a value of
$300,000 to $500,000 and a second full appraisal for properties that have a
value over $500,000.
S-19
The seller has three loan documentation programs:
o Full Documentation -- underwriter review of the borrower's credit
report, handwritten loan application, property appraisal, and the
documents that are provided to verify employment and bank
deposits, such as W-2's and pay stubs, or signed tax returns for
the past two years;
o Limited Documentation -- only available for self-employed
borrowers; six months of personal and/or business bank statements
are acceptable documentation of the borrower's stated cash flow;
loan-to value ratios of 80.01% to 90% require two years of
personal bank statements;
o Stated Income -- the borrower's income as stated on the loan
application must be reasonable for the related occupation because
the income is not independently verified. The seller does,
however, verify the existence of the business and employment; and
any self-employed business must have been in existence for at
least two years; and
The seller may, from time to time, apply underwriting criteria that are either
more stringent or more flexible than the general guidelines of the underwriting
programs outlined below depending on the economic conditions of a particular
market.
The seller has developed two primary underwriting programs:
o Traditional Underwriting Program (1st & 2nd lien mortgage loans)
-- generally, all secondary credit items receive a full
underwriting review prior to issuing an approval.
The seller's general guidelines for the Traditional Underwriting
Program are set forth below:
A+ A A- B C D
Mortgage History
No late payments Maximum of one Maximum of two Maximum of four Maximum of five Maximum of six
30-day late 30-day late 30-day late 30-day and one 30-day, two
payment payments in last payments or two 60-day late 60-day and one
12 months 30-day and one payments or four 90-day late
(maximum of one 60-day late 30-day, one payments
30-day late payments in last 60-day and one
payment if LTV is 12 months 90-day late
greater than 85%) payments in last
12 months
Secondary Credit
Maximum of three Maximum of three Maximum of three Maximum of four Discretionary Discretionary
30-day late 30-day late 30-day late 30-day and one
payments on payments on payments on 60-day late
revolving credit; revolving credit; revolving payments on
two 30-day late three 30-day late credit; three revolving credit;
payment on payments on 30-day late three 30-day and
installment credit installment credit payments on one 60-day late
installment payments on
credit (isolated installment
60-day late credit (isolated
payments 90-day late
acceptable) payments
acceptable)
S-20
Bankruptcy Filings
Chapters 7 & 13 - Chapter 7 - Chapter 7 - Chapter 7 - Chapter 7 - Chapter 7 & 13 -
Discharged 2 years Discharged 2 years Discharged 2 years Discharged 1 1/2 Discharged 1 year 1 day from
(re-established Chapter 13 - Chapter 13 -1 year years Chapter 13 -1 day discharge
credit since the Discharged 1 year from date of Chapter 13 -1 after discharge
discharge) (re-established filing with proof year from date with proof paid
credit since paid as agreed of filing with as agreed
discharge) (must be proof paid as
discharged) agreed (must be
discharged)
Debt-To-Income Ratio
50% 50% 50% 50% 55% 55%
Maximum Loan-To-Value (1st lien mortgage loans only)
90% 90% 90% 85% 80% 70%
o The Score Plus Underwriting Program (1st lien mortgage loans
only) -- generally, a borrower's secondary credit (excluding
mortgage, foreclosure and bankruptcy histories) is evaluated by
credit score. Accordingly, credit score minimums apply for each
credit grade.
S-21
The seller's general guidelines for the Score Plus Underwriting Program
are set forth below:
A+ A A- B C D
Mortgage History
No late payments Maximum of one Maximum of two Maximum of four Maximum of five N/A
30-day late payment 30-day late 30-day late 30-day and one
payments in last payments or two 60-day late
12 months 30-day and one payments or four
60-day late 30-day, one
payments in last 60-day and one
12 months 90-day late
payments in last
12 months
Secondary Credit
Minimum Credit Score Minimum Credit Minimum Credit Minimum Credit Minimum Credit N/A
620 Score Score Score Score
580 570 560 550
620 for LTV >95 620 >90 LTV
Bankruptcy Filings
Chapters 7 & 13 - Chapter 7 - Chapter 7 - Chapter 7 - Chapter 7 - N/A
Discharged 2 years Discharged 2 years Discharged 2 years Discharged 1.5 Discharged 2 years
(re-established Chapter 13 - Chapter 13 -2 years Chapter 13 -1
credit since the Discharged 2 years from date Chapter 13 -1.5 year from date of
discharge) years of filing with years from date filing with proof
(re-established proof paid as of filing with paid as agreed
credit since agreed (must be proof paid as (must be
discharge) discharged) agreed (must be discharged)
discharged)
Debt-To-Income Ratio
50<-90% LTV 50% < 90% 50% 50% 55% N/A
45%>90% LTV 45% > 90%
Maximum Loan-To-Value (1st lien mortgage loans only)
100% 100% 100% 85% 80% N/A
Foreclosure
>=5 Yrs >=5 Yrs >=3 Yrs >=3 Yrs >=3 Yrs N/A
If LTV > 95%,
not allowed
Servicing of the Mortgage Loans
General. Saxon Mortgage Services, Inc., an affiliate of the depositor,
will service the mortgage loans. The principal offices of the servicer are
located in Fort Worth, Texas. The servicer is a HUD-approved originator and is
approved by and in good standing with Fannie Mae and Freddie Mac. The servicer
will provide customary servicing functions with respect to the mortgage loans.
Among other things, the servicer is obligated under some circumstances to
advance delinquent payments of principal and interest with respect to the
mortgage loans and to pay month end interest with respect to mortgage loans
serviced by it. The servicer must obtain approval of the master servicer with
respect to some of its servicing activities. In managing the liquidation of
defaulted mortgage loans, the servicer will have sole discretion to take such
action in maximizing recoveries to the certificateholders including, without
limitation, selling defaulted mortgage loans and REO properties. See "Servicing
of Mortgage Loans" in the prospectus.
As of September 30, 2002, the servicer serviced a portfolio of
approximately 66,016 one-to-four family conventional residential mortgage loans
totaling approximately $6.8 billion. The following table sets forth certain
unaudited information concerning the delinquency experience, including loans in
foreclosure, and mortgage loans foreclosed with respect to the servicer's
S-22
conventional loan servicing portfolio as of the end of the indicated periods.
The indicated periods of delinquency are based on the number of days past due on
a contractual basis. No mortgage loan is considered delinquent for these
purposes until it is 31 days past due on a contractual basis.
Percentage of Total Portfolio
-----------------------------------------------------------------------------------------------------
September 30, 2002 December 31, 2001 December 31, 2000 December 31, 1999 December 31, 1998
------------------ ----------------- ----------------- ----------------- ------------------
By No. By Dollar By No. By Dollar By No. By Dollar By No. By Dollar By No. By Dollar
of Loans Amount of Loans Amount of Loans Amount of Loans Amount of Loans Amount
-------- ------ -------- ------ -------- ------ -------- ------ -------- --------
Period of Delinquency
31-60 days 8.11% 8.06% 10.38% 10.34% 6.86% 6.91% 5.62% 5.48% 6.48% 6.36%
61-90 days 2.36% 2.34% 2.10% 2.17% 1.69% 1.76% 1.67% 1.62% 1.28% 1.34%
91 days or more 4.41% 4.08% 3.96% 3.82% 3.04% 2.94% 1.96% 1.97% 1.46% 1.60%
------ ------ ------ ------ ------ ------ ------ ------ ------ -----
Total Delinquency(1) 14.88% 14.48% 16.44% 16.32% 11.60% 11.62% 9.25% 9.07% 9.22% 9.30%
Loans in foreclosure 3.82% 3.59% 4.48% 4.37% 3.92% 4.00% 2.88% 3.04% 2.03% 2.45%
- -------------------------------------------------
(1)Totals may not sum due to rounding.
These statistics represent the recent experience of the servicer. There
can be no assurance that the delinquency and foreclosure experience of the
mortgage loans in the trust will be comparable. In addition, these statistics
are based on all of the one-to-four family residential mortgage loans in the
servicer's servicing portfolio, including mortgage loans with a variety of
payment and other characteristics, including geographic locations and
underwriting standards. Not all the mortgage loans in the servicer's servicing
portfolio constitute non-conforming credits. Accordingly, there can be no
assurance that the delinquency and foreclosure experience of the trust's
mortgage loans in the future will correspond to the future delinquency and
foreclosure experience of the servicer's one-to-four family conventional
residential mortgage loan servicing portfolio. The actual delinquency and
foreclosure experience of the mortgage loans will depend, among other things,
upon:
o the value of real estate securing the mortgage loans; and
o the ability of borrowers to make required payments.
Servicing and Other Compensation and Payment of Expenses; Repurchase
The servicing fee rate applicable to each mortgage loan, and with
respect to each distribution date, equals the scheduled principal balance of the
mortgage loan, on the first day of the due period with respect to such
distribution date, multiplied by one-twelfth of: (i) approximately 0.30% per
annum for such of the first ten distribution dates following the closing date,
(ii) approximately 0.40% per annum for the eleventh through thirtieth
distribution dates, inclusive, following the closing date, (iii) approximately
0.65% per annum for the thirty-first through forty-eighth distribution dates,
inclusive, following the closing date and (iv) approximately 0.80% per annum for
the forty-ninth distribution date following the closing date and each
distribution date thereafter. A due period is the period from and including the
second day of a month to and including the first day of the following month. In
addition, late payment fees with respect to the mortgage loans, revenue from
miscellaneous servicing administration fees, and any interest or other income
earned on collections with respect to the mortgage loans pending remittance,
will be paid to or retained by the servicer as additional servicing
compensation. The servicer must pay certain insurance premiums and ongoing
expenses. The
S-23
servicer may, with the consent of the master servicer, transfer its servicing to
successor servicers that meet the criteria for servicers approved by the rating
agencies.
The servicer and/or the depositor will have the right, but not the
obligation, to repurchase from the trust any mortgage loan delinquent as to
three consecutive scheduled payments, at a price equal to the unpaid principal
balance thereof plus accrued interest on that balance or, in the case of a
Nonrecoverable Mortgage Loan, at a price equal to the Nonrecoverable Mortgage
Loan Purchase Price, which is based on the servicer's determination of the
projected net liquidation proceeds for the Nonrecoverable Mortgage Loan.
Advances and Payment of Compensating Interest
Before each distribution date, the servicer and any successor servicer
must advance its own funds with respect to delinquent payments of principal of
and interest on the mortgage loans, net of the servicing fees with respect to
any mortgage loan for which it is making an advance, unless the servicer
believes that the advance is non-recoverable. Advances of principal and interest
on a mortgage loan will be considered non-recoverable only to the extent those
amounts are not reimbursable from:
o late collections in respect of such loan;
o insurance proceeds in respect of such loan; and
o net liquidation proceeds in respect of such loan.
The servicer's obligation to advance delinquent payments of principal of and
interest on any mortgage loan as to which the servicer has entered into a
modification or forbearance agreement will be based upon the terms of that
mortgage loan as so modified. In addition, if the servicer determines that the
expenses associated with the foreclosure and liquidation of a delinquent loan
will exceed the projected liquidation proceeds, the servicer's obligation to
make advances in respect of such loan will terminate at the time of such
determination.
Any failure by the servicer to make any required advance will
constitute an event of default under the servicing agreement. If the servicer
fails to make a required advance of principal and interest, the master servicer
will be obligated to make the advance. The total advance obligations of the
master servicer may be subject to a dollar limitation that is acceptable to the
rating agencies as set forth in the agreement for the trust. If so specified in
the agreement, the servicer may be terminated upon the occurrence of one or more
specified events (including performance of the mortgage loans). See "Servicing
of Mortgage Loans -- Advances" in the prospectus.
In addition, in the event of a prepayment in full received by the
servicer during the period from the 18th day of a month to the end of that
month, the servicer must deposit in the distribution account on or before the
distribution date in the immediately succeeding month an amount equal to any
resulting Prepayment Interest Shortfall, but only to the extent of the servicing
fee payable with respect to such distribution date (such payment, "Compensating
Interest"). If the servicer fails to deposit an amount equal to any Compensating
Interest, as
S-24
required, the master servicer will be obligated to deposit the amount that the
servicer was required to have deposited.
The Master Servicer
Saxon Mortgage, Inc., will act as master servicer of the mortgage
loans. The master servicer has limited experience master servicing mortgage
loans. The master servicer will:
o supervise the servicing of the mortgage loans;
o provide or cause to be provided specified reports to the trustee
regarding the mortgage loans;
o make advances to the extent described in this prospectus
supplement with respect to the mortgage loans if the servicer
fails to make a required advance; and
o appoint a successor servicer if a servicer is terminated.
The master servicer is entitled to a master servicing fee, payable on
each distribution date, in the amount equal to one-twelfth of the master
servicing fee rate multiplied by the scheduled principal balance of the mortgage
loans as of the first day of the month immediately preceding the month of such
distribution date. The master servicer will pay the trustee its monthly fees and
expenses out of the master servicing fee.
PREPAYMENT AND YIELD CONSIDERATIONS
General
The weighted average life of, and, if purchased at other than par, the
yield to maturity on, each class of the offered certificates will be directly
related to the rate of payment of principal of the mortgage loans in the related
group, including:
o payments in full prior to stated maturity;
o liquidations due to defaults;
o casualties and condemnations; and
o repurchases of mortgage loans by the depositor.
If the actual rate of principal payments on the mortgage loans in a
group is slower than the rate anticipated by an investor who purchases an
offered certificate at a discount, the actual yield to the investor will be
lower than that investor's anticipated yield. If the actual rate of principal
payments on the mortgage loans in a group is faster than the rate anticipated by
an investor who purchases an offered certificate at a premium (and, in
particular, the Class A-IO and Class S Certificates), the actual yield to that
investor will be lower than such investor's anticipated yield.
S-25
The actual rate of principal prepayments on pools of mortgage loans is
influenced by a variety of economic, tax, geographic, demographic, social, legal
and other factors and has fluctuated considerably in recent years. In addition,
the rate of principal prepayments may differ among pools of mortgage loans at
any time because of specific factors relating to the mortgage loans in the
particular pool, including, among other things:
o the age of the mortgage loans;
o the geographic locations of the properties securing the loans;
o the extent of the mortgagors' equity in the properties;
o changes in the mortgagors' housing needs, job or employment
status; and
o the credit quality of the mortgage loans.
The timing of changes in the rate of prepayments may significantly
affect the actual yield to investors who purchase the offered certificates at
prices other than par, even if the average rate of principal prepayments is
consistent with the expectations of investors. In general, the earlier the
payment of principal of the mortgage loans the greater the effect on an
investor's yield to maturity. As a result, the effect on an investor's yield of
principal prepayments occurring at a rate higher or lower than the rate
anticipated by the investor during the period immediately following the issuance
of the offered certificates may not be offset by a subsequent like reduction or
increase in the rate of principal prepayments. Investors must make their own
decisions as to the appropriate prepayment assumptions to be used in deciding
whether to purchase any of the offered certificates. The depositor does not make
any representations or warranties as to the rate of prepayment or the factors to
be considered in connection with an investor's determination.
The calculation of a Realized Loss on a Nonrecoverable Mortgage Loan
will be calculated prior to the actual liquidation of such a loan. As a result
of such earlier determination, the yield to investors may be adversely affected.
Similarly, the purchase by the master servicer of any Nonrecoverable Mortgage
Loan (in exercise of its option to purchase a delinquent loan or as part of an
optional termination) may result in reduced yields on the certificates, and in
particular, subordinate classes. The determination that a mortgage loan is a
Nonrecoverable Mortgage Loan will be made by the servicer, an affiliate of the
initial holder of the Class C Certificate. As a result of any such
determination, a benefit may accrue to such initial holder under certain
circumstances.
The term weighted average life refers to the average amount of time
that will elapse from the date of issuance of a certificate until each dollar of
principal of that certificate will be distributed to the investor. The weighted
average life and yield to maturity, if purchased at a price other than par, of
each class of the offered certificates will be influenced by the rate at which
principal payments on the mortgage loans in the related group are paid. These
payments may be in the form of scheduled amortization or prepayments which
include prepayments and liquidations due to default or early termination of the
trust.
The Class AF-6 Certificates will not be entitled to distributions of
principal, either scheduled or unscheduled, until the distribution date
occurring in December 2005, except as
S-26
otherwise described in this prospectus supplement. On and after that date, the
relative entitlement of the Class AF-6 Certificates to payments in respect of
principal is subject to increase in accordance with the calculation of the Class
AF-6 Distribution Amount. See "Description of the Offered Certificates -
Distributions" herein.
Prospective investors in group I certificates purchased at a discount
should consider the effect of the rate of prepayments of the group I mortgage
loans that provide only for monthly payments of interest for the first five
years following origination. See "Risk Factors -- Mortgage Loans with
Interest-Only Payments" herein.
As described herein, Excess Interest will be applied, to the extent
available, as an additional payment of principal on the related offered
certificates to build and maintain limited overcollateralization at levels
required as set forth in the agreement. See "Description of the Offered
Certificates -- Excess Interest" herein. The level of Excess Interest available
on any distribution date will be influenced by, among other things:
o The overcollateralization level of the mortgage loans. This means
the extent to which interest on the mortgage loans is accruing on
a higher principal balance than the certificate principal
balances of the certificates;
o The loss experience of the mortgage loans. For example, Excess
Interest will be reduced as a result of realized losses on the
mortgage loans;
o The extent to which the Weighted Average Net Rate of the loans in
all groups exceeds the weighted average of the pass-through rates
of the offered certificates;
o The extent to which the compensation of the servicer increases
over the life of a mortgage loan. As described herein, the
initial servicing fee rate of 0.30% increases to 0.80% in later
periods, therefore substantially reducing excess cash flow; and
o The amount of prepayment penalties due and paid by borrowers
during the related due period.
No assurances can be given as to the amount of Excess Interest distributable at
any time or in the aggregate.
Mandatory Prepayment
Amounts, other than interest or investment earnings, remaining in the
pre-funding account on the first distribution date after the end of the
pre-funding period will be applied as a payment of principal on the certificates
as described in this prospectus supplement under the heading "Description of the
Offered Certificates -- Distributions" herein. The seller believes that almost
all of the original pre-funded amount will be used by the trust to purchase
subsequent mortgage loans. It is unlikely, however, that the aggregate amount of
subsequent mortgage loans purchased will be identical to the original pre-funded
amount. Consequently, certificateholders will receive some prepayment of
principal. See "Description of the Offered Certificates -- Pre-Funding Account."
S-27
Prepayments and Yields for Offered Certificates
All of the mortgage loans in group I are or will be fixed rate mortgage
loans. The rate of prepayments with respect to conventional fixed rate mortgage
loans has fluctuated significantly in recent years. In general, if prevailing
interest rates fall significantly below the interest rates on fixed rate
mortgage loans, those mortgage loans are likely to be subject to higher
prepayment rates than if prevailing rates remain at or above the interest rates
on the mortgage loans. Conversely, if prevailing interest rates rise appreciably
above the interest rates on fixed rate mortgage loans, those mortgage loans are
likely to experience a lower prepayment rate than if prevailing rates remain at
or below the interest rates on such mortgage loans.
All of the mortgage loans in group II are or will be adjustable rate
mortgage loans. As is the case with conventional fixed rate mortgage loans,
adjustable rate mortgage loans may be subject to a greater rate of principal
prepayments in a declining interest rate environment. For example, if prevailing
interest rates fall significantly, adjustable rate mortgage loans could be
subject to higher prepayment rates than if prevailing interest rates remain
constant because the availability of fixed rate mortgage loans at lower interest
rates may encourage mortgagors to refinance their adjustable rate mortgage loans
to a lower fixed interest rate. Nevertheless, no assurance can be given as to
the level of prepayments that the mortgage loans will experience. The Class AV
Certificates will generally reflect the prepayment experience of the group II
mortgage loans.
The final scheduled distribution date for the Class AF-1, Class AF-2,
Class AF-3, Class AF-4, Class AF-5, Class AF-6, Class AV, Class M-1, Class M-2
and Class B Certificates is the date on which the certificate principal balance
would be reduced to zero assuming, among other things, that no prepayments are
received on the mortgage loans in the related group or groups and that scheduled
monthly payments of principal of and interest on each of such mortgage loans are
timely received and that no excess interest is applied to build
overcollaterization. The final scheduled distribution date for the Class S
Certificates is the date on which the Notional Principal Balance of the S-I
Component would be reduced to zero assuming, among other things, that no
prepayments are received on the mortgage loans in Group I and that scheduled
monthly payments of principal of and interest on each of such mortgage loans are
timely received and that no excess interest is applied to build
overcollaterization.
The actual final distribution date with respect to each class of
offered certificates could occur significantly earlier than its final scheduled
distribution date because:
o excess interest will be applied to build overcollateralization,
o prepayments are likely to occur which will be distributed in
reduction of the related certificate principal balances or
notional principal balances, as applicable, and
o the master servicer will have the right to purchase all of the
mortgage loans on any distribution date when the aggregate
principal balance of the mortgage loans has declined to less than
10% of the sum of:
o the aggregate principal balance of the initial mortgage
loans as of the cut-off date, and
S-28
o any amounts initially deposited in the pre-funding account,
and
o certain subsequent mortgage loans may have remaining terms to
maturity significantly shorter than the weighted average
remaining terms to maturity of the initial mortgage loans.
The actual final distribution date with respect to each class of the
offered certificates will also be affected by the default and recovery
experience of the mortgage loans. The actual final distribution date of the
offered certificates may be earlier or later than the final scheduled
distribution date.
Prepayments on mortgage loans are commonly measured relative to a
prepayment model or standard, called the prepayment assumption. A separate
prepayment assumption has been calculated for the fixed and the adjustable rate
mortgage loans. Both prepayment assumptions represent an assumed rate of
constant prepayment relative to the then outstanding principal balance of a pool
of mortgage loans for a specified period. With respect to the fixed rate
mortgage loans, 100% of the prepayment assumption (Scenario IV for group I)
assumes prepayment rates of 2.20% per annum of the then outstanding principal
balance of the related mortgage loans in the first month of the life of those
mortgage loans and an additional approximately 2.20% per annum in each month
thereafter up to and including the tenth month. Beginning in the tenth month and
in each month thereafter during the life of those mortgage loans, 100% of the
prepayment assumption for the fixed rate mortgage loans assumes a constant
prepayment rate of 22% per annum. With respect to the adjustable rate mortgage
loans, 100% of the prepayment assumption (Scenario IV for group II) assumes
prepayment rates of 4.00% per annum of the then outstanding principal balance of
the related mortgage loans in the first month of the life of those mortgage
loans and an additional approximately 1.4762% per annum in each month thereafter
up to and including the twenty-second month. Beginning in the twenty-second
month and in each month thereafter during the life of those mortgage loans, 100%
of the prepayment assumption for the adjustable rate mortgage loans assumes a
constant prepayment rate of 35% per annum. As used in the tables below, 0%
prepayment assumption (Scenario I for each group below) assumes prepayment rates
equal to 0% of the prepayment assumption. No prepayment assumption purports to
be a historical description of prepayment experience or a prediction of the
anticipated rate of prepayment of any pool of mortgage loans, including the
related mortgage loans.
The following tables have been prepared on the basis of the following
assumptions known as modeling assumptions:
o the mortgage loans of the related group or groups prepay at the
indicated percentage of the related prepayment assumption;
o distributions on the offered certificates are received, in cash,
on the 25th day of each month, commencing in December 2002, in
accordance with the payment priorities set forth in this
prospectus supplement;
o no defaults or delinquencies in, or modifications, waivers or
amendments respecting, the payment by the mortgagors of principal
and interest on the mortgage loans occur;
S-29
o scheduled payments on the mortgage loans are assumed to be
received on the last day of each due period commencing in
December 2002, and prepayments represent payment in full of
individual mortgage loans and are assumed to be received on the
last day of each prepayment period, commencing in November 2002,
and include 30 days' interest thereon;
o six month LIBOR remains constant at 1.57438%;
o the servicing fee rate is as set forth under "The Mortgage Loan
Pool-- Servicing and Other Compensation and Payment of Expenses;
Repurchases";
o one year CMT remains constant at 1.46%;
o one month LIBOR is equal to 1.69000%;
o the closing date for the offered certificates is November 8,
2002;
o the master servicer's fee is 0.05%;
o there is zero reinvestment income on all amounts in the
distribution account;
o subsequent mortgage loans are acquired during the month indicated
in the following mortgage loan characteristics tables;
o the prepayment penalty has been calculated as 80% of six months
interest on the prepaid amount for prepayments which occur before
the expiration of the prepayment penalty term as indicated in the
loan tables below;
o the mortgage interest rate for each adjustable rate mortgage loan
is adjusted on its next reset date and on subsequent reset dates,
if necessary, to equal the sum, subject to the applicable
periodic adjustment caps and floors, of:
o the assumed level of the applicable index and
o the respective gross margin;
o for purposes of the "Weighted Average Life-- Optional
Termination" in the tables, the offered certificates are redeemed
on the initial Clean-Up Call Date; and
o each group consists of mortgage loans having the approximate
characteristics set forth in the following tables.
The actual amount on deposit in the pre-funding account as of the
closing date may vary from the assumed amount of pre-funding proceeds used in
preparing the following tables.
S-30
Initial Group I Mortgage Loan Characteristics
Original Original Remaining Remaining
Current Gross Amortization Term to Term to Prepayment Months to
Amortization Balance WAC Term Maturity Maturity Penalty Term(1) Interest Only
Methodology ($) (%) (months) (months) (months) (months) Expiration
- ------------------- ---------------- ----------- --------------- ------------- -------------- ---------------- --------------
Balloon 3,089,538.84 10.578 360 180 117 1 N/A
Balloon 1,319,008.60 10.680 360 211 148 0 N/A
Level 428,763.78 10.501 178 178 114 0 N/A
Level 3,509,330.49 9.547 178 178 115 0 N/A
Level 189,926.90 9.877 240 240 176 0 N/A
Level 539,386.77 9.993 240 240 177 0 N/A
Level 11,454,612.57 9.977 360 360 296 0 N/A
Level 15,761,214.00 9.720 360 360 297 0 N/A
Balloon 19,022,909.34 8.293 360 180 178 33 N/A
Balloon 579,390.00 9.566 360 180 178 0 N/A
Level 14,657,348.55 8.066 176 176 174 32 N/A
Level 6,997,498.31 8.196 176 176 175 0 N/A
Level 9,522,437.57 8.111 240 240 239 32 N/A
Level 3,361,189.81 8.265 240 240 239 0 N/A
Level 83,348,671.54 8.300 359 359 357 32 N/A
Level 30,544,662.36 8.788 359 359 358 0 N/A
Interest Only/Level 4,914,688.36 7.616 294 354 353 35 59
Interest Only/Level 1,692,100.00 7.591 269 329 328 0 59
(1) Assumes contractual prepayment penalty equal to 80% of six months
interest on the prepaid amount.
Subsequent Group I Mortgage Loan Characteristics
Original Original Remaining Remaining
Current Gross Amortization Term to Term to Prepayment Months to
Amortization Balance WAC Term to Maturity Maturity Penalty Term(1) Pre-Funding Interest Only
Methodology ($) (%) (months) (months) (months) (months) Month* Expiration
- ------------------- ----------------- ---------- -------------- ------------ ------------ ------------ ------------- --------------
Balloon 9,701,734.45 8.293 360 180 180 35 1 N/A
Balloon 295,490.44 9.566 360 180 180 0 1 N/A
Level 7,475,286.82 8.066 180 176 176 33 1 N/A
Level 3,568,742.78 8.196 180 176 176 0 1 N/A
Level 4,856,468.53 8.111 240 240 240 33 1 N/A
Level 1,714,215.76 8.265 240 240 240 0 1 N/A
Level 42,508,044.57 8.300 360 359 359 34 1 N/A
Level 15,577,859.19 8.788 360 359 359 0 1 N/A
Interest Only/Level 2,506,504.16 7.616 294 354 354 36 1 60
Interest Only/Level 862,975.51 7.591 269 329 329 0 1 60
(1) Assumes contractual prepayment penalty equal to 80% of six months
interest on the prepaid amount.
* Indicates the 30-day period during the pre-funding period in which such
mortgage loan is acquired.
S-31
Initial Group II Mortgage Loan Characteristics
Remaining
Original Original Remaining Maximum Minimum Initial Periodic Prepayment
Current Gross Amortization Term to Term to Gross Next Reset Mortgage Mortgage Periodic Rate Penalty
Balance WAC Term Maturity Maturity Margin Reset Frequency Rate Rate Rate Cap Cap Term
($) (%) (1) (months) (months) (months) (%) (months)(2) (months) (%) (%) (%) (%) (months)(3)
- -------------- -------- ----------- -------- --------- ------- --------- ---------- -------- -------- -------- -------- -----------
3,435,950.32 9.592 360 360 294 5.748 3 6 15.382 1.034 1.023 9.114 0
978,441.98 9.434 360 360 293 5.483 2 6 15.783 0.816 1.000 8.692 0
292,212.81 9.372* 360 360 299 6.578 7 12 16.574 2.000 2.000 9.574 0
2,242,590.24 6.893* 360 360 293 4.291 7 12 14.549 1.531 2.000 6.726 0
7,025,968.23 9.874 360 360 296 5.882 3 6 16.457 3.048 1.222 9.772 0
3,267,367.79 9.751 360 360 297 5.849 3 6 16.123 2.985 1.000 9.572 0
262,427.84 7.750 360 360 358 5.650 4 6 13.750 5.750 1.000 1.000 0
237,860,577.76 8.453 360 360 358 5.397 22 6 14.944 7.703 1.239 1.022 23
51,135,729.79 8.550 360 360 358 5.608 22 6 14.983 7.477 1.134 1.016 0
159,827,728.76 8.657 360 360 358 5.609 34 6 15.194 7.776 1.197 1.028 32
22,819,844.04 8.537 360 360 358 5.681 34 6 14.908 7.298 1.109 1.002 0
(1) Based on 6-Month LIBOR, except as otherwise indicated.
(2) Assumes Mortgage Loans with Next Reset equal to or greater than 20 months
were used to determine the notional principal balance of the S-II Component.
(3) Assumes contractual prepayment penalty equal to 80% of six months interest
on the prepaid amount.
* Based on One-Year CMT.
Subsequent Group II Mortgage Loan Characteristics
Remaining
Prepayment
Original Original Remaining Next Maximum Minimum Initial Periodic Penalty
Current Gross Amortization Term to Term to Gross Reset Reset Mortgage Mortgage Periodic Rate Term Pre-
Balance WAC Term Maturity Maturity Margin (months) Frequency Rate Rate Rate Cap Cap (months) Funding
($) (%) (1) (months) (months) (months) (%) (2) (months) (%) (%) (%) (%) (3) Month*
- -------------- ------- ----------- -------- ---------- ------- ------- --------- -------- -------- -------- ------- -------- -------
117,254.66 7.750 360 360 360 5.650 6 6 13.750 5.750 1.000 1.000 0 1
106,277,830.94 8.453 360 360 360 5.397 24 6 14.944 7.703 1.239 1.022 24 1
22,847,814.87 8.550 360 360 360 5.608 24 6 14.983 7.477 1.134 1.016 0 1
71,412,188.17 8.657 360 360 360 5.609 36 6 15.194 7.776 1.197 1.028 36 1
10,196,071.79 8.537 360 360 360 5.681 36 6 14.908 7.298 1.109 1.002 0 1
(1) Based on 6-Month LIBOR, except as otherwise indicated.
(2) Assumes Mortgage Loans with Next Reset equal to or greater than 20 months
were used to determine the notional principal balance of the S-II Component.
(3) Assumes contractual prepayment penalty equal to 80% of six months interest
on the prepaid amount.
* Indicates the 30-day period during the pre-funding period in which such
mortgage loan is acquired.
S-32
PREPAYMENT SCENARIOS
Scenario I Scenario II Scenario III Scenario IV Scenario V Scenario VI Scenario VII
Group I
Prepayment
Assumption: 0% 50% 75% 100% 125% 150% 175%
Group II
Prepayment
Assumption: 0% 50% 75% 100% 125% 150% 175%
The following tables set forth the approximate percentages of the
initial principal amount of the offered certificates that would be outstanding
after each of the dates shown assuming the clean-up call is not exercised, and
the approximate weighted average life in years of the offered certificates,
based on prepayment scenarios described in the table entitled "Prepayment
Scenarios." The percentages have been rounded to the nearest 1%.
S-33
PERCENTAGE OF INITIAL CERTIFICATE PRINCIPAL BALANCE
Class AF-1 Scenario Class AF-2 Scenario
--------------------------------------------- --------------------------------------------
I II III IV V VI VII I II III IV V VI VII
- -- --- -- - -- --- - -- --- -- - -- ---
Initial Percent 100% 100% 100% 100% 100% 100% 100% Initial Percent 100% 100% 100% 100% 100% 100% 100%
11/25/2003... 85 60 46 33 19 5 0 11/25/2003... 100 100 100 100 100 100 82
11/25/2004... 80 22 0 0 0 0 0 11/25/2004... 100 100 87 34 0 0 0
11/25/2005... 75 0 0 0 0 0 0 11/25/2005... 100 75 0 0 0 0 0
11/25/2006... 69 0 0 0 0 0 0 11/25/2006... 100 20 0 0 0 0 0
11/25/2007... 64 0 0 0 0 0 0 11/25/2007... 100 0 0 0 0 0 0
11/25/2008... 58 0 0 0 0 0 0 11/25/2008... 100 0 0 0 0 0 0
11/25/2009... 51 0 0 0 0 0 0 11/25/2009... 100 0 0 0 0 0 0
11/25/2010... 46 0 0 0 0 0 0 11/25/2010... 100 0 0 0 0 0 0
11/25/2011... 40 0 0 0 0 0 0 11/25/2011... 100 0 0 0 0 0 0
11/25/2012... 31 0 0 0 0 0 0 11/25/2012... 100 0 0 0 0 0 0
11/25/2013... 24 0 0 0 0 0 0 11/25/2013... 100 0 0 0 0 0 0
11/25/2014... 16 0 0 0 0 0 0 11/25/2014... 100 0 0 0 0 0 0
11/25/2015... 6 0 0 0 0 0 0 11/25/2015... 100 0 0 0 0 0 0
11/25/2016... 0 0 0 0 0 0 0 11/25/2016... 91 0 0 0 0 0 0
11/25/2017... 0 0 0 0 0 0 0 11/25/2017... 41 0 0 0 0 0 0
11/25/2018... 0 0 0 0 0 0 0 11/25/2018... 9 0 0 0 0 0 0
11/25/2019... 0 0 0 0 0 0 0 11/25/2019... 0 0 0 0 0 0 0
Weighted Weighted
Average Average
Life(1) to Life(1) to
Maturity Maturity
(Yrs.)....... 6.98 1.37 1.04 0.86 0.75 0.67 0.61 (Yrs.)....... 15.02 3.55 2.50 1.96 1.62 1.39 1.23
Optional Optional
Termination Termination
(Yrs.)....... 6.98 1.37 1.04 0.86 0.75 0.67 0.61 (Yrs.)....... 15.02 3.55 2.50 1.96 1.62 1.39 1.23
Class AF-3 Scenario Class AF-4 Scenario
--------------------------------------------- --------------------------------------------
I II III IV V VI VII I II III IV V VI VII
- -- --- -- - -- --- - -- --- -- - -- ---
Initial Percent 100% 100% 100% 100% 100% 100% 100% Initial Percent 100% 100% 100% 100% 100% 100% 100%
11/25/2003... 100 100 100 100 100 100 100 11/25/2003... 100 100 100 100 100 100 100
11/25/2004... 100 100 100 100 81 26 0 11/25/2004... 100 100 100 100 100 100 67
11/25/2005... 100 100 100 22 0 0 0 11/25/2005... 100 100 100 100 39 0 0
11/25/2006... 100 100 48 0 0 0 0 11/25/2006... 100 100 100 90 31 0 0
11/25/2007... 100 78 9 0 0 0 0 11/25/2007... 100 100 100 40 0 0 0
11/25/2008... 100 49 0 0 0 0 0 11/25/2008... 100 100 74 7 0 0 0
11/25/2009... 100 25 0 0 0 0 0 11/25/2009... 100 100 45 0 0 0 0
11/25/2010... 100 13 0 0 0 0 0 11/25/2010... 100 100 35 0 0 0 0
11/25/2011... 100 0 0 0 0 0 0 11/25/2011... 100 98 21 0 0 0 0
11/25/2012... 100 0 0 0 0 0 0 11/25/2012... 100 78 5 0 0 0 0
11/25/2013... 100 0 0 0 0 0 0 11/25/2013... 100 60 0 0 0 0 0
11/25/2014... 100 0 0 0 0 0 0 11/25/2014... 100 42 0 0 0 0 0
11/25/2015... 100 0 0 0 0 0 0 11/25/2015... 100 26 0 0 0 0 0
11/25/2016... 100 0 0 0 0 0 0 11/25/2016... 100 11 0 0 0 0 0
11/25/2017... 100 0 0 0 0 0 0 11/25/2017... 100 0 0 0 0 0 0
11/25/2018... 100 0 0 0 0 0 0 11/25/2018... 100 0 0 0 0 0 0
11/25/2019... 91 0 0 0 0 0 0 11/25/2019... 100 0 0 0 0 0 0
11/25/2020... 68 0 0 0 0 0 0 11/25/2020... 100 0 0 0 0 0 0
11/25/2021... 44 0 0 0 0 0 0 11/25/2021... 100 0 0 0 0 0 0
11/25/2022... 17 0 0 0 0 0 0 11/25/2022... 100 0 0 0 0 0 0
11/25/2023... 0 0 0 0 0 0 0 11/25/2023... 92 0 0 0 0 0 0
11/25/2024... 0 0 0 0 0 0 0 11/25/2024... 69 0 0 0 0 0 0
11/25/2025... 0 0 0 0 0 0 0 11/25/2025... 45 0 0 0 0 0 0
11/25/2026... 0 0 0 0 0 0 0 11/25/2026... 17 0 0 0 0 0 0
11/25/2027... 0 0 0 0 0 0 0 11/25/2027... 0 0 0 0 0 0 0
Weighted Weighted
Average Average
Life(1) to Life(1) to
Maturity Maturity
(Yrs.)....... 18.80 6.26 4.09 2.94 2.31 1.95 1.69 (Yrs.)....... 22.82 11.74 7.41 4.95 3.44 2.53 2.17
Optional Optional
Termination Termination
(Yrs.)....... 18.80 6.26 4.09 2.94 2.31 1.95 1.69 (Yrs.)....... 22.82 11.54 7.30 4.95 3.44 2.53 2.17
(1) The weighted average life is determined by (i) multiplying the amount
of each principal payment by the number of years from the date of
issuance to the related distribution date, (ii) adding the results and
(iii) dividing the sum by the initial certificate principal balance
for the applicable class.
S-34
PERCENTAGE OF INITIAL CERTIFICATE PRINCIPAL BALANCE
Class AF-5 Scenario Class AF-6 Scenario
--------------------------------------------- --------------------------------------------
I II III IV V VI VII I II III IV V VI VII
- -- --- -- - -- --- - -- --- -- - -- ---
Initial Percent 100% 100% 100% 100% 100% 100% 100% Initial Percent 100% 100% 100% 100% 100% 100% 100%
11/25/2003... 100 100 100 100 100 100 100 11/25/2003... 100 100 100 100 100 100 100
11/25/2004... 100 100 100 100 100 100 100 11/25/2004... 100 100 100 100 100 100 100
11/25/2005... 100 100 100 100 100 59 0 11/25/2005... 100 100 100 100 100 100 0
11/25/2006... 100 100 100 100 100 59 0 11/25/2006... 99 92 91 93 98 100 0
11/25/2007... 100 100 100 100 87 53 0 11/25/2007... 98 86 84 84 86 98 0
11/25/2008... 100 100 100 100 63 31 0 11/25/2008... 96 77 73 69 69 70 0
11/25/2009... 100 100 100 85 48 18 0 11/25/2009... 93 68 61 55 54 42 0
11/25/2010... 100 100 100 82 48 18 0 11/25/2010... 84 46 35 28 25 17 0
11/25/2011... 100 100 100 73 40 13 0 11/25/2011... 75 31 21 15 7 1 0
11/25/2012... 100 100 100 63 29 2 0 11/25/2012... 63 20 12 8 2 * 0
11/25/2013... 100 100 92 49 14 0 0 11/25/2013... 55 14 7 3 * 0 0
11/25/2014... 100 100 80 36 4 0 0 11/25/2014... 46 9 4 1 * 0 0
11/25/2015... 100 100 69 24 0 0 0 11/25/2015... 38 6 3 * 0 0 0
11/25/2016... 100 100 57 12 0 0 0 11/25/2016... 31 4 1 * 0 0 0
11/25/2017... 100 93 42 3 0 0 0 11/25/2017... 16 2 1 0 0 0 0
11/25/2018... 100 80 31 0 0 0 0 11/25/2018... 10 1 * 0 0 0 0
11/25/2019... 100 72 21 0 0 0 0 11/25/2019... 8 1 * 0 0 0 0
11/25/2020... 100 65 11 0 0 0 0 11/25/2020... 6 1 * 0 0 0 0
11/25/2021... 100 58 4 0 0 0 0 11/25/2021... 4 1 * 0 0 0 0
11/25/2022... 100 49 0 0 0 0 0 11/25/2022... 3 * 0 0 0 0 0
11/25/2023... 100 39 0 0 0 0 0 11/25/2023... 2 * 0 0 0 0 0
11/25/2024... 100 31 0 0 0 0 0 11/25/2024... 1 * 0 0 0 0 0
11/25/2025... 100 20 0 0 0 0 0 11/25/2025... 1 * 0 0 0 0 0
11/25/2026... 100 11 0 0 0 0 0 11/25/2026... * * 0 0 0 0 0
11/25/2027... 90 3 0 0 0 0 0 11/25/2027... * * 0 0 0 0 0
11/25/2028... 64 0 0 0 0 0 0 11/25/2028... * 0 0 0 0 0 0
11/25/2029... 37 0 0 0 0 0 0 11/25/2029... * 0 0 0 0 0 0
11/25/2030... 7 0 0 0 0 0 0 11/25/2030... * 0 0 0 0 0 0
11/25/2031... 0 0 0 0 0 0 0 11/25/2031... 0 0 0 0 0 0 0
Weighted Weighted
Average Average
Life(1) to Life(1) to
Maturity Maturity
(Yrs.)....... 26.58 19.80 14.67 10.89 7.94 5.30 2.66 (Yrs.)....... 11.87 8.15 7.48 7.13 6.97 6.85 2.89
Optional Optional
Termination Termination
(Yrs.)....... 26.58 13.21 9.21 6.93 5.44 3.89 2.66 (Yrs.)....... 11.87 8.02 7.13 6.26 5.38 4.55 2.89
Class AV Scenario Class M-1 Scenario
--------------------------------------------- --------------------------------------------
I II III IV V VI VII I II III IV V VI VII
- -- --- -- - -- --- - -- --- -- - -- ---
Initial Percent 100% 100% 100% 100% 100% 100% 100% Initial Percent 100% 100% 100% 100% 100% 100% 100%
11/25/2003... 97 88 84 80 75 71 67 11/25/2003... 100 100 100 100 100 100 100
11/25/2004... 96 70 59 48 37 28 19 11/25/2004... 100 100 100 100 100 100 100
11/25/2005... 95 54 37 23 11 2 0 11/25/2005... 100 100 100 100 100 100 94
11/25/2006... 93 40 26 17 10 2 0 11/25/2006... 100 100 79 56 39 78 94
11/25/2007... 92 30 19 11 5 1 0 11/25/2007... 100 91 60 39 24 15 54
11/25/2008... 90 24 13 6 2 0 0 11/25/2008... 100 76 46 27 15 8 29
11/25/2009... 88 20 9 4 1 0 0 11/25/2009... 100 63 35 19 10 5 13
11/25/2010... 87 16 6 2 0 0 0 11/25/2010... 100 53 27 13 6 1 3
11/25/2011... 85 12 4 1 0 0 0 11/25/2011... 100 44 21 9 4 0 0
11/25/2012... 82 10 3 * 0 0 0 11/25/2012... 100 36 16 7 * 0 0
11/25/2013... 80 8 2 0 0 0 0 11/25/2013... 100 30 12 5 0 0 0
11/25/2014... 77 6 1 0 0 0 0 11/25/2014... 100 25 9 2 0 0 0
11/25/2015... 75 5 * 0 0 0 0 11/25/2015... 100 20 7 0 0 0 0
11/25/2016... 72 3 0 0 0 0 0 11/25/2016... 100 17 5 0 0 0 0
11/25/2017... 69 2 0 0 0 0 0 11/25/2017... 100 13 4 0 0 0 0
11/25/2018... 65 2 0 0 0 0 0 11/25/2018... 100 11 * 0 0 0 0
11/25/2019... 62 1 0 0 0 0 0 11/25/2019... 100 9 0 0 0 0 0
11/25/2020... 58 1 0 0 0 0 0 11/25/2020... 100 7 0 0 0 0 0
11/25/2021... 53 * 0 0 0 0 0 11/25/2021... 100 6 0 0 0 0 0
11/25/2022... 49 0 0 0 0 0 0 11/25/2022... 100 4 0 0 0 0 0
11/25/2023... 44 0 0 0 0 0 0 11/25/2023... 99 3 0 0 0 0 0
11/25/2024... 40 0 0 0 0 0 0 11/25/2024... 90 * 0 0 0 0 0
11/25/2025... 37 0 0 0 0 0 0 11/25/2025... 81 0 0 0 0 0 0
11/25/2026... 33 0 0 0 0 0 0 11/25/2026... 71 0 0 0 0 0 0
11/25/2027... 28 0 0 0 0 0 0 11/25/2027... 61 0 0 0 0 0 0
11/25/2028... 24 0 0 0 0 0 0 11/25/2028... 50 0 0 0 0 0 0
11/25/2029... 19 0 0 0 0 0 0 11/25/2029... 39 0 0 0 0 0 0
11/25/2030... 14 0 0 0 0 0 0 11/25/2030... 26 0 0 0 0 0 0
11/25/2031... 7 0 0 0 0 0 0 11/25/2031... 13 0 0 0 0 0 0
11/25/2032... 0 0 0 0 0 0 0 11/25/2032... 0 0 0 0 0 0 0
Weighted Weighted
Average Average
Life(1) to Life(1) to
Maturity Maturity
(Yrs.)....... 18.67 4.49 3.21 2.51 2.01 1.62 1.42 (Yrs.)..... 25.91 9.66 6.80 5.31 4.66 4.67 5.47
Optional Optional
Termination Termination
(Yrs.)....... 18.59 4.39 3.14 2.46 1.98 1.61 1.42 (Yrs.)..... 25.76 8.89 6.20 4.83 4.29 4.33 3.75
(1) The weighted average life is determined by (i) multiplying the amount
of each principal payment by the number of years from the date of
issuance to the related distribution date, (ii) adding the results and
(iii) dividing the sum by the initial certificate principal balance
for the applicable class.
* Indicates a number that is greater than zero but less than 0.5%.
S-35
PERCENTAGE OF INITIAL CERTIFICATE PRINCIPAL BALANCE
Class M-2 Scenario Class B Scenario
--------------------------------------------- --------------------------------------------
I II III IV V VI VII I II III IV V VI VII
- -- --- -- - -- --- - -- --- -- - -- ---
Initial Percent 100% 100% 100% 100% 100% 100% 100% Initial Percent 100% 100% 100% 100% 100% 100% 100%
11/25/2003... 100 100 100 100 100 100 100 11/25/2003... 100 100 100 100 100 100 100
11/25/2004... 100 100 100 100 100 100 100 11/25/2004... 100 100 100 100 100 100 100
11/25/2005... 100 100 100 100 100 100 100 11/25/2005... 100 100 100 100 100 100 100
11/25/2006... 100 100 79 56 39 26 30 11/25/2006... 100 100 79 56 39 26 14
11/25/2007... 100 91 60 39 24 15 8 11/25/2007... 100 91 60 39 24 11 2
11/25/2008... 100 76 46 27 15 8 1 11/25/2008... 100 76 46 27 12 2 0
11/25/2009... 100 63 35 19 10 2 0 11/25/2009... 100 63 35 18 4 0 0
11/25/2010... 100 53 27 13 6 0 0 11/25/2010... 100 53 27 9 0 0 0
11/25/2011... 100 44 21 9 * 0 0 11/25/2011... 100 44 20 4 0 0 0
11/25/2012... 100 36 16 6 0 0 0 11/25/2012... 100 36 13 0 0 0 0
11/25/2013... 100 30 12 2 0 0 0 11/25/2013... 100 30 7 0 0 0 0
11/25/2014... 100 25 9 0 0 0 0 11/25/2014... 100 25 3 0 0 0 0
11/25/2015... 100 20 7 0 0 0 0 11/25/2015... 100 20 0 0 0 0 0
11/25/2016... 100 17 3 0 0 0 0 11/25/2016... 100 14 0 0 0 0 0
11/25/2017... 100 13 0 0 0 0 0 11/25/2017... 100 9 0 0 0 0 0
11/25/2018... 100 11 0 0 0 0 0 11/25/2018... 100 5 0 0 0 0 0
11/25/2019... 100 9 0 0 0 0 0 11/25/2019... 100 2 0 0 0 0 0
11/25/2020... 100 7 0 0 0 0 0 11/25/2020... 100 0 0 0 0 0 0
11/25/2021... 100 4 0 0 0 0 0 11/25/2021... 100 0 0 0 0 0 0
11/25/2022... 100 1 0 0 0 0 0 11/25/2022... 100 0 0 0 0 0 0
11/25/2023... 99 0 0 0 0 0 0 11/25/2023... 99 0 0 0 0 0 0
11/25/2024... 90 0 0 0 0 0 0 11/25/2024... 90 0 0 0 0 0 0
11/25/2025... 81 0 0 0 0 0 0 11/25/2025... 81 0 0 0 0 0 0
11/25/2026... 71 0 0 0 0 0 0 11/25/2026... 71 0 0 0 0 0 0
11/25/2027... 61 0 0 0 0 0 0 11/25/2027... 61 0 0 0 0 0 0
11/25/2028... 50 0 0 0 0 0 0 11/25/2028... 50 0 0 0 0 0 0
11/25/2029... 39 0 0 0 0 0 0 11/25/2029... 39 0 0 0 0 0 0
11/25/2030... 26 0 0 0 0 0 0 11/25/2030... 26 0 0 0 0 0 0
11/25/2031... 13 0 0 0 0 0 0 11/25/2031... 9 0 0 0 0 0 0
11/25/2032... 0 0 0 0 0 0 0 11/25/2032... 0 0 0 0 0 0 0
Weighted Weighted
Average Average
Life(1) to Life(1) to
Maturity Maturity
(Yrs.)....... 25.90 9.57 6.74 5.22 4.46 4.14 4.04 (Yrs.)....... 25.86 9.28 6.51 5.02 4.23 3.81 3.54
Optional Optional
Termination Termination
(Yrs.)....... 25.76 8.89 6.20 4.80 4.13 3.87 3.73 (Yrs.)....... 25.76 8.89 6.20 4.78 4.05 3.66 3.41
(1) The weighted average life is determined by (i) multiplying the amount
of each principal payment by the number of years from the date of
issuance to the related distribution date, (ii) adding the results and
(iii) dividing the sum by the initial certificate principal balance
for the applicable class.
* Indicates a number that is greater than zero but less than 0.5%.
S-36
The Class A-IO and Class S Certificates
The Class A-IO and Class S Certificates are entitled to distributions
of interest only and are not entitled to distributions of principal. The Class
A-IO and Class S Certificates do not have a principal balance but will, in each
case, accrue interest based on the sum of two notional principal balances; each
such notional principal balance will relate to a separate loan group. Following
the thirtieth distribution date, the Class A-IO Certificates will not be
entitled to distributions of any kind. Following the thirty-sixth distribution
date, the Class S Certificates will be entitled to distributions of interest
only in respect of the S-I Component.
As indicated in the table below, the yield to investors on the Class
A-IO and Class S Certificates will be sensitive to a high rate of principal
payments (including prepayments) on the mortgage loans, which generally can be
repaid at any time (subject, in certain cases, to payment of a prepayment
penalty). Additionally, the yield to investors on the Class S Certificates will
be highly sensitive to the value of one month LIBOR, and will vary inversely
with such value. In other words, as the value of one month LIBOR increases, the
pass-through rate on these Certificates will decrease. If one month LIBOR equals
or exceeds the Class S Strike Rate (which is likely to represent an historically
low level of one month LIBOR), the pass-through rate on the Class S Certificates
will be zero. If LIBOR does not decrease from its current level, the yield on
the Class S Certificates will be negative.
The information set forth in the following tables were prepared on the
basis of the modeling assumptions and the assumption that the purchase price of
the Class A-IO and Class S Certificates (expressed as a percentage of its
original notional principal balance) is as indicated in such table and does not
include accrued interest. The yields shown for the Class S Certificates will
assume different constant values of one month LIBOR. The assumed purchase prices
are not necessarily those at which actual sales will occur. Additionally, the
yields set forth in the tables below were calculated by determining the monthly
discounted rates that, when applied to the applicable assumed stream of cash
flow to be paid on the certificates, would cause the discounted present value of
the assumed stream of cash flow to equal the assumed purchase prices plus
accrued interest, if any, and converting such monthly rates to corporate bond
equivalent rates. Such calculations do not take into account variations that may
occur in the interest rates at which investors may be able to reinvest funds
received by them as distributions on the certificates and consequently do not
purport to reflect the return on any investment in the classes when such
reinvestment rates are considered.
Sensitivity of Class A-IO Certificates to Prepayments
(Pre-Tax Yields to Initial Clean-up Call Date)
Assumed Price 8.782417%
CPR
30% 40% 50% 60% 70%
-------------------------------------------------------------------------
4.650% 4.650% 4.650% 4.574% (16.695)%
-------------------------------------------------------------------------
S-37
Sensitivity of Class S Certificates to Prepayments
(Pre-Tax Yields to Initial Clean-up Call Date)
Assumed Price 0.471495%*
CPR
---
One Month LIBOR 20% 25% 30% 35% 40%
--------------------------------- ----------- ----------- ---------- ------------ ------------
1.44%.......................... 6.897% 0.722% (5.197)% (10.718)% (15.613)%
1.19%.......................... 82.221% 74.752% 67.461% 60.269% 53.126%
---------------
*Assumes that the Class S Strike Rate equals 1.69000%.
There is no assurance that prepayments will occur at any constant
percentage or in accordance with any of the prepayment assumptions.
Payment Delay Feature
The effective yield to the holders of group I senior certificates
(other than the Class AF-1 Certificates) and the Class A-IO, will be lower than
the yield otherwise produced by the related pass-through rate and the purchase
price of those certificates because principal and interest distributions will
not be payable to holders until at least the 25th day of the month following the
month of accrual (without any additional distributions of interest or earnings
thereon in respect of such delay).
DESCRIPTION OF THE OFFERED CERTIFICATES
General
The certificates to be issued by the trust will consist of:
o the following group I senior certificates, all of which are
offered by this prospectus supplement:
o Class AF-1, Class AF-2, Class AF-3, Class AF-4, Class AF-5
and Class AF-6 Certificates;
o the following group II senior certificates, all of which are
offered by this prospectus supplement:
o Class AV Certificates;
o the following interest only certificates, which are offered by
this prospectus supplement:
o Class A-IO and Class S Certificates;
o the following subordinate certificates, all of which are offered
by this prospectus supplement:
o the Class M-1, Class M-2 and Class B Certificates; and
S-38
o the Class P, Class C and Class R Certificates, which are not
offered hereby.
The Class M-1 Certificates are subordinate in right of payment to the
Class A Certificates; the Class M-2 Certificates are subordinate in right of
payment to the Class A and Class M-1 Certificates; and the Class B Certificates
are subordinate in right of payment to the Class A, Class M-1 and Class M-2
Certificates, in each case to the extent described herein. See "--Distributions
- -- Distributions of Principal."
The Class A-IO Certificates consist of two non-separable payment
components, the "A-IO-I Component" and the "A-IO-II Component." The Notional
Principal Balances of the A-IO-I and A-IO-II Component initially will be equal
to $135,000,000 and $176,229,000, respectively. Interest distributable to
holders of the Class A-IO Certificates will be calculated on the basis of
interest accrued on the Notional Principal Balances of the A-IO-I Component and
the A-IO-II Component during the first thirty accrual periods. Thereafter, no
further interest will accrue on the Class A-IO Certificates and no further
distributions will be made on the Class A-IO Certificates.
The Class S Certificates also consist of two non-separable payment
components, the "S-I Component" and the "S-II Component." The Notional Principal
Balance of the S-II Component will be reduced to zero after the 36th
distribution date following the closing date; accordingly, no interest will
accrue on the S-II Component thereafter.
Significant defined terms that are necessary to develop an
understanding of the manner in which distributions will be made on the offered
certificates appear in the Glossary at the end of this prospectus supplement.
Persons in whose names certificates are registered in the certificate
register maintained by the trustee are the holders of the certificates. For as
long as the offered certificates are in book-entry form with DTC, the only
holder of the offered certificates (as the term holder is used in the agreement)
for the trust will be Cede & Co., a nominee of DTC. No beneficial owner will be
entitled to receive a definitive certificate representing the beneficial owner's
interest in the trust, except in the event that physical certificates are issued
under limited circumstances set forth in the agreement. All references in this
prospectus supplement and the accompanying prospectus to the holders of offered
certificates shall mean and include the rights of holders as such rights may be
exercised through DTC and its participating organizations, except as otherwise
specified in the agreement. See "Description of the Offered Certificates --
Book-entry Registration of the Offered Certificates" herein.
As described under "The Mortgage Loan Pool," the mortgage loan pool is
divided into group I, which contains mortgage loans having fixed interest rates
and group II, which contains mortgage loans having adjustable interest rates.
The agreement requires that the trustee create a distribution account.
All funds in that account must be invested and reinvested, as directed by the
master servicer, in permitted investments. See "The Agreement -- Administration
of Accounts" in the prospectus.
One day prior to the related distribution date or, if that day is not a
business day, the immediately preceding business day, the master servicer is
required to withdraw from the master servicer custodial account and remit to the
distribution account an amount equal to the interest
S-39
funds and principal funds (less the master servicing fee for that distribution
date) with respect to each group for that distribution date.
Distributions
General. Distributions on the offered certificates (other than the
Class AF-1, Class AV, Class M-1, Class M-2 and Class B Certificates) will be
made on each distribution date to holders of record as of the last business day
of the month immediately preceding the calendar month in which the distribution
date occurs, or the closing date in the case of the first distribution date, in
an amount equal to the product of the holder's percentage interest and the
amount to be distributed to that class on the distribution date. Distributions
on the Class AF-1, Class AV, Class M-1, Class M-2 and Class B Certificates will
be made on each distribution date to holders of record as of the business day
immediately preceding that distribution date in an amount equal to the product
of the holder's percentage interest and the amount to be distributed to that
class on the distribution date. The percentage interest represented by any
certificate will be equal to the percentage obtained by dividing the certificate
principal balance of the certificate by the certificate principal balance of all
certificates of the same class.
Distributions of Interest. On each distribution date, the amount of
interest distributable with respect to the group I senior certificates (other
than the Class AF-1 Certificates) and the Class A-IO is the interest which has
accrued on those certificates at the related pass-through rate during the
calendar month immediately preceding the calendar month in which the
distribution date occurs. On each distribution date, interest distributable with
respect to the Class AF-1 Certificates, the group II senior certificates, the
Class S Certificates and the subordinate certificates is the interest which has
accrued on those certificates at the then applicable pass-through rate from and
including the preceding distribution date (or from the closing date in the case
of the first distribution date) to and including the day prior to the current
distribution date. Each period referred to in the prior sentence relating to the
accrual of interest is an accrual period for the related distribution date.
All calculations of interest on the group I senior certificates (other
than the Class AF-1 Certificates) and Class A-IO Certificates will be made on
the basis of a 360-day year assumed to consist of twelve 30-day months (30/360).
All calculations of interest on the Class AF-1 Certificates, the group II senior
certificates and the Class M-1, Class M-2, Class B and Class S Certificates will
be made on the basis of the actual number of days in each monthly accrual period
and a year of 360 days (actual/360).
On each distribution date, the Interest Funds with respect to each
group will be distributed in the following order of priority:
o first, from interest collections on each mortgage loan group, to
each related class of senior certificates and the related
component of the Class A-IO and Class S Certificates, the Current
Interest and any Interest Carry Forward Amount for such class on
that distribution date; provided, however, that, in the case of
each group, any related shortfall in available amounts will be
applied on a pro rata basis among such classes;
o second, the remaining amount for each mortgage loan group will be
combined and applied in the following order of priority:
S-40
o to the Class M-1 Certificates, the Current Interest for that
class and distribution date;
o to the Class M-2 Certificates, the Current Interest for that
class and distribution date;
o to the Class B Certificates, the Current Interest for that
class and distribution date; and
o any remainder will be treated as Excess Interest and
distributed as described below under the subheading "--
Excess Interest" herein.
The pass-through rate for the Class AF-1, Class AV, Class M-1, Class
M-2 and Class B Certificates will be equal to the lesser of (i) the Formula Rate
and (ii) the applicable Net WAC Cap.
o The Formula Rate for each such class is the lesser of (i) one
month LIBOR plus the applicable margin set forth on page S-2 and
(ii) the Maximum Cap Rate.
The pass-through rate of the Class AF-2, Class AF-3, Class AF-4, Class
AF-5 and Class AF-6 Certificates is the lesser of (i) the per annum rate for
such class set forth on page S-2, and (ii) the Group I Net WAC Cap.
After the Clean-Up Call Date, the pass-through rates on the Class AF-5
and Class AF-6 Certificates will increase by 0.50% and the spread over one month
LIBOR for the Class AV, Class M-1, Class M-2 and Class B Certificates will
increase to 0.800%, 1.125%, 2.5875%, and 3.975%, respectively.
The pass-through rate of the Class A-IO Certificates is 5.000% per
annum. The per annum pass-through rate of the Class S Certificates is the
greater of (i) the Class S Strike Rate minus one month LIBOR and (ii) 0.00%.
o Interest will accrue on the Class A-IO and Class S Certificates
on the basis of the Notional Principal Balance of each component
of such class.
Distributions of Principal. On each distribution date, the Principal
Distribution Amount for that distribution date with respect to each group is
required to be distributed as follows:
o The Class A Principal Distribution Amount for Group I will be
distributed as follows:
o first to the Class AF-6 Certificates in an amount up to the
Class AF-6 Distribution Amount for such date, until the
certificate principal balance thereof has been reduced to
zero; and second sequentially to the Class AF-1, Class AF-2,
Class AF-3, Class AF-4, Class AF-5 and Class AF-6
Certificates, in that order, until the certificate principal
balance of such certificates has been reduced to zero;
provided, however, that on and after any distribution date
on which the certificate principal balance of the
subordinate certificates has been reduced to zero, such
amounts will be distributed on a pro rata basis, and not
sequentially, among such classes.
S-41
o The Class A Principal Distribution Amount for Group II will be
distributed to the Class AV Certificates until the certificate
principal balance thereof has been reduced to zero.
o In the event the certificate principal balance of (A) the group I
senior certificates or (B) the group II senior certificates, has
been reduced to zero, on each distribution date thereafter
principal distributions otherwise distributable to such retired
certificates will be applied to the remaining senior certificates
related to the other mortgage loan group. Any such distributions
in respect of the group I senior certificates will be made in the
order of priority described above.
o The combined Principal Distribution Amount of all groups
remaining after distributions to the senior certificates
described above will be distributed in the following order of
priority:
o to the Class M-1 Certificates, the Class M-1 Principal
Distribution Amount until the certificate principal balance
thereof has been reduced to zero;
o to the Class M-2 Certificates, the Class M-2 Principal
Distribution Amount until the certificate principal balance
thereof has been reduced to zero; and
o to the Class B Certificates, the Class B Principal
Distribution Amount until the certificate principal balance
thereof has been reduced to zero.
Notwithstanding the foregoing, before the Stepdown Date, or while a
Trigger Event exists, the Principal Distribution Amount for each group will be
distributed in the following order of priority:
o exclusively to the related Class A Certificates (in the case of
Group I, in the manner described above) until the certificate
principal balance of the Class A Certificates has been reduced to
zero;
o after the certificate principal balance of the Class A
Certificates has been reduced to zero, exclusively to the Class
M-1 Certificates until the certificate principal balance of the
Class M-1 Certificates has been reduced to zero;
o after the certificate principal balance of the Class M-1
Certificates has been reduced to zero, exclusively to the Class
M-2 Certificates until the certificate principal balance of the
Class M-2 Certificates has been reduced to zero; and
o after the certificate principal balance of the Class M-2
Certificates has been reduced to zero, exclusively to the Class B
Certificates until the certificate principal balance of the Class
B Certificates has been reduced to zero.
On each distribution date, the Released Principal Amount, if any, will
be distributed to the holder of the Class C Certificates.
S-42
Excess Interest and Pledged Prepayment Penalty Cashflow
The certificates of each group will have the benefit of a portion of
prepayment penalties paid on mortgage loans in the related group. Prepayment
penalties not allocated to the offered certificates will be distributed to the
holders of the Class P Certificates. On each distribution date, Pledged
Prepayment Penalties with respect to each group will be applied to pay any
shortfall in interest on certificates in the related group resulting from the
application of a cap.
On each distribution date, Interest Funds from each group not otherwise
required to be distributed as described under the heading
"--Distributions--Distributions of Interest" and Net Pledged Prepayment
Penalties will be distributed in the following order of priority:
o on each of the first four distribution dates only, to the Basis
Risk Reserve Fund, any Basis Risk Payment for such date;
o on each of the first four distribution dates only, from amounts
on deposit in the Basis Risk Reserve Fund, to the Class A
Certificates on a pro rata basis, any Cap Carryover Amount
applicable to the Class A Certificates;
o on each of the first four distribution dates only, from amounts
on deposit in the Basis Risk Reserve Fund, sequentially, to the
Class M-1, Class M-2 and Class B Certificates, in that order, any
Cap Carryover Amount applicable to the Class M-1, Class M-2 and
Class B Certificates;
o the Principal Percentage for Group I of the Extra Principal
Distribution Amount will be added to the Principal Distribution
Amount for Group I and the Principal Percentage for Group II of
the Extra Principal Distribution Amount will be added to the
Principal Distribution Amount for Group II;
o to the Class M-1 Certificates, any Interest Carry Forward Amount
for that class;
o to the Class M-1 Certificates, any Unpaid Realized Loss Amount
for that class;
o to the Class M-2 Certificates, any Interest Carry Forward Amount
for that class;
o to the Class M-2 Certificates, any Unpaid Realized Loss Amount
for that class;
o to the Class B Certificates, any Interest Carry Forward Amount
for that class;
o to the Class B Certificates, any Unpaid Realized Loss Amount for
that class;
o to the Basis Risk Reserve Fund, any Basis Risk Payment for such
date;
o from amounts in the Basis Risk Reserve Fund, to the Class A
Certificates on a pro rata basis, any Cap Carryover Amount
applicable to the Class A Certificates;
o from amounts in the Basis Risk Reserve Fund, sequentially, to the
Class M-1, Class M-2 and Class B Certificates, in that order, any
Cap Carryover Amount applicable to the Class M-1, Class M-2 and
Class B Certificates; and
S-43
o to the other certificates to the extent of any remaining Unpaid
Realized Loss Amount;
o to the Class C and Class R Certificates, the remaining amount.
The level of Excess Interest will depend on, among other things:
o the rate at which prepayment penalties are collected;
o the overcollateralization level of the mortgage loans;
o the loss experience of the mortgage loans;
o the servicing fee at any time (which escalates over time as
described herein);
o the level of one month LIBOR and the indices for the adjustable
rate mortgage loans; and
o the extent to which the weighted average of the net rates of the
loans in all loan groups exceeds the weighted average of the pass
through rates of the offered certificates.
No assurance can be given as to the levels of Excess Interest at any time. For a
more detailed description of the factors affecting the levels of Excess Interest
and prepayment penalties see "Prepayment and Yield Considerations--General."
Realized Losses
Prior to each distribution date, the servicer will determine whether
any Realized Losses have occurred on the mortgage loans. As to any liquidated
mortgage loan (i.e., a loan that the servicer has determined that all amounts
recoverable on such loan have been received), a Realized Loss is calculated at
final liquidation and is generally equal to the amount by which the unpaid
principal balance thereof exceeds the related net liquidation proceeds. As to
any Nonrecoverable Mortgage Loan (i.e., a defaulted loan as to which the
servicer has determined that estimated liquidation expenses will exceed expected
liquidation proceeds), a Realized Loss is calculated by the servicer at the time
of such determination and is generally equal to the amount by which the unpaid
principal balance thereof exceeds the estimated net liquidation proceeds of the
loan.
If, on any distribution date, the aggregate certificate principal
balance of the certificates (after giving effect to all distributions to be made
on that distribution date) exceeds the aggregate principal balance of the
mortgage loans (plus any amounts on deposit in the pre-funding account), the
certificate principal balance of the subordinate certificates (but not the Class
A Certificates) will be reduced by an amount equal to that excess, which is an
Applied Realized Loss Amount, in inverse order of seniority:
o first, to the Class B Certificates, until the certificate
principal balance of that class has been reduced to zero;
o second, to the Class M-2 Certificates, until the certificate
principal balance of that class has been reduced to zero; and
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o third, to the Class M-1 Certificates, until the certificate
principal balance of that class has been reduced to zero.
If the certificate principal balance of a class of subordinate
certificates is reduced, that class thereafter will be entitled to distributions
of interest and principal only with respect to the certificate principal balance
so reduced. The earlier the reduction of the certificate principal balance of a
class of subordinate certificates (e.g., as a result of a Nonrecoverable
Mortgage Loan), the greater the effect on the accrual of interest on such class.
On subsequent distribution dates, however, as described above, Excess Interest,
if any, will be applied to reduce Unpaid Realized Loss Amounts in direct order
of seniority.
Since a Realized Loss on a Nonrecoverable Mortgage Loan is calculated
before the liquidation of such loan by estimating net liquidation proceeds, the
effect to certificateholders (i.e., a reduction in available
overcollateralization or, after such overcollateralization has been reduced to
zero, a reduction of the certificate principal balance of the subordinate
certificates) will be experienced by certificateholders in advance of the time
that would have been the case if such Realized Loss had been determined at the
time of liquidation. In the event that the servicer ultimately recovers an
amount in respect of a Nonrecoverable Mortgage Loan in excess of the Realized
Loss previously calculated for such loan ("Subsequent Recoveries"), such amounts
will be applied
o first, to the most senior class of subordinate certificates then
outstanding in reduction of any Applied Realized Loss Amount
previously allocated to such class (which amount will not further
reduce the certificate principal balance of such class); and
o second, to increase Interest Funds for the related group on such
date.
Notwithstanding any application of a Subsequent Recovery to a class of
subordinate certificates to reduce any Unpaid Realized Loss Amount outstanding
to such class, no payment will be made in respect of the amount of interest that
would have accrued on such class of certificates had such Unpaid Realized Loss
Amount not been allocated thereto.
Although the certificate principal balance of Class A Certificates will
not be reduced on account of Realized Losses even if the certificate principal
balances of all the subordinate certificates have been reduced to zero, under
certain loss scenarios, the amount available to be distributed to the Class A
Certificates as principal may be less than the certificate principal balances of
the Class A Certificates.
Pre-Funding Account
On the closing date, the seller will deposit approximately $299,918,483
into a separate pre-funding account to be maintained in the name of the trustee
for the benefit of the holders of the group I certificates and group II
certificates, as applicable. Approximately $89,067,322 of the original
pre-funded amount will be used to acquire group I subsequent mortgage loans and
approximately $210,851,160 of the original pre-funded amount will be used to
acquire group II subsequent mortgage loans, in each case during the period
beginning on the closing date and generally terminating on the earlier to occur
of:
o the date on which the amount on deposit in the pre-funding
account, excluding any interest or other investment earnings, is
less than $100,000; and
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o February 7, 2003.
The original pre-funded amount will be reduced during the pre-funding
period by the amount used to purchase subsequent mortgage loans in accordance
with the agreement for the trust. Any pre-funded amount, excluding any interest
or other investment earnings, remaining at the end of the pre-funding period
will be included as part of principal funds and will be distributed to holders
of the group I certificates and group II certificates, respectively, then
entitled to distributions of principal on the first distribution date thereafter
as a prepayment of principal in reduction of the related certificate principal
balances. This will result in an unscheduled distribution of principal in
respect of the related certificates on that date.
Amounts on deposit in the pre-funding account will be invested in
permitted investments. All interest and any other investment earnings on amounts
on deposit in the pre-funding account will not be paid to the seller. The
pre-funding account will not be an asset of any REMIC established under the
agreement for the trust. For federal income tax purposes, the pre-funding
account will be owned by, and all interest and other investment earnings on
amounts in the pre-funding account will be taxable to, the seller.
Calculation Agent
The master servicer has appointed the Trustee to serve as calculation
agent for the trust. As calculation agent, the Trustee will be responsible for
calculating and distributing to holders of certificates all amounts of principal
and interest due on each distribution date.
Calculation of One Month LIBOR
On each interest determination date, the calculation agent, as agent of
the master servicer, will determine one month LIBOR.
One month LIBOR means, as of any interest determination date, the rate
for one-month U.S. dollar deposits which appears on the Telerate Page 3750, as
of 11:00 a.m., London time, on that interest determination date. If that 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 United States dollars are offered
by the reference banks at approximately 11:00 a.m., London time, on that day to
prime banks in the London interbank market for a period equal to the relevant
accrual period (commencing on the first day of that accrual period). The
calculation agent, as agent for the master servicer, will request the principal
London office of each of the reference banks to provide a quotation of its rate.
If at least two such quotations are provided, the rate for that day will be the
arithmetic mean of the quotations. If fewer than two quotations are provided as
requested, the rate for that day will be the arithmetic mean of the rates quoted
by major banks in New York City, selected by the master servicer, at
approximately 11:00 a.m., New York City time, on that day for loans in United
States dollars to leading European banks for a period equal to the relevant
accrual period (commencing on the first day of that accrual period).
Telerate Page 3750 means the display page currently so designated on
the Bridge Telerate Market Report (or another page that may replace that page on
that service for the purpose of displaying comparable rates or prices) and
reference banks means leading banks selected by the master servicer and engaged
in transactions in Eurodollar deposits in the international Eurocurrency market.
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Book-Entry Registration of the Offered Certificates
The offered certificates will be book-entry certificates. Beneficial
owners may elect to hold their book-entry certificates directly through DTC in
the United States or upon request Clearstream Banking, societe anonyme (formerly
Cedelbank), or Euroclear in Europe if they are participants of those systems or
indirectly through organizations which are participants. The book-entry
certificates will be issued in one or more certificates per class of offered
certificates which in the aggregate equal the principal balance of the offered
certificates and will initially be registered in the name of Cede & Co., the
nominee of DTC. See "Description of the Certificates -- Book-Entry Procedures"
and "-- Global Clearance, Settlement and Tax Documentation Procedures" in the
prospectus.
THE AGREEMENT
The certificates will be issued in accordance with a pooling and
servicing agreement to be dated as of November 1, 2002, among the depositor, the
master servicer, servicer and the trustee. In addition to the provisions of the
agreement summarized elsewhere in this prospectus supplement, there is set forth
below a summary of certain other provisions of the agreement. See also "The
Agreement -- The Trustee," "-- Administration of Accounts," "-- Events of
Default and Remedies," "-- Amendment" and "-- Termination" in the prospectus.
Formation of the Trust
On the closing date, the depositor will create and establish the trust
under the agreement and will sell without recourse the initial mortgage loans to
the trust, and the trust will issue the certificates under the terms of the
agreement. During the pre-funding period, the depositor may sell without
recourse subsequent mortgage loans to the trust. The prospectus contains
important additional information regarding the terms and conditions of the
certificates. The depositor will provide to any prospective or actual holder of
offered certificates, upon written request, a copy of the agreement without
exhibits. Requests should be addressed to Saxon Asset Securities Company, 4951
Lake Brook Drive, Suite 300, Glen Allen, Virginia 23060, Attention: Secretary.
The trust will consist of:
o the mortgage loans;
o prepayment penalties to the extent described in this prospectus
supplement;
o those assets that are held in any account held for the benefit of
the certificateholders;
o any mortgaged premises acquired on behalf of the
certificateholders by foreclosure or by deed in lieu of
foreclosure;
o the rights of the trustee to receive the proceeds of applicable
insurance policies and funds, if any, required to be maintained
under the terms of the agreement; and
o certain rights of the depositor to the enforcement of
representations and warranties made by the seller relating to the
mortgage loans.
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The offered certificates will not represent an interest in or an
obligation of, nor will the mortgage loans be guaranteed by, the seller, the
depositor, the servicer, the master servicer or the trustee.
Reports to Certificateholders
On each distribution date, the master servicer will report or cause to
be reported to each holder of an offered certificate, by posting to the
trustee's website (www.corporatetrust.db.com) or other means of reporting
described in the agreement:
o with respect to each class of offered certificates based on a
certificate in the original principal amount of $1,000:
o the amount of the aggregate distribution on such
distribution date;
o the amount of the distribution allocable to interest;
o the amount of the distribution allocable to principal,
separately identifying the aggregate amount of any
prepayments, substitution shortfalls, repurchase amounts or
other recoveries of principal included therein, any Extra
Principal Distribution Amount and any Applied Realized Loss
Amount with respect to, and any Unpaid Realized Loss Amount
at, the distribution date;
o the principal balance after giving effect to any distribution
allocable to principal; and
o any Interest Carry Forward Amount;
o any Cap Carryover Amount;
o the weighted average of the mortgage interest rates on the
mortgage loans in each group less the servicing and master
servicing fee rates;
o the Realized Losses for each group for the related period and
cumulatively since the cut-off date;
o the largest mortgage loan balance outstanding in each group;
o the prepayment penalties due from borrowers, collected by the
servicer or the master servicer and transferred to the trust, in
each case for the related prepayment period;
o the servicing fees and master servicing fees allocable to each
group;
o one month LIBOR on the most recent interest determination date;
o the pass-through rates for each class (and whether such rates
have been capped); and
o for each distribution date during the pre-funding period, the
amount, if any, on deposit in the pre-funding account.
Certificateholders may obtain assistance in operating the trustee's website by
calling the trustee's investor relations department at (800) 735-7777.
Delivery and Substitution of Mortgage Loans
The depositor must repurchase any mortgage loan for which the required
documentation is not delivered on the closing date (or subsequent closing date
in the case of subsequent mortgage loans) or reasonably promptly thereafter.
Under the limited circumstances specified in the agreement, the depositor may
substitute substantially similar mortgage loans for mortgage
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loans initially delivered. It is anticipated that any permitted substitution
will not materially change the characteristics of the mortgage pools, as set
forth above. See "The Trusts -- The Mortgage Loans -- General," and "--
Substitution of Mortgage Loans" in the prospectus.
The Trustee
Deutsche Bank Trust Company Americas will act as trustee of the trust.
The mailing address of the trustee's Corporate Trust Office is Deutsche Bank
Trust Company Americas, 1761 East St. Andrew Place, Santa Ana, California 92705,
Attention: Saxon 2002-3 (SX0203), and its telephone number is (714) 247-6000.
Voting Rights
The voting rights of the trust will be allocated as follows:
o 0.50% to the Class P Certificates;
o 1% to each of the Class A-IO and Class S Certificates for so long
as such Classes are outstanding;
o 1% to each of the Class C and Class R Certificates; and
o the remainder to the classes of offered certificates (other than
the Class A-IO and Class S Certificates) in proportion to their
respective outstanding certificate principal balances.
Termination
The trust will terminate upon the payment to the holders of all
certificates of all amounts required to be paid to the holders and upon the last
to occur of:
o the final payment or other liquidation, or any related advance,
of the last mortgage loan; and
o the disposition of all property acquired in respect of any
mortgage loan remaining in the trust.
By the Master Servicer. At its option, the master servicer may, on any
distribution date when the aggregate principal balance of the mortgage loans is
less than 10% of the sum of:
o the aggregate principal balances of the initial mortgage loans as
of the cut-off date; and
o any amounts initially deposited in the pre-funding account,
purchase from the trust all remaining mortgage loans, in whole only, and other
property acquired by foreclosure, deed in lieu of foreclosure or otherwise then
constituting the trust at a price generally equal to 100% of the aggregate
principal balance of the mortgage loans (or, in the case of Nonrecoverable
Mortgage Loan, at the Nonrecoverable Mortgage Loan Purchase Price) plus one
month's interest computed as provided in the agreement. The date on which this
optional repurchase is made is known as the Clean-Up Call Date.
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Sale of Mortgage Loans
In connection with the sale of mortgage loans, the depositor will be
required to deliver a file with respect to each mortgage loan consisting of:
o the original note endorsed in blank or to the order of the
trustee or a custodian acting on behalf of the trustee, or a lost
note affidavit in lieu thereof, with all prior and intervening
endorsements (the seller, in some instances, having instructed
the party selling a mortgage loan to the seller to have required
the originator to endorse the original note directly to such
custodian);
o the original recorded security instrument or a certified copy,
naming the originator of the related servicer, trustee or
custodian as mortgagee, or if the original security instrument has
been submitted for recordation but has not been returned by the
applicable public recording office, a photocopy certified by an
officer of the related servicer, title company,
closing/settlement-escrow agent or closing attorney;
o each original recorded intervening assignment of the security
instrument as may be necessary to show a complete chain of title
to the related servicer, trustee or custodian (the seller, in some
instances, having instructed the party selling a mortgage loan to
the seller to record an assignment directly from the originator to
the custodian) or if any assignment has been submitted for
recordation but has not been returned from the applicable public
recording office or is otherwise not available, a copy certified
by an officer of the related servicer;
o if an assignment of the security instrument to the related
servicer has been recorded or sent for recordation, an original
assignment of the security instrument from the servicer in blank
or to the trustee or custodian in recordable form;
o an original title insurance policy, certificate of title insurance
or written commitment or a copy certified as true and correct by
the insurer; and
o if indicated on the applicable schedule, the original or certified
copies of each assumption agreement, modification agreement,
written assurance or substitution agreement, if any.
The custodian is required to review each mortgage loan note and provide
certification regarding the existence of such mortgage loan notes on or before
the closing date and the custodian is required to review the remainder of the
mortgage loan file within a specified number of days after the closing date and
provide a final certification on the entire mortgage loan file prior to the
first anniversary of the closing date.
On the closing date, the depositor will also assign to the trustee all
the depositor's right, title and interest in the sales agreement between the
seller and the depositor insofar as it relates to the representations and
warranties made therein by the seller in respect of the origination of the
mortgage loans and the remedies provided for breach of such representations and
warranties. Upon discovery by the trustee or the master servicer of a breach of
any representation, warranty or covenant which materially and adversely affects
the interests of the holders of the certificates, the discovering party will
promptly notify the depositor and the seller. The seller will have 60 days from
its discovery or its receipt of a notice to cure the breach or, if required, to
repurchase the mortgage loan or, subject to the conditions in the agreement, to
substitute a qualified
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substitute mortgage loan. See "Origination of Mortgage Loans -Representations
and Warranties" in the prospectus.
Events of Default
The master servicer will have the right to direct the termination of
the servicer if the servicer is in breach under the agreement. In the event of a
termination, the master servicer must appoint a successor servicer to assume the
obligations of the servicer under the agreement, including the obligation to
make advances. See "The Mortgage Loan Pool -Advances and Compensating Interest"
herein. If the master servicer is unable to appoint a successor servicer, the
master servicer will be obligated to service the mortgage loans. Any successor
servicer will be entitled to compensation arrangements similar to, but no
greater than, those provided to the predecessor servicer. See "Servicing of
Mortgage Loans" in the prospectus.
In addition, upon the occurrence of a Servicing Trigger Event, the
trustee will, upon direction of a majority of the holders of outstanding
certificates, remove the servicer and appoint a successor servicer.
Governing Law
The agreement and each certificate will be construed in accordance with
and governed by the laws of the State of New York applicable to agreements made
and to be performed therein.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
General
The agreement provides that the trust, exclusive of (i) the assets held
in the pre-funding account and the Basis Risk Reserve Fund and (ii) the
prepayment penalties received on the mortgage loans other than the Pledged
Prepayment Penalties, will comprise one or more lower tier REMICs (each, a
"Lower Tier REMIC") and a single upper tier REMIC (the "Upper Tier REMIC") in a
tiered structure. Each of the Lower Tier REMICs and the Upper Tier REMIC will
designate a single class of interests as the residual interest in that REMIC.
The Class R Certificate will represent ownership of the residual interests in
each of the REMICs. Elections will be made to treat each of the Lower Tier
REMICs and the Upper Tier REMIC as a REMIC for federal income tax purposes.
Upon the issuance of the offered certificates, McKee Nelson LLP ("Tax
Counsel") will deliver its opinion to the effect that, assuming compliance with
the agreement, each of the Lower Tier REMICs and the Upper Tier REMIC will
qualify as a REMIC within the meaning of Section 860D of the Internal Revenue
Code of 1986, as amended (the "Code"). In addition, Tax Counsel will deliver an
opinion to the effect that the Basis Risk Reserve Fund is an "outside reserve
fund" that is beneficially owned by the beneficial owner of the Class C
Certificate. Moreover, Tax Counsel will deliver an opinion to the effect that
the rights of the beneficial owners of the offered certificates to receive
payments from the Basis Risk Reserve Fund represent interests in a notional
principal contract for federal income tax purposes.
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Tax Treatment of the Class A-IO Certificate
The Class A-IO Certificate will represent ownership of REMIC regular
interests for federal income tax purposes. See "Material Federal Income Tax
Consequences -- REMIC Certificates" in the Prospectus. In addition, the Class
A-IO Certificate will be issued with original issue discount ("OID"). A
beneficial owner of a certificate issued with OID must include the OID in income
as it accrues on a constant yield method, regardless of whether the beneficial
owner receives currently the cash attributable to such OID. See "Material
Federal Income Tax Consequences -- REMIC Certificates -- Original Issue
Discount" in the Prospectus. The prepayment assumption that will be used in
determining the accrual of any OID or market discount will be a rate equal to
100% of the prepayment assumption for both the fixed rate mortgage loans and the
adjustable rate mortgage loans. See "Prepayment and Yield Considerations -
Prepayments and Yields for Offered Certificates" above. No representation is
made that the mortgage loans will prepay at such a rate or at any other rate.
Tax Treatment of the Remaining Offered Certificates
For federal income tax purposes, a beneficial owner of an offered
certificate other than a Class A-IO Certificate (each such offered certificate,
a "Component Certificate") will be treated (i) as holding an undivided interest
in a REMIC regular interest corresponding to that certificate and (ii) as having
entered into a limited recourse interest rate cap contract or, in the case of a
Class S Certificate, a limited recourse interest rate floor contract (in either
case, the "Cap Contract"). The REMIC regular interest corresponding to a
Component Certificate will be entitled to receive interest and principal
payments at the times and in the amounts equal to those made on the Component
Certificate to which it corresponds, except that (i) the interest payments will
be determined without regard to any payments made from the Basis Risk Reserve
Fund, (ii) the interest payments on the REMIC regular interest corresponding to
the Class S Certificates will be determined without regard to any subsequent
mortgage loans in Group II and (iii) the Group II Net WAC Cap will be determined
by reducing the mortgage interest rate of each subsequent mortgage loan in Group
II by the Class S Strike Rate during any time that the principal balance of such
mortgage loan is reflected in the Notional Principal Balance of the S-II
Component. Any amount paid on a Component Certificate in excess of the amounts
payable on the corresponding REMIC regular interest will be treated as having
been paid on such certificate from the Basis Risk Reserve Fund and will be
deemed to have been paid pursuant to the Cap Contract. Consequently, each
beneficial owner of a Component Certificate will be required to report income
accruing with respect to the REMIC regular interest component as discussed under
"Material Federal Income Tax Consequences -- REMIC Certificates" in the
Prospectus. In addition, each beneficial owner of a Component Certificate will
be required to report net income with respect to the Cap Contract component and
will be permitted to recognize a net deduction with respect to the Cap Contract
component, subject to the discussion under "--The Cap Contract Components"
below. Prospective investors should consult their own tax advisors regarding the
consequences to them in light of their own particular circumstances of taxing
separately the two components comprising each Component Certificate.
Allocations
A beneficial owner of a Component Certificate must allocate its
purchase price for the certificate between its components -- the REMIC regular
interest component and the Cap Contract component. For information reporting
purposes the Trustee will assume the Cap Contract components will have nominal
value. Each Cap Contract is difficult to value, and the
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Internal Revenue Service ("IRS") could assert that the value of a Cap Contract
component as of the closing date is greater than the value used for information
reporting purposes. Prospective investors should consider the tax consequences
to them if the IRS were to assert a different value for the Cap Contract
components.
Upon the sale, exchange, or other disposition of a Component
Certificate, the beneficial owner of the certificate must allocate the amount
realized between the components of the certificate based on the relative fair
market values of those components at the time of sale and must treat the sale,
exchange or other disposition as a sale, exchange or disposition of the REMIC
regular interest component and the Cap Contract component. Assuming that the
Component Certificate is held as a "capital asset" within the meaning of Section
1221 of the Code, gain or loss on the disposition of an interest in the Cap
Contract component should be capital gain or loss. For a discussion of the
material federal income tax consequences to a beneficial owner upon disposition
of a REMIC regular interest, see "Material Federal Income Tax Consequences --
REMIC Certificates" in the Prospectus.
Original Issue Discount
The REMIC regular interest component of a Class S Certificate will, and
the REMIC regular interest component of the remaining Component Certificates
may, be issued with OID. A beneficial owner of a certificate must include any
OID with respect to such component in income as it accrues on a constant yield
method, regardless of whether the beneficial owner receives currently the cash
attributable to such OID. See "Material Federal Income Tax Consequences -- REMIC
Certificates -- Original Issue Discount" in the Prospectus. The prepayment
assumption that will be used in determining the accrual of any OID, market
discount, or bond premium, if any, will be a rate equal to 100% of the
prepayment assumption for both the fixed rate mortgage loans and the adjustable
rate mortgage loans. See "Prepayment and Yield Considerations - Prepayments and
Yields for Offered Certificates" above. No representation is made that the
mortgage loans will prepay at such a rate or at any other rate.
The Cap Contract Components
The portion of the overall purchase price of a Component Certificate
attributable to the Cap Contract component must be amortized over the life of
such certificate, taking into account the declining balance of the related REMIC
regular interest component. Treasury regulations concerning notional principal
contracts provide alternative methods for amortizing the purchase price of an
interest rate cap or floor contract. Under one method -- the level yield
constant interest method -- the price paid for an interest rate cap or floor is
amortized over the life of the cap or floor as though it were the principal
amount of a loan bearing interest at a reasonable rate. Prospective investors
are urged to consult their tax advisors concerning the methods that can be
employed to amortize the portion of the purchase price paid for the Cap Contract
component of a Component Certificate.
Any payments made to a beneficial owner of a Component Certificate from
the Basis Risk Reserve Fund will be treated as periodic payments on an interest
rate cap contract or, in the case of a Class S Certificate, an interest rate
floor contract. To the extent the sum of such periodic payments for any year
exceeds that year's amortized cost of the Cap Contract component, such excess
represents net income for that year. Conversely, to the extent that the amount
of that year's amortized cost exceeds the sum of the periodic payments, such
excess shall
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represent a net deduction for that year. Although not clear, net income or a net
deduction should be treated as ordinary income or as an ordinary deduction.
A beneficial owner's ability to recognize a net deduction with respect
to the Cap Contract component is limited under Sections 67 and 68 of the Code in
the case of (i) estates and trusts and (ii) individuals owning an interest in
such component directly or through a "pass-through entity" (other than in
connection with such individual's trade or business). Pass-through entities
include partnerships, S corporations, grantor trusts and non-publicly offered
regulated investment companies, but do not include estates, nongrantor trusts,
cooperatives, real estate investment trusts and publicly offered regulated
investment companies. Further, such a beneficial owner will not be able to
recognize a net deduction with respect to the Cap Contract component in
computing the beneficial owner's alternative minimum tax liability.
Status of the Component Certificates
The REMIC regular interest components of Component Certificates will be
treated as assets described in Section 7701(a)(19)(C) of the Code, and as "real
estate assets" under Section 856(c)(5)(B) of the Code, generally, in the same
proportion that the assets of the trust, exclusive of the assets not included in
any REMIC, would be so treated. In addition, the interest derived from the REMIC
regular interest component of a Component Certificate will be interest on
obligations secured by interests in real property for purposes of Section
856(c)(3) of the Code, subject to the same limitation in the preceding sentence.
The Cap Contract components of the Component Certificate will not qualify,
however, as an asset described in Section 7701(a)(19)(C) of the Code or as a
real estate asset under Section 856(c)(5)(B) of the Code, and any interest
payments funded by the Cap Contract components will not qualify as interest on
obligations secured by mortgages on real property for purposes of Section
856(c)(3) of the Code.
ERISA CONSIDERATIONS
ERISA Consideration
The underwritten certificates are eligible for relief under an
individual exemption issued to J.P. Morgan Securities Inc. on March 28, 2002
(Prohibited Transaction Exemption 2002-19) (the "Exemption"), and may be
purchased by an employee benefit plan or other retirement arrangement that is
subject to the Employment Retirement Income Security Act of 1974, as amended
("ERISA") or to Section 4975 of the Internal Revenue Code of 1986, as amended
(collectively, a "Plan") and that is an "accredited investor" within the meaning
of Rule 501(a)(1) of Regulation D of the Commission under the Securities Act of
1933, or by a person investing on behalf of or with plan assets of such a plan
or arrangement. A fiduciary of any employee benefit plan or other retirement
arrangement subject to ERISA, or the Code, should carefully review with its
legal advisors whether the purchase or holding of underwritten certificates
could give rise to a transaction prohibited or not otherwise permissible under
ERISA or the Code. See "ERISA Considerations" in the accompanying Prospectus for
a description of the requirements for relief under the Exemption.
The rating of an underwritten certificate may change. If a class of
underwritten certificates no longer has a rating of at least BBB- or Baa3 (the
lowest permitted rating), certificates of that class will no longer be eligible
for relief under the Exemption, and consequently may not be purchased by or sold
to a Plan (although a Plan that had purchased a
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certificate of that class when the class had a permitted rating would not be
required by the Exemption to dispose of it).
RATINGS
It is a condition of the issuance of the offered certificates that they
receive ratings as set forth on page S-2.
The ratings do not represent any assessment of the likelihood or rate
of principal prepayments or the likelihood that any Cap Carryover Amount will be
paid.
A security rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. The security rating assigned to the offered
certificates should be evaluated independently of similar security ratings
assigned to other kinds of securities.
The ratings assigned by S&P and Moody's to mortgage pass-through
certificates address the likelihood of the receipt by certificateholders of all
distributions to which certificateholders are entitled. S&P's and Moody's
ratings address the structural and legal aspects associated with the
certificates, including the nature of the underlying mortgage loans. S&P's and
Moody's ratings on mortgage pass-through certificates do not represent any
assessment of the likelihood or rate of principal prepayments.
The initial ratings assigned to the offered certificates do not address
the possibility that holders of the offered certificates might suffer a lower
than anticipated yield in the event of principal payments on the offered
certificates resulting from rapid prepayments of the mortgage loans or the
application of the Extra Principal Distribution Amount as described herein, or
in the event that the trust fund is terminated before the expected final
distribution dates of the offered certificates. The ratings on the offered
certificates do not address the ability of the trust to acquire subsequent
mortgage loans, any potential redemption with respect thereto or the effect on
yield resulting therefrom.
LEGAL INVESTMENT CONSIDERATIONS
Upon the termination of the pre-funding period, the group I senior
certificates, the group II senior certificates and the Class M-1 Certificates
will constitute "mortgage related securities" for purposes of the Secondary
Mortgage Market Enhancement Act of 1984 for so long as they are rated in one of
the two highest rating categories by one or more nationally recognized
statistical rating organizations. As such, they will be legal investments for
particular entities to the extent provided in SMMEA, subject to state laws
overriding SMMEA. In addition, institutions whose investment activities are
subject to review by federal or state regulatory authorities may be or may
become subject to restrictions, which may be retroactively imposed by such
regulatory authorities, on the investment by such institutions in certain forms
of mortgage related securities. Furthermore, some states have enacted
legislation overriding the legal investment provisions of SMMEA.
USE OF PROCEEDS
The depositor will sell the initial mortgage loans to the trust
concurrently with the delivery of the offered certificates. Net proceeds from
the sale of the offered certificates less the
S-55
original pre-funded amount will represent, together with the private
certificates, certain of which may be retained by the depositor or its
affiliates, the purchase price to be paid by the trust to the depositor for the
initial mortgage loans.
LEGAL MATTERS
Legal matters relating to the validity of the issuance of the
certificates will be passed upon for the depositor and the seller by McKee
Nelson LLP. Legal matters relating to the validity of the offered certificates
will be passed upon for the underwriters by Hunton & Williams.
UNDERWRITING
Under the terms and subject to the conditions contained in the
underwriting agreement dated October 30, 2002, the depositor has agreed to cause
the trust to sell to the underwriters named below the following principal
amounts or notional amounts of offered certificates.
Credit Suisse Greenwich
J.P. Morgan First Boston Capital Wachovia
Class Securities Inc. Corporation Markets, Inc. Securities
----- --------------- ------------- ------------- ----------
AF-1 $ 21,825,000 $ 21,825,000 $ 21,825,000 $ 21,825,000
AF-2 10,950,000 10,950,000 10,950,000 10,950,000
AF-3 9,525,000 9,525,000 9,525,000 9,525,000
AF-4 7,175,000 7,175,000 7,175,000 7,175,000
AF-5 7,225,000 7,225,000 7,225,000 7,225,000
AF-6 6,300,000 6,300,000 6,300,000 6,300,000
AV 147,000,000 147,000,000 147,000,000 147,000,000
A-IO 147,875,015 -- -- --
M-1 14,375,000 14,375,000 14,375,000 14,375,000
M-2 5,000,000 5,000,000 5,000,000 5,000,000
B 11,875,000 11,875,000 11,875,000 11,875,000
The depositor intends initially to retain a portion of the Class A-IO
Certificates and all of the Class S Certificates but may offer such certificates
for sale from time to time in the future.
The underwriting agreement provides that the underwriters are obligated
to purchase all of the offered certificates if any are purchased. The
underwriting agreement also provides that if an underwriter defaults, the
purchase commitments of non-defaulting underwriters may be increased or the
offering of the offered certificates may be terminated.
The underwriters will offer the offered certificates for sale from time
to time in one or more transactions (which may include block transactions), in
negotiated transactions or otherwise, or a combination of those methods of sale,
at market prices prevailing at the time of sale, at prices related to prevailing
market prices or at negotiated prices. The underwriters may do so by selling the
offered certificates to or through broker/dealers, who may receive compensation
in the form of underwriting discounts, concessions or commissions from the
underwriters and/or the purchasers of the offered certificates for whom they may
act as agents. In connection with the sale of the offered certificates, the
underwriters may be deemed to have received compensation from the trust in the
form of underwriting discounts, and the underwriters
S-56
may also receive commissions from the purchasers of the offered certificates for
whom they may act as agent. The underwriters and any broker/dealers that
participate with the underwriters in the distribution of the offered
certificates may be deemed to be underwriters, and any discounts or commissions
received by them and any profit on the resale of the offered certificates by
them may be deemed to be underwriting discounts or commissions under the
Securities Act of 1933.
The depositor expects to receive net proceeds (including accrued
interest) of approximately $1,010,763,314 before deducting expenses payable by
it of approximately $600,000.
The depositor and the seller have agreed to indemnify the underwriters
against certain liabilities including liabilities under the Securities Act of
1933, or contribute to payments that the underwriters may be required to make in
that respect.
There is currently no secondary market for the offered certificates.
Each underwriter intends to make a secondary market in the offered certificates
offered by that underwriter but has no obligation to do so. There can be no
assurance that a secondary market for the offered certificates will develop or,
if it does develop, that it will continue.
Some of the mortgage loans may have been the subject of financing
provided by affiliates of the underwriters.
GLOSSARY
An "accrual period" means, with respect to any distribution date, for
the Class AF-1, Class AV, Class M-1, Class M-2, Class B and Class S
Certificates, the period from the preceding distribution date (or from the
closing date in the case of the first distribution date) to and including the
day prior to the current distribution date. An "accrual period" means, with
respect to any distribution date, for the Class AF-2, Class AF-3, Class AF-4,
Class AF-5, Class AF-6 and Class A-IO Certificates, the calendar month
immediately preceding the month of such distribution date.
The "agreement" referred to in this prospectus supplement means the
pooling and servicing agreement, dated as of the cut-off date, among the
depositor, the servicer and the master servicer.
"Applied Realized Loss Amount" with respect to any class of subordinate
certificates and as to any distribution date, the sum of Realized Losses with
respect to mortgage loans which have been applied in reduction of the
certificate principal balance of the class (less any Excess Interest previously
distributed in repayment thereof).
"Assumed Principal Balance" as of any distribution date is the
aggregate scheduled principal balance of the mortgage loans plus applicable
amounts on deposit in the pre-funding account, in each case as of the related
determination date (or, in the case of any calculation made as of the cut-off
date, applicable amounts on deposit in the pre-funding account on the closing
date). The "Assumed Principal Balance" of either mortgage loan group on any
distributed date is the aggregate scheduled principal balance of the mortgage
loans included in such group plus the portion of funds on deposit in the
pre-funding account to be applied to the acquisition of subsequent mortgage
loans for such group.
S-57
"Basis Risk Payment" means, for any distribution date, an amount to be
deposited into the Basis Risk Reserve Fund equal to the sum of (i) the Cap
Carryover Amounts for such distribution date and (ii) any Required Reserve Fund
Deposit for such distribution date, provided however, the amount of the Basis
Risk Payment for any distribution date cannot exceed the amount of Excess
Interest and amounts currently on deposit in the Basis Risk Reserve Fund for
such date.
"Basis Risk Reserve Fund" means a fund created under the agreement and
held as part of the trust, but not as part of any REMIC created under the
agreement, to provide a source for payments of Cap Carryover Amounts. The Basis
Risk Reserve Fund will initially be funded with a deposit of $1,000.
"Cap Carryover Amount" means with respect to any distribution date and
any class of offered certificates, other than the Class A-IO and Class S
Certificates, the sum of (i) the excess of the interest calculated at the
pass-through rate applicable to such class for such date determined without
regard to the applicable Net WAC Cap over the amount of interest calculated at
the applicable Net WAC Cap, and (ii) the unpaid portion of the excess described
in clause (i) for prior distribution dates together with accrued interest
thereon at the applicable pass-through rate determined without regard to the
applicable Net WAC Cap. The Cap Carryover Amount for any class will be reduced
by any amounts repaid to such class in respect of such Cap Carryover Amount.
The "certificate principal balance" of each class of certificates, as
of any distribution date, is the aggregate principal amount of the certificates
of that class on the closing date as reduced by:
o all amounts distributed on previous distribution dates in
reduction of the certificate principal balance thereof, and
o in the case of a subordinate certificate, reductions in the
certificate principal balance thereof as a result of the
application of Realized Losses.
Any amounts distributed to a class of subordinate certificates in respect of any
Unpaid Realized Loss Amount will not further reduce the certificate principal
balance of that class.
"Class A Principal Distribution Amount" for each group on any
distribution date is the Principal Percentage for such group of the Senior
Principal Distribution Amount on such date.
"Class AF-6 Distribution Amount" for any distribution date, is the
product of:
o a fraction, the numerator of which is the certificate principal
balance of the Class AF-6 Certificates and the denominator of
which is the certificate principal balances of the Class AF-1,
Class AF-2, Class AF-3, Class AF-4, Class AF-5 and Class AF-6
Certificates, in each case immediately prior to the distribution
date,
o the Class A Principal Distribution Amount with respect to group I
for such distribution date and
o the applicable percentage for such distribution date set forth in
the following table:
S-58
Distribution Date Percentage
----------------- ----------
December 2002 - November 2005 0%
December 2005 - November 2007 45%
December 2007 - November 2008 80%
December 2008 - November 2009 100%
December 2009 and thereafter 300%
"Class B Principal Distribution Amount" with respect to any
distribution date on or after the Stepdown Date and as long as a Trigger Event
is not in effect, is the excess of
o the sum of
o the Class A certificate principal balance (after giving
effect to distributions on that date),
o the Class M-1 certificate principal balance (after giving
effect to distributions on that date),
o the Class M-2 certificate principal balance (after giving
effect to distributions on that date), and
o the Class B certificate principal balance immediately prior
to the distribution date over
----
o the lesser of
o 95.30% of the Assumed Principal Balance on the preceding
determination date and
o the Assumed Principal Balance on the preceding determination
date less 0.50% of the Assumed Principal Balance as of the
cut-off date (but in no event less than zero).
"Class M-1 Principal Distribution Amount" with respect to any
distribution date on or after the Stepdown Date and as long as a Trigger Event
is not in effect, is the excess of
o the sum of
o the Class A certificate principal balance (after giving
effect to distributions on that date) and
o the Class M-1 certificate principal balance immediately prior
to the distribution date over
----
o the lesser of
o 74.80% of the Assumed Principal Balance on the preceding
determination date and
S-59
o the Assumed Principal Balance on the preceding determination
date less 0.50% of the Assumed Principal Balance as of the
cut-off date (but in no event less than zero).
"Class M-2 Principal Distribution Amount" with respect to any
distribution date on or after the Stepdown Date and as long as a Trigger Event
is not in effect, is the excess of
o the sum of
o the Class A certificate principal balance (after giving
effect to distributions on that date),
o the Class M-1 certificate principal balance (after giving
effect to distributions on that date), and
o the Class M-2 certificate principal balance immediately prior
to the distribution date over
----
o the lesser of
o 85.80% of the Assumed Principal Balance on the preceding
determination date and
o the Assumed Principal Balance on the preceding determination
date less 0.50% of the Assumed Principal Balance as of the
cut-off date (but in no event less than zero).
"Class S Strike Rate" means the per annum rate equal to LIBOR as
determined on the interest determination date for the first accrual period.
"Clean-Up Call Date" is any distribution date when the Assumed
Principal Balance is less than 10% of the Assumed Principal Balance on the
cut-off date.
The "collection account" is an account maintained by the servicer into
which collections on the mortgage loans are deposited.
"Compensating Interest" means an amount, as of any distribution date,
payable by the servicer, equal to the lesser of
o prepayment interest shortfalls for such date in respect of any
prepayments in full, and
o the servicing fee for such date.
"CPR" is a constant prepayment standard or model commonly used to
measure prepayments on mortgage loans. The model represents an assumed constant
rate of prepayment each month relative to the then outstanding principal balance
of the mortgage loans for the life of such mortgage loans. CPR does not purport
to be either a historical description of the prepayment experience of the
mortgage loans or a prediction of the anticipated rate of prepayment of any
mortgage loans, including the mortgage loans to be included in the trust.
S-60
"Current Interest," with respect to each class of the certificates and
each distribution date, is the interest accrued on the certificate principal
balance of the class (or, in the case of the Class A-IO and Class S
Certificates, the Notional Principal Balance for each related component)
immediately prior to the distribution date during the applicable accrual period
at the applicable pass-through rate as reduced, on a pro rata basis, by any
related Net Prepayment Interest Shortfalls and Relief Act Shortfalls for such
date.
The "cut-off date" is November 1, 2002 in respect of the mortgage loans
to be sold to the trust on the closing date.
The "depositor" under the agreement is Saxon Asset Securities Company,
a Virginia corporation.
The "determination date" for each distribution date is the seventeenth
day of the month, or if such day is not a business day, the immediately
preceding business day.
The "distribution account" is an account maintained by the trustee from
which distributions are made on the certificates.
A "due period" is the period from and including the second day of a
month to and including the first day of the following month.
"Excess Interest" for any distribution date means, interest funds
remaining after the payment of all related interest distributions as described
under "Distributions -- Distributions of Interest" in this prospectus
supplement, plus Net Pledged Prepayment Penalties.
"Extra Principal Distribution Amount" with respect to any distribution
date is the lesser of (i) Excess Interest, if any, and (ii) the excess of (A)
the Required Overcollateralization Amount over (B) the Overcollateralization
Amount (assuming for this purpose that all Principal Funds are distributed as
principal to the certificates on such date).
The "Group I Net WAC Cap" with respect to any distribution date is a
per annum rate equal to the Weighted Average Net Rate of the mortgage loans in
group I less:
o (a) the product of (i) the pass-through rate for the A-IO-I
Component for such distribution date and (ii) the Notional
Principal Balance of the A-IO-I Component prior to such
distribution date; divided by
(b) the Assumed Principal Balance for group I; and
o (a) the product of (i) the pass-through rate for the S-I
Component for such distribution date and (ii) the Notional
Principal Balance of the S-I Component prior to such
distribution date; divided by
(b) the Assumed Principal Balance for group I.
In the case of the Class AF-1 Certificates, the Group I Net WAC Cap
derived under the above described formula will be adjusted to reflect an
actual/360 day count convention.
The "group I senior certificates" are the Class AF-1, Class AF-2, Class
AF-3, Class AF-4, Class AF-5 and Class AF-6 Certificates.
S-61
The "Group II Net WAC Cap" with respect to any distribution date is a
per annum rate equal to the Weighted Average Net Rate of the mortgage loans in
group II less:
o (a) the product of (i) the pass-through rate for the A-IO-II
Component for such distribution date and (ii) the Notional
Principal Balance of the A-IO-II Component prior to such
distribution date; divided by
(b) the Assumed Principal Balance for group II; and
o (a) the product of (i) the pass-through rate for the S-II
Component for such distribution date and (ii) the Notional
Principal Balance of the S-II Component prior to such
distribution date; divided by
(b) the Assumed Principal Balance for group II.
The Group II Net WAC Cap derived under the above described formula will
be adjusted to reflect an actual/360 day count convention.
The "group II senior certificates" are the Class AV Certificates.
The "Group Subordinate Amount" for each group and any distribution date
is the excess of the Assumed Principal Balance for such group for the
immediately preceding distribution date over the aggregate certificate principal
balance of the senior certificates of such group immediately prior to such
distribution date.
"Interest Carry Forward Amount" with respect to each class of the
certificates and each distribution date, is the sum of:
o the excess of
o Current Interest for the class with respect to prior
distribution dates (excluding any Cap Carryover Amount) over
o the amount actually distributed to the class with respect to
Current Interest on those prior distribution dates and
o interest on the excess at the applicable pass-through rate.
An "interest determination date" is the second business day preceding
each distribution date.
"Interest Funds" with respect to each master servicer remittance date,
to the extent actually deposited in the master servicer custodial account, are
equal to the sum, without duplication of
o all scheduled interest due during the related due period and
collected by the servicer as of the related determination
date less the related servicing fee and master servicing fee;
o all advances relating to interest;
S-62
o all Compensating Interest;
o liquidation proceeds to the extent the liquidation proceeds
relate to interest, less all non-recoverable advances
relating to interest and certain expenses reimbursed during
the related due period; and
o any Subsequent Recoveries for such date.
The "master servicer" under the agreement is Saxon Mortgage, Inc., a
Virginia corporation.
"Maximum Cap Rate" as to any Distribution Date is a per annum rate that
would equal the applicable Net WAC Cap for such date if such Net WAC Cap were
determined under the assumption that (i) each adjustable rate Mortgage Loan had
an interest rate equal to the maximum rate permitted under the terms of the
related mortgage note, and (ii) each fixed rate Mortgage Loan had an interest
rate equal to its stated fixed rate.
The "mortgage loans" referred to in this prospectus supplement are the
mortgage loans to be conveyed by the depositor to the trust under the agreement.
"Net Pledged Prepayment Penalties" for each distribution date means the
Pledged Prepayment Penalties remaining after payment of any Cap Carryover
Amounts.
"Net Prepayment Interest Shortfalls" for any distribution date refer to
the excess of (a) any prepayment interest shortfalls, over (b) any Compensating
Interest payments made by the servicer or master servicer.
"Net WAC Cap" as to any Distribution Date, is (i) with respect to the
group I senior certificates, the Group I Net WAC Cap, (ii) with respect to the
group II senior certificates, the Group II Net WAC Cap and (iii) with respect to
the Class M-1, Class M-2 and Class B certificates, the Subordinate Net WAC Cap.
A "Nonrecoverable Mortgage Loan" is any defaulted loan as to which the
servicer has determined under the agreement that the expenses associated with
the liquidation and foreclosure thereof will exceed the proceeds expected to be
recovered in any such proceeding.
The "Nonrecoverable Mortgage Loan Purchase Price" means an amount
determined under the agreement in respect of any Nonrecoverable Mortgage Loan
generally equal to the sum of:
o the projected net liquidation value thereof (i.e., the fair
market value of the related mortgaged property less all
expenses expected to be incurred in liquidation of such
loan), and
o interest accrued on such loan.
The "Notional Principal Balance" for each component of the Class A-IO
Certificates, as of any distribution date, is equal to the lesser of the amount
set forth below for such date and the related Assumed Principal Balance for such
distribution date:
S-63
A-IO-I Class A-IO-II
Distribution Date Component Component
- ----------------- ------------ -------------
1 $135,000,000 $176,229,000
2 134,475,000 176,229,000
3 133,653,000 176,229,000
4 132,574,000 176,229,000
5 131,240,000 176,229,000
6 129,651,000 176,229,000
7 127,812,000 176,229,000
8 125,760,000 176,229,000
9 123,500,000 176,229,000
10 121,045,000 176,229,000
11 118,535,000 176,229,000
12 115,983,000 176,229,000
13 113,486,000 130,540,000
14 111,041,000 130,540,000
15 104,272,000 130,540,000
16 96,502,000 130,540,000
17 89,309,000 130,540,000
18 82,652,000 130,540,000
19 76,491,000 130,540,000
20 70,788,000 130,540,000
21 65,510,000 130,540,000
22 60,625,000 130,540,000
23 56,104,000 130,540,000
24 51,919,000 122,277,000
25 48,046,000 113,200,000
26 44,461,000 104,796,000
27 41,144,000 97,015,000
28 38,074,000 89,811,000
29 35,232,000 83,142,000
30 32,602,000 76,967,000
31 0 0
The "Notional Principal Balance" of the S-I Component as of any
distribution date, is equal to the greater of (i) the excess of (1) the Assumed
Principal Balance for group I on such date; over (2) the aggregate certificate
principal balance of the group I senior certificates (other than the Class AF-1
Certificates) on such date, and (ii) zero. The "Notional Principal Balance" of
the S-II Component, as of any distribution date on or prior to the thirty-sixth
distribution date after the closing date, is equal to the aggregate principal
balance of the adjustable rate mortgage loans in group II for such distribution
date that have not reached their initial adjustment date. Following the
thirty-sixth distribution date, the Notional Principal Balance of the S-II
Component will be zero.
"Overcollateralization Amount" for each distribution date is the excess
of the Assumed Principal Balance on that distribution date over the aggregate
certificate principal balance of the certificates after giving effect to
principal distributions on that distribution date.
"Pledged Prepayment Penalties" for any distribution date and any group
is an amount equal to the sum of (i) the lesser of (x) prepayment penalties
collected for the group during the related Prepayment Period and (y) 60% of the
prepayment penalties owed and not waived by the servicer pursuant to the terms
of the agreement for that group and the related Prepayment Period and (ii) the
aggregate amount, if any, by which (i)(y) exceeded (i)(x) for prior distribution
dates for that group.
S-64
A "prepayment interest shortfall" means, as to each distribution date
and any mortgage loan as to which a prepayment of principal was received during
the period from the eighteenth day of the month preceding the month of such
distribution date through the last day of such month, the amount, if any, by
which one month's interest at the related mortgage rate (less the servicing fee)
on such prepayment exceeds the amount of interest actually paid by the mortgagor
in connection with such prepayment.
"Prepayment Penalty Period" has the meaning set forth in this
prospectus supplement under the heading "The Mortgage Loan Pool --
Characteristics of the Mortgage Loans."
"Prepayment Period" with respect to each distribution date is the
period beginning on the 18th day of the month (or, if the immediately preceding
Prepayment Period ended on a later day, that later day) immediately preceding
the month in which such distribution date occurs (or, in the case of the first
distribution date, the cut-off date) and ending on the Determination Date of the
month in which such distribution date occurs.
"Principal Distribution Amount" with respect to each group and
distribution date, is the excess of
o the sum of
o the Principal Funds for that distribution date and group and
o the related Principal Percentage of any Extra Principal
Distribution Amount for that distribution date over
----
o the related Principal Percentage of the Released Principal Amount
for that distribution date.
"Principal Funds" with respect to each master servicer remittance date,
to the extent actually deposited in the master servicer custodial account, are
equal to the sum, without duplication of:
o the scheduled principal collected by the servicer during the
related due period or advanced on or before the master servicer
remittance date;
o prepayments of principal collected by the servicer in the
applicable prepayment period;
o the scheduled principal balance of each mortgage loan that was
repurchased by the depositor;
o any substitution shortfall, which is the amount, if any, by which
the aggregate unpaid principal balance of any substitute mortgage
loans is less than the aggregate unpaid principal balance of any
deleted mortgage loans, delivered by the depositor in connection
with a substitution of mortgage loans; and
o all liquidation proceeds collected by the servicer during the
related due period, to the extent the liquidation proceeds related
to principal, less all non-recoverable advances relating to
principal reimbursed during the related due period.
S-65
"Principal Percentage" for any distribution date and group is the
percentage equivalent of a fraction, the numerator of which is the Principal
Funds for such group and the denominator of which is the Principal Funds for all
groups.
"Realized Loss" means as to any distribution date and any
o liquidated mortgage loan (other than a Nonrecoverable Mortgage
Loan), the amount by which the unpaid principal balance thereof
exceeds the net liquidation proceeds received thereon; and
o Nonrecoverable Mortgage Loan, the amount by which the unpaid
principal balance thereof exceeds the projected net liquidation
proceeds thereof (i.e., the amount expected to be recovered in
liquidation of such loan, less estimated expenses) as determined
at the time that the amount of Realized Loss for the related
Nonrecoverable Mortgage Loan was calculated.
"Released Principal Amount" as to any distribution date will equal the
amount by which the Overcollateralization Amount (assuming for this purpose that
all Principal Funds for that date are distributed as principal to the
certificates) on that distribution date exceeds the Required
Overcollateralization Amount for that distribution date.
The "Required Overcollateralization Amount" for each distribution date
is
o prior to the Stepdown Date, 2.35% of the Assumed Principal Balance
as of the cut-off date and
o on and after the Stepdown Date, if a Trigger Event is not in
effect, the greater of
o the lesser of
o 2.35% of the Assumed Principal Balance as of the cut-off
date and
o 4.70% of the Assumed Principal Balance on the preceding
determination date and
o 0.50% of the Assumed Principal Balance as of the cut-off date
and
o if a Trigger Event is in effect, the Overcollateralization Amount
as of the preceding distribution date.
"Required Reserve Fund Deposit" means, for any distribution date on
which
o the excess of (a) the Group I Net WAC Cap, over (b) the weighted
average of the rates on the offered certificates, other than the
Class A-IO and Class S Certificates, is less than 0.25%, an amount
that would cause the balance held in the Basis Risk Reserve Fund
to equal 0.50% of the Assumed Principal Balance of the group I
mortgage loans for such date, and, for any other distribution
date, the amount that would cause the balance held in the Basis
Risk Reserve Fund to equal $1,000, and
S-66
o the excess of (a) the Group II Net WAC Cap, over (b) the weighted
average of the rates on the offered certificates, other than the
Class A-IO and Class S Certificates, is less than 0.25%, an amount
that would cause the balance held in the Basis Risk Reserve Fund
to equal 0.50% of the Assumed Principal Balance of the group II
mortgage loans for such date, and, for any other distribution
date, the amount that would cause the balance held in the Basis
Risk Reserve Fund to equal $1,000.
The "seller" of the mortgage loans to the trust is Saxon Mortgage,
Inc., a Virginia corporation.
"Senior Credit Enhancement Percentage" as of any distribution date is
equal to a fraction, expressed as a percentage, the numerator of which is the
sum of the aggregate certificate principal balance of the subordinate
certificates for such distribution date and the Overcollateralization Amount for
such distribution date, and the denominator of which is the Assumed Principal
Balance of the mortgage loans as of such distribution date.
"Senior Principal Distribution Amount" is
o with respect to any distribution date prior to the Stepdown Date
or as to which a Trigger Event exists, 100% of the aggregate
Principal Distribution Amount for the distribution date and
o with respect to any distribution date on or after the Stepdown
Date and as to which a Trigger Event is not in effect, the excess
of
o the Class A certificate principal balance immediately prior
to the distribution date over
o the lesser of
o 63.30% of the Assumed Principal Balance on the preceding
determination date and
o the Assumed Principal Balance on the preceding
determination date less 0.50% of the Assumed Principal
Balance as of the cut-off date (but in no event less
than zero).
The "servicer" of the mortgage loans is Saxon Mortgage Services, Inc.,
a Texas corporation.
A "Servicing Trigger Event," with respect to each determination date,
exists if Total Calculated Cumulative Losses exceed: (i) 8.50% on any
determination date up to, and including, the fifth anniversary of the cut-off
date; or (ii) 10.82% on any determination date from the sixth to, and including,
the tenth anniversary of the cut-off date. Following the tenth anniversary of
the cut-off date, no Servicing Trigger Event shall exist.
The "statistical cut-off date" is November 1, 2002.
"Stepdown Date" is the earlier to occur of:
S-67
o the later to occur of
o the distribution date in December 2005 and
o the first distribution date on which the certificate
principal balance of the senior certificates is less than or
equal to 63.30% of the Assumed Principal Balance (after
assuming principal distributions) on such date and
o the distribution date after the certificate principal balance of
the Class A Certificates has been reduced to zero.
The "Subordinate Net WAC Cap" with respect to any distribution date is
a per annum rate equal to the weighted average of the Group I Net WAC Cap and
the Group II Net WAC Cap, weighted on the basis of the related Group Subordinate
Amount for such distribution date and adjusted to reflect an actual/360 day
count convention.
"Subsequent Recoveries" for any Nonrecoverable Mortgage Loan on any
distribution means the amount by which net liquidation proceeds recovered on
such loan exceed the previously estimated Realized Loss for such loan.
"Total Calculated Cumulative Losses" means, as of any determination
date, the sum of the aggregate amount of losses that have been experienced as of
such determination date as a percentage of the Assumed Principal Balance as of
the cut-off date.
A "Trigger Event," with respect to each distribution date after the
Stepdown Date, exists if either (i)
o the quotient, expressed as a percentage, of
o the aggregate scheduled principal balance of all 60 or more
day delinquent mortgage loans (including bankruptcy,
foreclosure and REO loans) and
o the Assumed Principal Balance as of the preceding
determination date
equals or exceeds 50% of the Senior Credit Enhancement Percentage, or (ii)
losses occurring since the closing date as a percentage of the Assumed Principal
Balance as of the cut-off date, for the related distribution dates, are greater
than:
Distribution Date Cumulative Loss Percentage
----------------- --------------------------
37 to 48 4.50%
49 to 60 5.75%
61 and thereafter 7.00%
"Unpaid Realized Loss Amount" with respect to any class of subordinate
certificates and as to any distribution date, is the excess of
o Applied Realized Loss Amounts with respect to the class over
o the sum of all distributions in reduction of the Applied Realized
Loss Amounts to the class on all previous distribution dates.
S-68
"Weighted Average Net Rate" with respect to the mortgage loans in any
group is the weighted average of the mortgage interest rates of the mortgage
loans in such group less the sum of the servicing fee rate and master servicing
fee rate, as applicable, multiplied, in the case of the first four distribution
dates, by a fraction the numerator of which is the aggregate scheduled principal
balance of the mortgage loans in such group acquired on the closing date as of
the cut-off date and the denominator of which is the Assumed Principal Balance
of such group as of the cut-off date.
S-69
[THIS PAGE INTENTIONALLY LEFT BLANK]
Appendix A:
Pool Information
Initial Group I Mortgage Loans as of the Statistical Cut-off Date
Total Scheduled Principal Balance: $210,932,677.79
Number of Loans: 1,905
Average Minimum Maximum
Scheduled Principal Balance: $ 110,725.82 $ 8,970.30 $ 1,559,054.95
Weighted Average Minimum Maximum
Mortgage Rate: 8.600% 6.250% 14.450%
Original LTV: 78.04% 13.73% 100.00%
Credit Score: 625 375 805
Original Term (months): 309 60 360
Remaining Term (months): 297 55 360
Seasoning (months): 12 0 78
Remaining Amortization Term (months): 315 46 360
Earliest Latest
First Payment Date: June 1, 1996 December 1, 2002
Maturity Date: June 17, 2007 November 1, 2032
A-1
Current Scheduled Principal Balance
Percentage of
Total Mortgage Loans by
Scheduled Total Scheduled
Principal Principal Balance
Current Scheduled Number of Balance as of the as of the Cut-off
Principal Balance ($) Mortgage Loans Cut-off Date Date
-------------------------------------- ---------------- ------------------ -------------------
0.01 to 25,000.00........ 45 $ 934,947.41 0.44%
25,000.01 to 50,000.00........ 292 11,425,083.82 5.42
50,000.01 to 75,000.00........ 442 27,505,318.09 13.04
75,000.01 to 100,000.00........ 344 29,801,786.88 14.13
100,000.01 to 125,000.00........ 228 25,558,779.87 12.12
125,000.01 to 150,000.00........ 163 22,437,289.85 10.64
150,000.01 to 175,000.00........ 104 16,811,412.06 7.97
175,000.01 to 200,000.00........ 92 17,204,355.31 8.16
200,000.01 to 225,000.00........ 54 11,488,326.00 5.45
225,000.01 to 250,000.00........ 34 8,095,756.35 3.84
250,000.01 to 275,000.00........ 27 6,994,326.95 3.32
275,000.01 to 300,000.00........ 14 3,996,129.61 1.89
300,000.01 to 400,000.00........ 40 13,826,652.13 6.56
400,000.01 to 500,000.00........ 17 7,701,811.47 3.65
500,000.01 to 600,000.00........ 4 2,304,050.01 1.09
600,000.01 to 700,000.00........ 2 1,306,491.36 0.62
800,000.01 to 900,000.00........ 1 836,033.38 0.40
1,000,000.01 to 1,600,000.00........ 2 2,704,127.24 1.28
----- ---------------- ------
Total............................... 1,905 $ 210,932,677.79 100.00%
===== ================ ======
A-2
Current Mortgage Interest Rates
Percentage of
Total Mortgage Loans
Scheduled by Total Scheduled
Principal Principal Balance
Current Mortgage Number of Balance as of the as of the Cut-off
Interest Rates (%) Mortgage Loans Cut-off Date Date
-------------------------------------- ---------------- ------------------ -------------------
6.001 to 6.250.................. 1 $ 370,000.00 0.18%
6.251 to 6.500.................. 28 5,028,668.07 2.38
6.501 to 6.750.................. 53 8,843,160.30 4.19
6.751 to 7.000.................. 60 9,354,289.13 4.43
7.001 to 7.250.................. 51 9,486,887.94 4.50
7.251 to 7.500.................. 115 15,126,477.56 7.17
7.501 to 7.750.................. 108 15,178,731.64 7.20
7.751 to 8.000.................. 166 20,762,860.83 9.84
8.001 to 8.250.................. 105 14,926,914.66 7.08
8.251 to 8.500.................. 126 16,095,230.95 7.63
8.501 to 8.750.................. 129 14,991,959.96 7.11
8.751 to 9.000.................. 141 15,076,428.91 7.15
9.001 to 9.250.................. 94 8,000,203.88 3.79
9.251 to 9.500.................. 104 9,883,948.06 4.69
9.501 to 9.750.................. 107 9,271,078.30 4.40
9.751 to 10.000.................. 115 10,439,695.20 4.95
10.001 to 10.250.................. 51 3,817,050.91 1.81
10.251 to 10.500.................. 80 6,318,697.28 3.00
10.501 to 10.750.................. 56 4,100,755.52 1.94
10.751 to 11.000.................. 40 2,814,379.49 1.33
11.001 to 11.250.................. 23 1,375,025.52 0.65
11.251 to 11.500.................. 37 1,949,285.82 0.92
11.501 to 11.750.................. 25 2,170,813.38 1.03
11.751 to 12.000.................. 34 2,183,475.84 1.04
12.001 to 12.250.................. 16 876,674.76 0.42
12.251 to 12.500.................. 17 1,247,290.83 0.59
12.501 to 12.750.................. 11 758,382.20 0.36
12.751 to 13.000.................. 5 205,442.04 0.10
13.001 to 13.250.................. 5 197,214.95 0.09
14.001 to 14.250.................. 1 29,220.33 0.01
14.251 to 14.500.................. 1 52,433.53 0.02
----- ---------------- ------
Total.............................. 1,905 $ 210,932,677.79 100.00%
===== ================ ======
A-3
Original Combined Loan-to-Value Ratio(1)
Percentage of
Total Mortgage Loans
Scheduled by Total Scheduled
Principal Principal Balance
Original Combined Number of Balance as of the as of the Cut-off
Loan-to-Value Ratio (%) Mortgage Loans Cut-off Date Date
-------------------------------------- ---------------- ------------------ -------------------
10.01 to 15.00................... 2 $ 59,776.09 0.03%
15.01 to 20.00................... 5 211,852.63 0.10
20.01 to 25.00................... 5 182,075.62 0.09
25.01 to 30.00................... 9 545,730.86 0.26
30.01 to 35.00................... 9 509,377.94 0.24
35.01 to 40.00................... 14 957,770.41 0.45
40.01 to 45.00................... 24 2,393,895.65 1.13
45.01 to 50.00................... 42 2,732,002.84 1.30
50.01 to 55.00................... 49 4,399,394.49 2.09
55.01 to 60.00................... 61 5,929,764.70 2.81
60.01 to 65.00................... 109 12,498,357.85 5.93
65.01 to 70.00................... 189 18,487,858.08 8.76
70.01 to 75.00................... 208 23,597,154.39 11.19
75.01 to 80.00................... 511 58,917,988.18 27.93
80.01 to 85.00................... 203 22,843,356.49 10.83
85.01 to 90.00................... 374 44,448,597.93 21.07
90.01 to 95.00................... 78 10,473,207.92 4.97
95.01 to 100.00................... 13 1,744,515.72 0.83
----- ---------------- ------
Total............................... 1,905 $ 210,932,677.79 100.00%
===== ================ ======
(1) The combined loan-to-value ratio of a mortgage loan (including a second
mortgage loan) is equal to the ratio (expressed as a percentage) of the original
scheduled principal balance of the mortgage loan plus any senior lien balances
and the fair market value of the mortgaged premises at the time of origination.
The fair market value is the lower of (i) the purchase price and (ii) the
appraised value in the case of purchases and is the appraised value in all other
cases.
A-4
Remaining Scheduled Term to Maturity
Percentage of
Total Mortgage Loans
Scheduled by Total Scheduled
Principal Balance Principal Balance
Number of as of the Cut-off as of the Cut-off
Remaining Term (Months) Mortgage Loans Date Date
-------------------------------------- ---------------- ------------------ -------------------
49 to 60......................... 5 83,356.61 0.04
61 to 72......................... 1 16,698.35 0.01
73 to 84......................... 1 77,654.24 0.04
97 to 108......................... 3 132,159.24 0.06
109 to 120......................... 153 8,819,224.55 4.18
133 to 144......................... 8 715,773.23 0.34
157 to 168......................... 1 27,433.22 0.01
169 to 180......................... 391 40,394,022.08 19.15
229 to 240......................... 126 13,319,627.38 6.31
277 to 288......................... 14 1,042,291.35 0.49
289 to 300......................... 342 28,586,662.83 13.55
349 to 360......................... 860 117,717,774.71 55.81
----- ---------------- ------
Total............................... 1,905 $ 210,932,677.79 100.00%
===== ================ ======
A-5
Remaining Amortization Term
Percentage of
Total Mortgage Loans
Scheduled by Total Scheduled
Principal Balance Principal Balance
Remaining Amortization Number of as of the Cut-off as of the Cut-off
Term (Months) Mortgage Loans Date Date
-------------------------------------- ---------------- ------------------ -------------------
0 to 48......................... 3 $ 81,641.90 0.04%
49 to 60......................... 5 83,356.61 0.04
61 to 108......................... 18 850,789.84 0.40
109 to 120......................... 82 3,936,183.65 1.87
121 to 132......................... 2 103,925.15 0.05
133 to 144......................... 8 715,773.23 0.34
145 to 156......................... 2 80,768.76 0.04
157 to 168......................... 3 89,275.58 0.04
169 to 180......................... 232 20,649,111.62 9.79
181 to 192......................... 1 62,312.53 0.03
193 to 204......................... 1 62,022.53 0.03
205 to 216......................... 2 177,484.35 0.08
217 to 228......................... 3 188,599.48 0.09
229 to 240......................... 132 13,567,551.10 6.43
241 to 252......................... 8 693,500.79 0.33
253 to 264......................... 10 712,018.13 0.34
265 to 276......................... 16 1,241,113.66 0.59
277 to 288......................... 51 3,566,933.32 1.69
289 to 300......................... 312 26,883,255.13 12.74
325 to 336......................... 1 92,388.03 0.04
337 to 348......................... 7 447,752.48 0.21
349 to 360......................... 1,006 136,646,919.92 64.78
----- ---------------- ------
Total............................... 1,905 $ 210,932,677.79 100.00%
===== ================ ======
Occupancy Type of Mortgaged Premises
Percentage of
Total Mortgage Loans
Scheduled by Total Scheduled
Principal Balance Principal Balance
Number of as of the Cut-off as of the Cut-off
Occupancy Type Mortgage Loans Date Date
-------------------------------------- ---------------- ------------------ -------------------
Primary Home.......................... 1,741 $ 198,373,523.95 94.05%
Investment............................ 141 10,982,866.22 5.21
Second Home........................... 23 1,576,287.62 0.75
----- ---------------- ------
Total............................... 1,905 $ 210,932,677.79 100.00%
===== ================ ======
A-6
Origination Program
Percentage of
Total Mortgage Loans
Scheduled by Total Scheduled
Principal Balance Principal Balance
Number of as of the Cut-off as of the Cut-off
Origination Program Mortgage Loans Date Date
-------------------------------------- ---------------- ------------------ -------------------
Full Documentation.................... 1,511 $ 160,139,411.53 75.92%
Stated Documentation.................. 253 34,367,650.93 16.29
Limited Documentation................. 123 15,485,858.47 7.34
No Ratio Documentation................ 18 939,756.86 0.45
----- ---------------- ------
Total............................... 1,905 $ 210,932,677.79 100.00%
===== ================ ======
Mortgage Loan Purpose
Percentage of
Total Mortgage Loans
Scheduled by Total Scheduled
Principal Balance Principal Balance
Number of as of the Cut-off as of the Cut-off
Mortgage Loan Purpose Mortgage Loans Date Date
-------------------------------------- ---------------- ------------------ -------------------
Cash Out Refinance.................... 1,432 $ 159,990,533.00 75.85%
Purchase.............................. 252 26,233,481.58 12.44
Refinance............................. 221 24,708,663.21 11.71
----- ---------------- ------
Total............................... 1,905 $ 210,932,677.79 100.00%
===== ================ ======
Property Type
Percentage of
Total Mortgage Loans
Scheduled by Total Scheduled
Principal Balance Principal Balance
Number of as of the Cut-off as of the Cut-off
Property Type Mortgage Loans Date Date
-------------------------------------- ---------------- ------------------ -------------------
Single Family Detached................ 1,561 $ 175,759,990.95 83.33%
Planned Unit Development.............. 77 11,662,015.26 5.53
Two to Four Family.................... 59 6,790,247.56 3.22
Condominium Low-Rise.................. 69 6,026,709.08 2.86
Manufactured Housing.................. 74 4,360,418.57 2.07
Single Family Attached................ 40 3,683,827.51 1.75
Townhouse............................. 14 1,519,333.65 0.72
Condominium High-Rise................. 10 847,985.21 0.40
Deminimus PUD......................... 1 282,150.00 0.13
----- ---------------- ------
Total............................... 1,905 $ 210,932,677.79 100.00%
===== ================ ======
A-7
Mortgage Loan Type
Percentage of
Mortgage Loans
Total by Total
Scheduled Scheduled
Principal Balance Principal Balance
Number of as of the Cut-off as of the Cut-off
Mortgage Loan Type Mortgage Loans Date Date
-------------------------------------- ---------------- ------------------ -------------------
Fixed Rate 5 Year..................... 1 $ 26,879.36 0.01%
Fixed Rate 10 Year.................... 22 1,039,908.73 0.49
Fixed Rate 12 Year.................... 10 810,125.82 0.38
Fixed Rate 15 Year.................... 303 23,716,027.22 11.24
Fixed Rate 20 Year.................... 141 13,612,941.05 6.45
Fixed Rate 25 Year.................... 19 2,185,268.05 1.04
Fixed Rate 30 Year.................... 1,171 138,923,892.42 65.86
30/15 Year Balloon.................... 211 24,010,846.78 11.38
Fixed 5/10 Interest Only.............. 1 161,079.50 0.08
Fixed 5/15 Interest Only.............. 1 436,000.00 0.21
Fixed 5/25 Interest Only.............. 25 6,009,708.86 2.85
----- ---------------- ------
Total.............................. 1,905 $ 210,932,677.79 100.00%
===== ================ ======
A-8
Geographic Distribution of Mortgaged Premises
Percentage of
Total Mortgage Loans
Scheduled by Total Scheduled
Number of Principal Balance Principal Balance as
State Mortgage Loans as of the Cut-off Date of the Cut-off Date
-------------------------------------- ---------------- ---------------------- --------------------
Alabama.............................. 1 $ 48,259.71 0.02%
Alaska............................... 8 967,616.63 0.46
Arizona.............................. 36 3,409,908.05 1.62
Arkansas............................. 34 2,257,373.37 1.07
California........................... 218 33,979,292.72 16.11
Colorado............................. 24 3,497,364.15 1.66
Connecticut.......................... 23 3,264,448.47 1.55
Delaware............................. 7 654,011.81 0.31
District of Columbia................. 1 82,367.59 0.04
Florida.............................. 194 20,244,406.41 9.60
Georgia.............................. 98 9,534,130.08 4.52
Hawaii............................... 5 749,884.30 0.36
Idaho................................ 7 891,241.55 0.42
Illinois............................. 32 3,082,872.12 1.46
Indiana.............................. 57 4,128,270.72 1.96
Iowa................................. 6 353,279.64 0.17
Kansas............................... 6 589,938.61 0.28
Kentucky............................. 20 1,665,353.19 0.79
Louisiana............................ 40 4,185,259.45 1.98
Maine................................ 3 355,530.67 0.17
Maryland............................. 41 7,010,704.94 3.32
Massachusetts........................ 23 4,405,617.40 2.09
Michigan............................. 29 2,119,322.24 1.00
Minnesota............................ 35 4,466,402.94 2.12
Mississippi.......................... 27 1,932,858.62 0.92
Missouri............................. 45 3,255,480.17 1.54
Montana.............................. 3 133,095.82 0.06
Nebraska............................. 7 528,966.07 0.25
Nevada............................... 11 1,490,232.36 0.71
New Hampshire........................ 8 1,109,215.99 0.53
New Jersey........................... 41 5,707,330.33 2.71
New Mexico........................... 25 2,414,477.33 1.14
New York............................. 98 14,616,610.41 6.93
North Carolina....................... 36 3,455,416.70 1.64
North Dakota......................... 1 94,693.03 0.04
Ohio................................. 66 5,105,191.88 2.42
Oklahoma............................. 29 2,186,282.86 1.04
Oregon............................... 22 2,675,162.38 1.27
Pennsylvania......................... 80 8,079,276.15 3.83
Rhode Island......................... 7 1,036,768.30 0.49
South Carolina....................... 28 1,507,674.17 0.71
South Dakota......................... 5 622,568.21 0.30
Tennessee............................ 57 3,925,170.55 1.86
Texas................................ 241 23,660,209.91 11.22
Utah................................. 16 3,122,870.97 1.48
Vermont.............................. 1 59,881.69 0.03
Virginia............................. 70 9,276,292.91 4.40
Washington........................... 19 1,795,794.26 0.85
West Virginia........................ 9 860,152.93 0.41
Wisconsin............................ 3 262,448.58 0.12
Wyoming.............................. 2 75,698.45 0.04
----- ---------------- ------
Total.............................. 1,905 $ 210,932,677.79 100.00%
===== ================ ======
No more than approximately 0.74% of the related mortgaged properties
are located in any one postal zip code.
A-9
Credit Score
Percentage of
Mortgage Loans
Total by Total
Scheduled Scheduled
Principal Balance Principal Balance
Number of as of the Cut-off as of the Cut-off
Credit Score Mortgage Loans Date Date
-------------------------------------- ---------------- ------------------ -------------------
Not Available......................... 98 $ 6,863,913.24 3.25%
350 to 399......................... 1 49,000.22 0.02
450 to 499......................... 10 1,014,589.57 0.48
500 to 549......................... 232 21,694,793.61 10.29
550 to 599......................... 422 43,552,754.93 20.65
600 to 649......................... 600 70,094,034.77 33.23
650 to 699......................... 366 46,610,529.47 22.10
700 to 749......................... 125 16,061,343.05 7.61
750 to 799......................... 49 4,826,584.71 2.29
800 to 849......................... 2 165,134.22 0.08
----- ---------------- ------
Total............................... 1,905 $ 210,932,677.79 100.00%
===== ================ ======
Credit Grade
Percentage of
Total Mortgage Loans
Scheduled by Total Scheduled
Principal Balance Principal Balance
Number of as of the Cut-off as of the Cut-off
Credit Grade Mortgage Loans Date Date
-------------------------------------- ---------------- ------------------ -------------------
A+.................................... 630 $ 80,713,614.80 38.27%
A..................................... 507 59,381,358.78 28.15
A-.................................... 487 48,484,852.84 22.99
B..................................... 184 15,232,496.90 7.22
C..................................... 80 5,974,740.66 2.83
D..................................... 17 1,145,613.81 0.54
----- ---------------- ------
Total............................... 1,905 $ 210,932,677.79 100.00%
===== ================ ======
Delinquency
Percentage of
Total Mortgage Loans
Scheduled by Total Scheduled
Principal Balance Principal Balance
Number of as of the Cut-off as of the Cut-off
Delinquency Mortgage Loans Date Date
-------------------------------------- ---------------- ------------------ -------------------
Current............................... 1,887 $ 209,835,352.10 99.48%
30 days delinquent.................... 18 1,097,325.69 0.52
----- ---------------- ------
Total............................... 1,905 $ 210,932,677.79 100.00%
===== ================ ======
A-10
Amortization Type
Percentage of
Mortgage Loans
Total by Total
Scheduled Scheduled
Principal Balance Principal Balance
Number of as of the Cut-off as of the Cut-off
Amortization Type Mortgage Loans Date Date
-------------------------------------- ---------------- ------------------ -------------------
Fully Amortizing...................... 1,694 $ 186,921,831.01 88.62%
Balloon............................... 211 24,010,846.78 11.38
----- ---------------- ------
Total............................... 1,905 $ 210,932,677.79 100.00%
===== ================ ======
Prepayment Penalty Type
Percentage of
Mortgage Loans
Total by Total
Scheduled Scheduled
Principal Balance Principal Balance
Number of as of the Cut-off as of the Cut-off
Prepayment Penalty Type Mortgage Loans Date Date
-------------------------------------- ---------------- ------------------ -------------------
1 Year - 6 months advance............. 80 $ 12,241,377.04 5.80%
1 Year - 5% of prepayment amount...... 1 123,543.27 0.06
1 Year - 2%........................... 5 834,352.05 0.40
2 Year - 3 months advance............. 1 85,372.84 0.04
2 Year - 6 months advance............. 27 2,698,927.30 1.28
2.5 Year - 1%......................... 3 665,492.88 0.32
3 Year - 3 months advance............. 20 3,981,366.19 1.89
3 Year - 6 months advance............. 803 96,940,824.16 45.96
3 Year - 1%........................... 28 2,087,081.07 0.99
3 Year - 2 month advance.............. 1 74,902.04 0.04
3 Year - 2%........................... 35 3,873,558.06 1.84
3 Year - 5/4/3........................ 43 4,592,839.62 2.18
3.5 Year - 2%......................... 26 3,469,326.42 1.64
5 Year - 6 months advance............. 121 9,971,330.97 4.73
5 Year - 2%........................... 2 83,980.83 0.04
5 Year 5/4/3/2/1...................... 11 876,360.27 0.42
6 Month - 6 months advance............ 1 62,022.53 0.03
7 Year - 6 months advance............. 1 71,614.77 0.03
No Prepayment Penalty................. 665 64,303,780.34 30.49
Miscellaneous Prepayment Penalty...... 31 3,894,625.14 1.85
----- ---------------- ------
Total............................... 1,905 $ 210,932,677.79 100.00%
===== ================ ======
A-11
Initial Group II Mortgage Loans as of the Statistical Cut-off Date
Total Scheduled Principal Balance: $489,148,839.56
Number of Loans: 3,071
Average Minimum Maximum
Scheduled Principal Balance: $ 159,279.99 $ 2,876.33 $ 1,460,965.08
Weighted Average Minimum Maximum
Mortgage Rate: 8.566% 5.125% 13.920%
Gross Margin: 5.510% 2.625% 11.700%
First Period Rate Cap: 1.247% 1.000% 6.000%
Period Rate Cap: 1.030% 1.000% 3.000%
Life Floor: 7.734% 3.750% 13.920%
Life Cap: 15.061% 11.750% 20.920%
Months to Roll (months): 26
Original LTV: 79.75% 12.50% 100.00%
Credit Score: 596 458 818
Original Term (months): 360 360 360
Remaining Term (months): 356 273 360
Seasoning (months): 4 0 87
Earliest Latest
First Payment Date: September 1, 1995 December 1, 2002
Maturity Date: August 1, 2025 November 1, 2032
A-12
Current Scheduled Principal Balance
Percentage of
Total Mortgage Loans by
Scheduled Total Scheduled
Principal Principal Balance
Current Scheduled Number of Balance as of the as of the Cut-off
Principal Balance ($) Mortgage Loans Cut-off Date Date
-------------------------------------- ---------------- ------------------ -------------------
0.01 to 25,000.00........ 19 $ 376,029.38 0.08%
25,000.01 to 50,000.00........ 149 6,189,041.93 1.27
50,000.01 to 75,000.00........ 469 29,673,962.94 6.07
75,000.01 to 100,000.00........ 460 40,491,081.87 8.28
100,000.01 to 150,000.00........ 789 97,030,365.42 19.84
150,000.01 to 200,000.00........ 498 86,016,723.55 17.58
200,000.01 to 250,000.00........ 241 54,030,703.60 11.05
250,000.01 to 300,000.00........ 145 39,482,410.32 8.07
300,000.01 to 350,000.00........ 93 30,156,903.76 6.17
350,000.01 to 400,000.00........ 71 26,627,419.81 5.44
400,000.01 to 450,000.00........ 33 14,044,676.85 2.87
450,000.01 to 500,000.00........ 33 15,812,730.12 3.23
500,000.01 to 550,000.00........ 14 7,322,227.45 1.50
550,000.01 to 600,000.00........ 18 10,538,460.51 2.15
600,000.01 to 650,000.00........ 13 8,259,499.97 1.69
650,000.01 to 700,000.00........ 6 4,071,188.00 0.83
700,000.01 to 750,000.00........ 5 3,677,483.21 0.75
750,000.01 to 800,000.00........ 1 769,483.34 0.16
850,000.01 to 900,000.00........ 3 2,633,456.36 0.54
950,000.01 to 1,000,000.00........ 8 7,951,603.21 1.63
1,000,000.01 to 1,500,000.00........ 3 3,993,387.96 0.82
----- ---------------- ------
Total............................... 3,071 $ 489,148,839.56 100.00%
===== ================ ======
A-13
Current Mortgage Interest Rates
Percentage of
Mortgage Loans
Total by Total
Scheduled Scheduled
Principal Balance Principal Balance
Current Mortgage Number of as of the Cut-off as of the Cut-off
Interest Rates (%) Mortgage Loans Date Date
-------------------------------------- ---------------- ------------------ -------------------
5.001 to 5.250................... 1 $ 234,286.50 0.05%
5.501 to 5.750................... 4 742,923.40 0.15
5.751 to 6.000................... 18 3,219,051.62 0.66
6.001 to 6.250................... 28 6,429,590.17 1.31
6.251 to 6.500................... 65 14,108,164.96 2.88
6.501 to 6.750................... 73 15,991,906.78 3.27
6.751 to 7.000................... 134 25,914,224.33 5.30
7.001 to 7.250................... 113 22,095,472.31 4.52
7.251 to 7.500................... 170 33,812,483.07 6.91
7.501 to 7.750................... 189 33,297,766.06 6.81
7.751 to 8.000................... 226 40,416,896.59 8.26
8.001 to 8.250................... 161 25,191,532.44 5.15
8.251 to 8.500................... 231 38,286,806.56 7.83
8.501 to 8.750................... 190 31,771,448.66 6.50
8.751 to 9.000................... 235 38,660,096.77 7.90
9.001 to 9.250................... 159 22,638,787.93 4.63
9.251 to 9.500................... 204 28,425,685.47 5.81
9.501 to 9.750................... 146 23,324,445.51 4.77
9.751 to 10.000................... 166 20,903,262.78 4.27
10.001 to 10.250................... 80 11,028,632.63 2.25
10.251 to 10.500................... 93 11,269,966.05 2.30
10.501 to 10.750................... 81 8,555,430.53 1.75
10.751 to 11.000................... 82 10,170,202.51 2.08
11.001 to 11.250................... 52 4,568,128.11 0.93
11.251 to 11.500................... 47 5,227,412.04 1.07
11.501 to 11.750................... 38 4,400,251.34 0.90
11.751 to 12.000................... 36 3,189,409.53 0.65
12.001 to 12.250................... 16 1,479,698.83 0.30
12.251 to 12.500................... 14 1,663,631.88 0.34
12.501 to 12.750................... 10 954,785.27 0.20
12.751 to 13.000................... 6 923,723.56 0.19
13.001 to 13.250................... 2 182,774.76 0.04
13.751 to 14.000................... 1 69,960.61 0.01
----- ---------------- ------
Total.............................. 3,071 $ 489,148,839.56 100.00%
===== ================ ======
A-14
Original Loan-to-Value Ratio
Percentage of
Mortgage Loans
Total by Total
Scheduled Scheduled
Principal Balance Principal Balance
Original Number of as of the Cut-off as of the Cut-off
Loan-to-Value Ratio (%) Mortgage Loans Date Date
-------------------------------------- ---------------- ------------------ -------------------
10.01 to 15.00................... 1 $ 49,793.83 0.01%
20.01 to 25.00................... 2 162,178.42 0.03
25.01 to 30.00................... 6 255,669.67 0.05
30.01 to 35.00................... 10 2,442,061.70 0.50
35.01 to 40.00................... 10 1,005,908.98 0.21
40.01 to 45.00................... 23 3,962,021.19 0.81
45.01 to 50.00................... 34 7,335,910.22 1.50
50.01 to 55.00................... 33 6,893,146.33 1.41
55.01 to 60.00................... 58 10,688,398.53 2.19
60.01 to 65.00................... 132 24,375,925.66 4.98
65.01 to 70.00................... 180 25,927,278.84 5.30
70.01 to 75.00................... 274 46,029,951.64 9.41
75.01 to 80.00................... 853 143,128,944.77 29.26
80.01 to 85.00................... 472 67,901,474.71 13.88
85.01 to 90.00................... 855 128,135,413.73 26.20
90.01 to 95.00................... 127 20,767,406.12 4.25
95.01 to 100.00................... 1 87,355.22 0.02
----- ---------------- ------
Total.............................. 3,071 $ 489,148,839.56 100.00%
===== ================ ======
Remaining Scheduled Term to Maturity
Percentage of
Total Mortgage Loans
Scheduled by Total Scheduled
Principal Balance Principal Balance
Number of as of the Cut-off as of the Cut-off
Remaining Term (Months) Mortgage Loans Date Date
-------------------------------------- ---------------- ------------------ -------------------
265 to 276......................... 1 $ 234,286.50 0.05%
277 to 288......................... 7 655,305.35 0.13
289 to 300......................... 159 16,352,939.52 3.34
337 to 348......................... 2 334,527.93 0.07
349 to 360......................... 2,902 471,571,780.26 96.41
----- ---------------- ------
Total............................... 3,071 $ 489,148,839.56 100.00%
===== ================ ======
A-15
Gross Margin
Percentage of
Total Mortgage Loans
Scheduled by Total Scheduled
Principal Balance Principal Balance
Number of as of the Cut-off as of the Cut-off
Gross Margin (%) Mortgage Loans Date Date
-------------------------------------- ---------------- ------------------ -------------------
2.501 to 2.750.................. 1 $ 269,020.94 0.05%
2.751 to 3.000.................. 8 1,514,315.04 0.31
3.001 to 3.250.................. 18 3,724,536.55 0.76
3.251 to 3.500.................. 24 6,536,367.62 1.34
3.501 to 3.750.................. 68 14,152,102.50 2.89
3.751 to 4.000.................. 87 19,317,803.61 3.95
4.001 to 4.250.................. 125 24,213,008.58 4.95
4.251 to 4.500.................. 188 32,959,829.16 6.74
4.501 to 4.750.................. 229 39,606,353.43 8.10
4.751 to 5.000.................. 238 40,666,812.48 8.31
5.001 to 5.250.................. 263 47,089,957.86 9.63
5.251 to 5.500.................. 286 43,107,833.81 8.81
5.501 to 5.750.................. 204 34,176,713.62 6.99
5.751 to 6.000.................. 237 35,149,616.06 7.19
6.001 to 6.250.................. 204 26,868,876.04 5.49
6.251 to 6.500.................. 241 31,805,664.74 6.50
6.501 to 6.750.................. 177 27,475,552.55 5.62
6.751 to 7.000.................. 148 18,938,695.04 3.87
7.001 to 7.250.................. 64 7,919,212.73 1.62
7.251 to 7.500.................. 84 9,841,336.90 2.01
7.501 to 7.750.................. 36 5,469,241.29 1.12
7.751 to 8.000.................. 41 5,049,083.81 1.03
8.001 to 8.250.................. 21 3,984,123.95 0.81
8.251 to 8.500.................. 19 2,534,722.62 0.52
8.501 to 8.750.................. 13 1,520,249.64 0.31
8.751 to 9.000.................. 18 1,957,081.70 0.40
9.001 to 9.250.................. 10 1,139,992.10 0.23
9.251 to 9.500.................. 4 521,665.30 0.11
9.501 to 9.750.................. 6 733,367.87 0.15
9.751 to 10.000.................. 5 459,681.73 0.09
10.001 to 10.250.................. 1 49,533.48 0.01
10.251 to 10.500.................. 1 41,587.07 0.01
10.751 to 11.000.................. 1 94,353.66 0.02
11.501 to 11.750.................. 1 260,546.08 0.05
----- ---------------- ------
Total.............................. 3,071 $ 489,148,839.56 100.00%
===== ================ ======
A-16
Maximum Lifetime Mortgage Interest Rates
Percentage of
Total Mortgage Loans
Scheduled by Total Scheduled
Principal Balance Principal Balance
Maximum Lifetime Number of as of the Cut-off as of the Cut-off
Mortgage Interest Rates (%) Mortgage Loans Date Date
-------------------------------------- ---------------- ------------------ -------------------
11.501 to 12.000................... 21 $ 3,768,151.62 0.77%
12.001 to 12.500................... 79 15,985,382.13 3.27
12.501 to 13.000................... 187 37,790,808.53 7.73
13.001 to 13.500................... 250 50,005,661.15 10.22
13.501 to 14.000................... 311 54,747,995.89 11.19
14.001 to 14.500................... 261 42,928,945.55 8.78
14.501 to 15.000................... 285 52,794,155.65 10.79
15.001 to 15.500................... 257 43,287,289.30 8.85
15.501 to 16.000................... 346 52,690,121.78 10.77
16.001 to 16.500................... 309 41,981,436.70 8.58
16.501 to 17.000................... 270 36,590,166.30 7.48
17.001 to 17.500................... 152 18,976,671.65 3.88
17.501 to 18.000................... 142 16,719,051.41 3.42
18.001 to 18.500................... 89 9,149,987.19 1.87
18.501 to 19.000................... 68 6,857,088.74 1.40
19.001 to 19.500................... 29 2,985,963.54 0.61
19.501 to 20.000................... 12 1,637,227.06 0.33
20.001 to 20.500................... 2 182,774.76 0.04
20.501 to 21.000................... 1 69,960.61 0.01
----- ---------------- ------
Total............................... 3,071 $ 489,148,839.56 100.00%
===== ================ ======
A-17
Minimum Lifetime Mortgage Interest Rates
Percentage of
Total Mortgage Loans
Scheduled by Total Scheduled
Principal Balance Principal Balance
Minimum Lifetime Number of as of the Cut-off as of the Cut-off
Mortgage Interest Rates (%) Mortgage Loans Date Date
-------------------------------------- ---------------- ------------------ -------------------
3.501 to 3.750................... 3 $ 549,100.00 0.11%
3.751 to 4.000................... 17 2,888,433.30 0.59
4.001 to 4.250................... 25 4,403,853.96 0.90
4.251 to 4.500................... 53 11,459,549.72 2.34
4.501 to 4.750................... 60 12,581,042.33 2.57
4.751 to 5.000................... 97 19,114,792.86 3.91
5.001 to 5.250................... 85 16,345,156.54 3.34
5.251 to 5.500................... 127 24,656,444.18 5.04
5.501 to 5.750................... 144 26,236,834.72 5.36
5.751 to 6.000................... 130 21,715,057.65 4.44
6.001 to 6.250................... 80 12,591,680.70 2.57
6.251 to 6.500................... 99 16,044,499.52 3.28
6.501 to 6.750................... 76 13,313,076.86 2.72
6.751 to 7.000................... 93 19,553,912.89 4.00
7.001 to 7.250................... 63 10,932,755.04 2.24
7.251 to 7.500................... 66 12,730,720.72 2.60
7.501 to 7.750................... 70 13,066,071.44 2.67
7.751 to 8.000................... 114 20,941,843.21 4.28
8.001 to 8.250................... 87 15,234,129.33 3.11
8.251 to 8.500................... 147 24,682,977.57 5.05
8.501 to 8.750................... 125 21,112,473.19 4.32
8.751 to 9.000................... 188 27,593,050.46 5.64
9.001 to 9.250................... 121 17,075,801.46 3.49
9.251 to 9.500................... 185 25,267,667.09 5.17
9.501 to 9.750................... 122 18,260,569.60 3.73
9.751 to 10.000................... 151 19,418,997.44 3.97
10.001 to 10.250................... 75 9,894,777.74 2.02
10.251 to 10.500................... 90 11,002,415.22 2.25
10.501 to 10.750................... 78 8,080,819.64 1.65
10.751 to 11.000................... 82 10,144,049.74 2.07
11.001 to 11.250................... 50 4,348,082.60 0.89
11.251 to 11.500................... 45 5,043,967.06 1.03
11.501 to 11.750................... 38 4,400,251.34 0.90
11.751 to 12.000................... 36 3,189,409.53 0.65
12.001 to 12.250................... 16 1,479,698.83 0.30
12.251 to 12.500................... 14 1,663,631.88 0.34
12.501 to 12.750................... 10 954,785.27 0.20
12.751 to 13.000................... 6 923,723.56 0.19
13.001 to 13.250................... 2 182,774.76 0.04
13.751 to 14.000................... 1 69,960.61 0.01
----- ---------------- ------
Total.............................. 3,071 $ 489,148,839.56 100.00%
===== ================ ======
A-18
Next Interest Rate Adjustment Date
Percentage of
Total Mortgage Loans
Scheduled by Total Scheduled
Principal Balance Principal Balance
Next Interest Rate Number of as of the Cut-off as of the Cut-off
Adjustment Date Mortgage Loans Date Date
-------------------------------------- ---------------- ------------------ -------------------
December 2002......................... 17 $ 1,452,996.29 0.30
January 2003.......................... 29 2,860,824.53 0.58
February 2003......................... 39 3,329,067.44 0.68
March 2003............................ 32 3,127,662.59 0.64
April 2003............................ 27 2,847,275.74 0.58
May 2003.............................. 17 1,640,484.24 0.34
June 2003............................. 1 193,823.40 0.04
July 2003............................. 1 1,333,095.62 0.27
August 2003........................... 1 234,286.50 0.05
September 2003........................ 1 84,799.12 0.02
October 2003.......................... 1 173,729.55 0.04
November 2003......................... 3 387,833.06 0.08
December 2003......................... 2 288,430.29 0.06
January 2004.......................... 2 265,854.75 0.05
February 2004......................... 1 87,044.38 0.02
March 2004............................ 2 153,417.35 0.03
April 2004............................ 4 433,114.02 0.09
May 2004.............................. 7 1,072,965.29 0.22
June 2004............................. 11 1,353,408.18 0.28
July 2004............................. 35 5,436,628.02 1.11
August 2004........................... 480 83,189,028.01 17.01
September 2004........................ 520 94,766,251.50 19.37
October 2004.......................... 424 69,560,556.83 14.22
November 2004......................... 193 32,228,690.06 6.59
December 2004......................... 3 499,597.76 0.10
March 2005............................ 2 583,633.65 0.12
April 2005............................ 1 66,318.30 0.01
May 2005.............................. 3 657,282.83 0.13
June 2005............................. 8 1,050,815.33 0.21
July 2005............................. 27 3,362,219.53 0.69
August 2005........................... 441 65,637,472.63 13.42
September 2005........................ 346 51,446,850.44 10.52
October 2005.......................... 262 41,075,864.01 8.40
November 2005......................... 118 16,541,545.00 3.38
August 2007........................... 4 414,131.51 0.08
September 2007........................ 2 351,595.50 0.07
October 2007.......................... 4 960,246.31 0.20
----- ---------------- ------
Total.............................. 3,071 $ 489,148,839.56 100.00%
===== ================ ======
A-19
Occupancy Type of Mortgaged Premises
Percentage of
Total Mortgage Loans
Scheduled by Total Scheduled
Principal Balance Principal Balance
Number of as of the Cut-off as of the Cut-off
Occupancy Type Mortgage Loans Date Date
-------------------------------------- ---------------- ------------------ -------------------
Primary Home.......................... 2,886 $ 470,658,197.87 96.22%
Investment............................ 150 15,508,305.40 3.17
Second Home........................... 35 2,982,336.29 0.61
----- ---------------- ------
Total.............................. 3,071 $ 489,148,839.56 100.00%
===== ================ ======
Origination Program
Percentage of
Total Mortgage Loans
Scheduled by Total Scheduled
Principal Balance Principal Balance
Number of as of the Cut-off as of the Cut-off
Origination Program Mortgage Loans Date Date
-------------------------------------- ---------------- ------------------ -------------------
Full Documentation.................... 2,477 $ 361,587,960.18 73.92%
Stated Documentation.................. 489 99,518,548.06 20.35
Limited Documentation................. 99 26,595,061.48 5.44
No Ratio Documentation................ 6 1,447,269.84 0.30
----- ---------------- ------
Total............................... 3,071 $ 489,148,839.56 100.00%
===== ================ ======
Mortgage Loan Purpose
Percentage of
Total Mortgage Loans
Scheduled by Total Scheduled
Principal Balance Principal Balance
Number of as of the Cut-off as of the Cut-off
Mortgage Loan Purpose Mortgage Loans Date Date
-------------------------------------- ---------------- ------------------ -------------------
Cash Out Refinance.................... 2,046 $ 326,296,859.23 66.71%
Purchase.............................. 777 123,941,346.20 25.34
Refinance............................. 248 38,910,634.13 7.95
----- ---------------- ------
Total............................... 3,071 $ 489,148,839.56 100.00%
===== ================ ======
A-20
Property Type
Percentage of
Total Mortgage Loans
Scheduled by Total Scheduled
Principal Balance Principal Balance
Number of as of the Cut-off as of the Cut-off
Property Type Mortgage Loans Date Date
-------------------------------------- ---------------- ------------------ -------------------
Single Family Detached................ 2,424 $ 380,916,023.89 77.87%
Planned Unit Development.............. 232 51,116,082.96 10.45
Low-Rise Condominium.................. 174 22,843,768.18 4.67
Two-to Four-Family.................... 99 16,620,328.82 3.40
Single Family Attached................ 39 5,409,510.55 1.11
Manufactured Housing.................. 57 4,519,826.89 0.92
Townhouse............................. 27 3,615,233.85 0.74
High-Rise Condominium................. 18 2,908,737.16 0.59
Deminimus PUD......................... 1 1,199,327.26 0.25
----- ---------------- ------
Total............................... 3,071 $ 489,148,839.56 100.00%
===== ================ ======
Loan Type
Percentage of
Mortgage Loans
Total by Total
Scheduled Scheduled
Principal Balance Principal Balance
Number of as of the Cut-off as of the Cut-off
Loan Type Mortgage Loans Date Date
-------------------------------------- ---------------- ------------------ -------------------
2/28 LIBOR ARM........................ 1,772 $ 298,303,516.29 60.98%
3/27 LIBOR ARM........................ 1,223 181,907,726.76 37.19
6-Month LIBOR ARM..................... 55 4,676,820.14 0.96
5/25 LIBOR ARM........................ 10 1,725,973.32 0.35
One-Year Treasury ARM................. 11 2,534,803.05 0.52
----- ---------------- ------
Total............................... 3,071 $ 489,148,839.56 100.00%
===== ================ ======
A-21
Credit Score
Percentage of
Mortgage Loans
Total by Total
Scheduled Scheduled
Principal Balance Principal Balance
Number of as of the Cut-off as of the Cut-off
Credit Score Mortgage Loans Date Date
-------------------------------------- ---------------- ------------------ -------------------
Not Available....................... 57 $ 5,075,162.94 1.04%
450 to 499......................... 39 5,249,664.71 1.07
500 to 549......................... 762 107,466,826.68 21.97
550 to 599......................... 939 149,136,055.85 30.49
600 to 649......................... 831 141,556,860.21 28.94
650 to 699......................... 333 59,741,067.54 12.21
700 to 749......................... 87 16,992,433.89 3.47
750 to 799......................... 22 3,658,776.83 0.75
800 to 849......................... 1 271,990.91 0.06
----- ---------------- ------
Total............................... 3,071 $ 489,148,839.56 100.00%
===== ================ ======
Credit Grade
Percentage of
Mortgage Loans
Total by Total
Scheduled Scheduled
Principal Balance Principal Balance
Number of as of the Cut-off as of the Cut-off
Credit Grade Mortgage Loans Date Date
-------------------------------------- ---------------- ------------------ -------------------
A+.................................... 687 $ 122,847,638.63 25.11%
A..................................... 606 114,694,928.72 23.45
A-.................................... 1,052 161,321,950.10 32.98
B..................................... 474 61,406,284.05 12.55
C..................................... 211 24,173,162.98 4.94
D..................................... 41 4,704,875.08 0.96
----- ---------------- ------
Total............................... 3,071 $ 489,148,839.56 100.00%
===== ================ ======
Delinquency
Percentage of
Total Mortgage Loans
Scheduled by Total Scheduled
Principal Balance Principal Balance
Number of as of the Cut-off as of the Cut-off
Delinquency Mortgage Loans Date Date
-------------------------------------- ---------------- ------------------ -------------------
Current............................... 3,037 $ 484,041,801.90 98.96%
30 days delinquent.................... 34 5,107,037.66 1.04
----- ---------------- ------
Total............................... 3,071 $ 489,148,839.56 100.00%
===== ================ ======
A-22
Geographic Distribution of Mortgaged Premises
Percentage of
Total Mortgage Loans
Scheduled by Total Scheduled
Principal Balance Principal Balance
Number of as of the Cut-off as of the Cut-off
State Mortgage Loans Date Date
-------------------------------------- ---------------- ------------------ -------------------
Alaska............................... 12 $ 2,114,245.35 0.43%
Arizona.............................. 77 9,978,108.25 2.04
Arkansas............................. 15 1,365,873.54 0.28
California........................... 571 127,676,413.38 26.10
Colorado............................. 80 15,091,945.81 3.09
Connecticut.......................... 56 11,610,996.81 2.37
Delaware............................. 6 989,489.21 0.20
Florida.............................. 294 38,999,635.77 7.97
Georgia.............................. 184 26,872,412.70 5.49
Hawaii............................... 5 1,665,349.35 0.34
Idaho................................ 10 897,296.37 0.18
Illinois............................. 116 17,262,071.24 3.53
Indiana.............................. 80 8,042,896.89 1.64
Iowa................................. 13 1,093,540.55 0.22
Kansas............................... 30 2,436,267.95 0.50
Kentucky............................. 21 2,410,303.96 0.49
Louisiana............................ 23 2,062,108.00 0.42
Maine................................ 3 511,927.48 0.10
Maryland............................. 111 24,415,789.07 4.99
Massachusetts........................ 51 12,657,852.05 2.59
Michigan............................. 80 8,428,641.26 1.72
Minnesota............................ 52 7,629,635.20 1.56
Mississippi.......................... 46 4,481,965.84 0.92
Missouri............................. 71 7,398,928.48 1.51
Montana.............................. 4 326,321.08 0.07
Nebraska............................. 9 1,854,749.02 0.38
Nevada............................... 29 4,660,633.64 0.95
New Hampshire........................ 15 2,240,955.27 0.46
New Jersey........................... 100 19,725,355.04 4.03
New Mexico........................... 27 3,540,707.66 0.72
New York............................. 58 13,050,057.30 2.67
North Carolina....................... 51 6,169,256.12 1.26
North Dakota......................... 4 394,309.71 0.08
Ohio................................. 127 12,331,122.59 2.52
Oklahoma............................. 29 2,545,567.63 0.52
Oregon............................... 52 7,273,767.37 1.49
Pennsylvania......................... 99 11,684,403.19 2.39
Rhode Island......................... 7 1,134,948.32 0.23
South Carolina....................... 31 3,081,485.45 0.63
South Dakota......................... 2 105,182.98 0.02
Tennessee............................ 44 4,176,589.42 0.85
Texas................................ 69 9,223,586.99 1.89
Utah................................. 23 3,028,553.09 0.62
Virginia............................. 171 30,887,737.04 6.31
Washington........................... 60 8,800,300.71 1.80
West Virginia........................ 6 462,487.71 0.09
Wisconsin............................ 44 5,944,711.30 1.22
Wyoming.............................. 3 412,356.42 0.08
----- ---------------- ------
Total.............................. 3,071 $ 489,148,839.56 100.00%
===== ================ ======
No more than approximately 0.45% of the related mortgaged properties
are located in any one postal zip code.
A-23
Prepayment Penalty Type
Percentage of
Mortgage Loans
Total by Total
Scheduled Scheduled
Principal Balance Principal Balance
Number of as of the Cut-off as of the Cut-off
Prepayment Penalty Type Mortgage Loans Date Date
-------------------------------------- ---------------- ------------------ -------------------
1 Year-6 months advance............... 12 $ 1,722,765.99 0.35%
2 Year-3 months advance............... 14 2,872,495.59 0.59
2 Year-6 months advance .............. 1,201 197,741,276.58 40.43
2 Year-1%............................. 6 1,361,503.02 0.28
3 Year-3 months advance .............. 26 6,634,264.02 1.36
3 Year-6 months advance .............. 1,221 176,689,828.56 36.12
3 Year-Waived each adjustment......... 1 139,759.34 0.03
3 Year-1% ............................ 9 923,902.55 0.19
3 Year-2% ............................ 12 1,133,818.95 0.23
3 Year 3/2/1.......................... 5 414,843.84 0.08
3 Year-5/4/3.......................... 2 132,138.58 0.03
5 Year-6 months advance .............. 30 2,852,795.47 0.58
No prepayment penalty................. 441 80,706,401.68 16.50
Penalty............................... 91 15,823,045.39 3.23
----- ---------------- ------
Total............................... 3,071 $ 489,148,839.56 100.00%
===== ================ ======
A-24
Prospectus
[GRAPHIC OMITTED] SAXON ASSET SECURITIES COMPANY
SAXON (Depositor)
MORTGAGE LOAN ASSET BACKED CERTIFICATES
(Issuable in series by separate trusts)
-------------------
Each series of certificates:
o will consist of one or more classes of mortgage pass through certificates
representing interests in the assets of a trust; and
o will receive principal and interest from payments collected on the assets
of the related trust.
The assets of each trust:
o will be mortgage loans or mortgage backed securities sold to the trust by
Saxon Asset Securities Company; and
o in the case of mortgage loans, will be serviced by one or more entities
identified in the related prospectus supplement.
Mortgage loans included in any trust will be secured by first or second liens
on:
o one- to four-family residential properties,
o condominium units,
o manufactured housing, or
o units in planned unit developments.
You should carefully consider the risk factors beginning on page 3 of
this prospectus.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
The date of this prospectus is September 25, 2001.
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED
IN THIS PROSPECTUS AND THE PROSPECTUS SUPPLEMENT
Information is provided to you about the certificates in two separate
documents that progressively provide more detail: (1) this prospectus, which
provides general information, some of which may not apply to a particular series
of certificates, including your series, and (2) the accompanying prospectus
supplement, which will describe the specific terms of your series of
certificates, including:
o the principal balance and interest rate of each class,
o the timing and priority of interest and principal payments,
o statistical and other information about the mortgage assets,
o information about credit enhancement, if any, for each class,
o the ratings for each class, and
o the method for selling the certificates.
The prospectus supplement describes the terms of the certificates in
greater detail than this prospectus, and may provide information that differs
from this prospectus. If the terms of a particular series of certificates vary
between this prospectus and the prospectus supplement, you should rely on the
information in the prospectus supplement.
You should rely only on the information provided in this prospectus and
the accompanying prospectus supplement, including the information incorporated
by reference. No one has been authorized to provide you with different
information. The certificates are not being offered in any state where the offer
is not permitted. Saxon Assets Securities Company does not claim the accuracy of
the information in this prospectus or the accompanying prospectus supplement as
of any date other than the dates stated on their respective covers.
Cross-references are included in this prospectus and in the
accompanying prospectus supplement to captions in these materials where you can
find further related discussions.
2
RISK FACTORS
Prospective investors should consider the following factors, as well as
the factors identified under "Risk Factors" in the related prospectus
supplement, in connection with a purchase of the certificates of any series.
The trusts will have The certificates will represent an ownership interest
no significant assets in the related trust and will not represent an
other than the assets interest in or obligation of any other entity and will
assigned to them by not be insured by any government agency or
the depositor and instrumentality. Each trust is expected to have no
certificateholders may significant assets other than the assets assigned to
look only to those it by Saxon Asset Securities Company, the depositor.
limited assets for
repayment of their You must rely primarily upon payments on the assets
certificates assigned to the related trust, any security for those
certificates and any sources of credit enhancement
identified in the related prospectus supplement for
distributions on the certificates.
None of any governmental agency or instrumentality,
the depositor, any servicer, any master servicer, any
trustee or any of their affiliates will guarantee or
insure any assets assigned to a trust, except as set
forth in the related prospectus supplement.
Credit enhancement, Any credit enhancement for any series of certificates
if provided, will be may be limited in amount and may be subject to
limited in both periodic reduction in accordance with a schedule or
amount and scope of formula. In addition, credit enhancement may provide
coverage, and may only very limited coverage as to some types of losses
not be sufficient to and may provide no coverage as to other types of
cover all losses or losses.
risks on your
investment
Property values may If the residential real estate market in general or a
decline, leading to regional or local area where the mortgage assets for a
higher losses on the trust are concentrated should experience an overall
mortgage loans, which decline in property values or a significant downturn
could reduce your in economic conditions, rates of delinquencies,
ability to be repaid foreclosures and losses could be higher than those now
generally experienced in the mortgage lending
industry.
To the extent losses are not covered by credit
enhancement, you will have to look primarily to the
value of the mortgaged premises for recovery of the
outstanding principal and unpaid interest of the
defaulted mortgage loans.
3
The bankruptcy of the The seller and the depositor intend that the transfers
seller may result in a of assets to the depositor and, in turn, to the
delay in or reduction related trust constitute sales under applicable law
of distributions rather than pledges to secure indebtedness for
insolvency purposes. If the seller becomes a debtor
under the federal Bankruptcy Code, however, a
creditor, trustee-in-bankruptcy or receiver of that
seller might argue that those transfers were pledges
rather than sales. That position, if argued or
accepted by a court, could result in a delay in or
reduction of distributions on the certificates of the
related series.
State and federal In addition to anti-deficiency and related
credit protection laws legislation, numerous other federal and state
may limit collection of statutory provisions, including the federal bankruptcy
principal and interest laws, the federal Soldiers' and Sailors' Civil Relief
on the mortgage loans Act of 1940 and state laws affording relief to
debtors, may interfere with or affect the ability of a
secured mortgage lender to realize upon its security.
Other federal and state laws provide priority to
certain tax and other liens over the lien of a
mortgage or deed of trust.
Modification of With respect to a mortgage loan on which a material
mortgage default has occurred or a payment default is imminent,
loans may delay or the servicer may enter into a forbearance or
reduce certificate modification agreement with the borrower. The terms of
payments any forbearance or modification agreement may affect
the amount and timing of payments on the mortgage loan
and, consequently, the amount and timing of payments
on one or more classes of the related series of
certificates. For example, a modification agreement
that results in a lower mortgage interest rate would
lower the pass through rate of any related class of
certificates that accrues interest at a rate based on
the weighted average net rate of the mortgage loans.
Prepayments on the The prepayment experience on the mortgage assets
mortgage loans could underlying a particular series of certificates will
cause you to be paid affect:
earlier than you
expect, which may o the average life of each class of those
adversely affect your certificates; and
yield to maturity
o for certificates purchased at a price other than
par, the effective yield on the certificates.
The timing and amount of prepayments on mortgage loans
are influenced by a variety of economic, geographic,
legal, social and other factors, including changes in
interest rate levels. In general, if mortgage interest
rates fall, the rate of prepayment would be expected
to increase. Conversely, if mortgage interest rates
rise, the rate of prepayment would be expected to
decrease.
4
Prepayments may also result from:
o foreclosure, condemnation and other dispositions of
the mortgaged premises, including amounts paid by
insurers under applicable insurance policies;
o the repurchase of any mortgage loan as to which
there has been a material breach of warranty or
defect in documentation or from the deposit of
certain amounts in respect of the delivery of a
substitute mortgage loan;
o the repurchase of mortgage loans modified in lieu
of refinancing;
o the repurchase of any liquidated mortgage loan or
delinquent mortgage loan, if applicable; or
o the repurchase or redemption of all the
certificates of a series or all the mortgage loans
or mortgage certificates in certain circumstances.
The yields realized by the holders of certain
certificates of a series with disproportionate
allocations of principal and interest will be
extremely sensitive to levels of prepayments on the
mortgage assets of the related trust. No assurance can
be given as to the prepayment experience of the
mortgage loans underlying any series of certificates.
You must make your own decision as to the appropriate
prepayment assumption.
You may not be able There can be no assurance that a secondary market will
to sell your securities, develop for the certificates of any series or, if a
and may have to hold market does develop, that it will provide you with
your securities to liquidity of investment or that it will continue for
maturity even though the life of your certificates.
you may want to sell
them Particular classes of certificates may not constitute
mortgage related securities under SMMEA, and some
investors may be subject to legal restrictions that
preclude their purchase of any such non-SMMEA
certificates. In addition, if so specified in the
related prospectus supplement, transferability of some
classes of certificates to particular types of
entities may be restricted.
Any restrictions on the purchase or transferability of
the certificates of a series may have a negative
effect on the development of a secondary market for
the certificates.
5
Issuance of If so specified in the related prospectus supplement,
certificates in a trust may issue certificates of a series in
book-entry form may book-entry form. Issuance of the certificates in
reduce the liquidity of book-entry form may reduce the liquidity of the
the certificates certificates in the secondary market because investors
may be unwilling to purchase certificates for which
they cannot obtain physical certificates. In addition,
because transfers of book-entry certificates will, in
most cases, be able to be effected only through
persons or entities that participate in the book-entry
system, your ability to pledge a book-entry
certificate to persons or entities that do not
participate in the book-entry system, or otherwise to
take actions with respect to a book-entry certificate,
may be impaired because physical certificates
representing the certificates will generally not be
available. You may experience some delay in receipt of
distributions of interest on and principal of the
book-entry certificates because the trustee will
forward distributions through book-entry system
participants which thereafter will be required to
credit those distributions to your accounts as a
beneficial owner of the certificates, whether directly
or indirectly through financial intermediaries.
The ratings assigned Any rating of certificates is not a recommendation to
to your securities by buy, sell or hold certificates and is subject to
the rating agencies revision or withdrawal at any time by the rating
may be lowered or agency issuing such rating. The rating of certificates
withdrawn at any credit-enhanced through external credit enhancement,
time, which may examples of which include a letter of credit,
affect the value of financial guaranty insurance policy or mortgage pool
your certificates and insurance policy, will depend primarily on the
your ability to sell creditworthiness of the provider of such external
them credit enhancement. Any lowering of the rating
assigned to the claims-paying ability of the
enhancement provider below the rating initially given
to the certificates of the related series would likely
result in a lowering of the rating assigned to the
certificates. The depositor will not be obligated to
obtain additional credit enhancement if necessary to
maintain the rating initially assigned to the
certificates of any series.
Any original issue Compound interest certificates and some classes of
discount must be certificates that are entitled only to interest
included in income for distributions will be, and particular classes of
tax purposes certificates may be, issued with original issue
discount for federal income tax purposes. The holder
of a certificate issued with original issue discount
must include original issue discount in ordinary gross
income for federal income tax purposes as it accrues,
in advance of receipt of the cash attributable to
income.
6
Mortgage loans with A portion of the mortgage assets included in a trust
balloon payment may be balloon loans that provide for the payment of
features may have a the unamortized principal balance of the mortgage
greater default risk loans in a single payment at maturity. Balloon loans
provide for equal monthly payments, consisting of
principal and interest, generally based on a 30-year
amortization schedule, and a single payment of the
remaining balance of the balloon loan, generally five,
seven, 10 or 15 years after origination. Amortization
of a balloon loan based on a scheduled period that is
longer than its term results in a remaining principal
balance at maturity that is substantially larger than
the regular scheduled payments. The depositor does not
have any information regarding the default history or
prepayment history of payments on balloon loans.
Because borrowers of balloon loans must make
substantial single payments at maturity, the default
risk associated with balloon loans may be greater than
that associated with fully-amortizing mortgage loans.
The ability of a borrower to repay a balloon loan at
maturity frequently will depend upon the borrower's
ability to refinance the loan. Neither the depositor
nor the trustee is obligated to obtain refinancing.
Any loss on a balloon loan resulting from a borrower's
inability to obtain refinancing will be borne by
certificateholders if not covered by credit
enhancement.
Mortgage loans A portion of the mortgage assets included in a trust
secured by junior may be loans secured by second or more junior liens on
liens may experience residential properties. Because the rights of a holder
higher rates of of a second or more junior lien are subordinate to the
delinquencies and rights of senior lienholders, the position of the
losses trust and the holders of the related certificates
could be more adversely affected by a reduction in the
value of the mortgaged premises than would the
position of the senior lienholders. If a borrower
defaults, liquidation or other proceeds may be
insufficient to satisfy a second or more junior lien
after satisfaction of the senior lien and the payment
of any liquidation expenses.
The rate of A portion of the mortgage assets included in a trust
delinquency on may be secured by liens on mortgaged premises that are
mortgage loans not owner- occupied. The rate of delinquencies,
secured by non-owner foreclosures and losses on the mortgage loans on those
occupied mortgage mortgaged premises could be higher than on mortgage
premises could be loans secured by liens on mortgaged premises which are
higher the primary residences of the owners.
7
The seller's All or a portion of the mortgage assets may consist of
underwriting mortgage loans underwritten in accordance with the
standards are less underwriting standards for non-conforming credits. A
stringent than those mortgage loan made to a non-conforming credit means a
used by federal mortgage loan that is ineligible for purchase under
agencies, which may the standard purchase programs of Fannie Mae or
increase the risk of Freddie Mac due to borrower credit characteristics,
default on the property characteristics, loan documentation
mortgage loans guidelines or other characteristics that do not meet
Fannie Mae or Freddie Mac underwriting guidelines,
including a loan made to:
o a borrower whose creditworthiness and repayment
ability do not satisfy Fannie Mae or Freddie Mac
underwriting guidelines; or
o a borrower with a record of major derogatory
credit items, including default on a prior
mortgage loan, credit write-offs, outstanding
judgments or prior bankruptcies.
As a consequence, delinquencies and foreclosures can
be expected to be greater with respect to those
mortgage loans than with respect to mortgage loans
originated in accordance with Fannie Mae or Freddie
Mac underwriting guidelines. In addition, changes in
the values of the mortgaged premises may have a
greater effect on the loss experience of those
mortgage loans than on mortgage loans originated in
accordance with Fannie Mae or Freddie Mac underwriting
guidelines. You must make your own decision as to the
effect of non-conforming credits upon the delinquency,
foreclosure, and prepayment experience of the mortgage
loans.
Mortgage loans may A substantial portion of the mortgage loans may be
be delinquent, delinquent upon the issuance of the related
resulting in greater certificates. Inclusion of delinquent mortgage loans
defaults, prepayments may cause the rate of defaults and prepayments to
and losses increase and, in turn, may cause losses to exceed the
available credit enhancement and affect the yield on
the related certificates.
Any violation of A number of federal and state laws and regulations
consumer protection related to residential mortgage refinance transactions
laws may give the contain stringent limits on interest rates,
borrower the right to origination fees and other loan terms, and impose
rescind or cancel the detailed disclosure requirements. In some instances,
loan transaction violations of these laws and regulations by the
originator of a loan could cause loans to be
unenforceable, or give the borrower the right to
rescind or cancel the loan transaction. Any loan
affected by violations of law would have a
significantly increased risk of default or prepayment.
8
DESCRIPTION OF THE CERTIFICATES
General
The certificates described in this prospectus and in the related
prospectus supplement will be issued from time to time in series under one or
more pooling and servicing agreements. The provisions of each agreement will
vary depending upon the nature of the certificates to be issued and the nature
of the related trust. The following summaries describe the material provisions
common to each series of certificates. The summaries do not purport to be
complete and are subject to the prospectus supplement and the agreement with
respect to a particular series. The material terms of the agreement with respect
to a series of certificates will be further described in the related prospectus
supplement and a copy of the agreement will be filed with the Securities and
Exchange Commission on Form 8-K.
The certificates of a series will be entitled to payment only from the
assets of the related trust. The certificates do not represent an interest in or
obligation of the depositor, the seller, any servicer, any master servicer, any
trustee or any of their affiliates, except as set forth herein and in the
related prospectus supplement. Neither the certificates nor the underlying
mortgage assets will be guaranteed or insured by any governmental agency or
instrumentality or by the depositor, the seller, any servicer, any master
servicer, any trustee or any of their affiliates, except as set forth in the
related prospectus supplement. To the extent that delinquent payments on or
losses in respect of defaulted mortgage loans are not advanced by the applicable
servicer or any other entity or paid from any applicable credit enhancement,
those delinquencies may result in delays in the distribution of payments to the
holders of one or more classes of certificates and those losses may be allocated
to the holders of one or more classes of certificates.
The certificates of each series will be issued as fully registered
certificates in certificated or book-entry form in the authorized denominations
for each class specified in the related prospectus supplement. The certificates
of each series in certificated form may be transferred, subject to the
limitations on transfer, if any, specified in the related agreement, or
exchanged at the corporate trust office of the trustee without the payment of
any service charge, other than any tax or other governmental charge payable in
connection therewith. If so specified in the prospectus supplement for a series,
distributions of principal and interest on each certificate in certificated form
will be made on each distribution date by or on behalf of the trustee by check
mailed to each holder of a certificate at the address of the holder appearing on
the books and records of the trust or by wire transfer of immediately available
funds upon timely request to the trustee in writing by any holder of a
certificate having an initial principal amount of at least $1,000,000 or any
other amount specified in the related prospectus supplement; provided, however,
that the final distribution in retirement of a certificate of a series in
certificated form will be made only upon presentation and surrender of the
certificate at the corporate trust office of the trustee. Distributions of
principal and of interest on each class of certificates in book-entry form will
be made as set forth below.
9
Classes of Certificates
Each series of certificates will be issued in one or more classes as
specified in the related prospectus supplement. The certificates of any class of
any series:
o may be entitled to receive:
o only principal, only interest (or other specified
collections) or any combination thereof,
o prepayments of principal throughout the life of the
certificates or only during specified periods,
o amounts only after the occurrence of specified events, or in
accordance with a specified schedule or formula or on the
basis of distributions on specified portions of the mortgage
assets,
o may be subordinated in right to receive distributions and may be
subject to allocation of losses in favor of one or more other
classes of certificates of the series, and
o which are interest bearing certificates may be entitled to
receive:
o interest at a pass through rate, which may be fixed,
variable or adjustable and may differ from the rate at which
other classes of certificates of the series are entitled to
receive interest, and
o distributions only after the occurrence of specified events
and may accrue interest until such events occur, in each case
as specified in the related prospectus supplement.
REGISTRATION OF THE OFFERED SECURITIES
Book-Entry Registration
The prospectus supplement for a series may specify that the
certificates of that series initially will be represented by one or more
book-entry certificates, which are expected to be registered in the name Cede &
Co., the nominee of The Depository Trust Company. Unless and until the
certificates are issued in fully registered, certificated form, no beneficial
owner of a book-entry certificate will be entitled to receive a physical
certificate. All references in this prospectus to actions by certificateholders
refer to actions taken by DTC or its nominee, as the case may be, upon
instructions from the participants in the DTC system, and all references in this
prospectus to payments, notices, reports and statements to certificateholders
refer to participants, notices, reports and statements to DTC or its nominee, as
the case may be, as the registered holder of the certificates, for distribution
to certificateholders in accordance with DTC's procedures. The beneficial owners
of the certificates will not be recognized by the trustee as certificateholders,
and the beneficial owners of the certificates will be permitted to exercise the
rights of certificateholders only indirectly through DTC and its participating
organizations. The beneficial owners of the certificates may hold certificates
in Europe through Clearstream or Euroclear, which in turn will hold through DTC,
if they participate in DTC, or indirectly through
10
organizations participating in DTC. See "- Clearstream and Euroclear" in this
prospectus for a further discussion of Clearstream and the Euroclear system.
The Depository Trust Company
DTC is a limited-purpose trust company organized under the New York
Banking Law, a "banking organization" within the meaning of the New York Banking
Law, a member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code and a "clearing agency"
registered under the provisions of Section 17A of the Securities Exchange Act of
1934, as amended. DTC holds securities for its participating organizations and
facilitates the clearance and settlement among those organizations of securities
transactions, such as transfers and pledges, in deposited securities through
electronic book-entry changes in their accounts. The electronic book-entry
system eliminates the need for physical movement of securities. The
organizations that participate in DTC include securities brokers and dealers,
who may include the underwriters of the certificates, banks, trust companies,
clearing corporations and other organizations. Indirect access to the DTC system
is also available to others such as securities brokers and dealers, banks and
trust companies that clear through or maintain a custodial relationship with an
organization participating in DTC, either directly or indirectly. Transfers
between organizations participating in DTC will occur in accordance with DTC
rules. The rules applicable to DTC and its participating organizations are on
file with the Securities and Exchange Commission.
Clearstream and Euroclear will hold omnibus positions on behalf of
their respective participating organizations through customers' securities
accounts in the name of Clearstream and Euroclear on the books of their
respective depositaries. The depositaries will in turn hold those positions in
customers' securities accounts in the depositaries' names on the books of DTC.
Transfers between organizations participating in Clearstream and organizations
participating in the Euroclear system will occur in accordance with their
respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC in the United States, on the one hand, and directly or indirectly
through organizations participating in Clearstream or the Euroclear system, on
the other, will be effected in DTC in accordance with DTC rules on behalf of the
relevant European international clearing system by its depositary; however,
these cross-market transactions will require delivery of instructions to the
relevant European international clearing system by the counterparty in that
system in accordance with its rules and procedures and within its established
deadlines. The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to its
depositary to take action to effect final settlement on its behalf by delivering
or receiving securities in DTC and making or receiving payment in accordance
with normal procedures for same-day funds settlement applicable to DTC.
Organizations participating in Clearstream or the Euroclear system may not
deliver instructions directly to the Clearstream or Euroclear depositaries.
Because of time zone differences, credits or securities in Clearstream
or Euroclear as a result of a transaction with an organization participating in
DTC will be made during the
11
subsequent securities settlement processing, dated the business day following
the DTC settlement date, and these credits or any transactions in these
securities settled during this processing will be reported to the relevant
organization participating in Clearstream or the Euroclear system on that
business day. Cash received in Clearstream or the Euroclear system as a result
of sales of securities by or through an organization participating in
Clearstream or the Euroclear system to an organization participating in DTC will
be received with value on the DTC settlement date but will be available in the
relevant Clearstream or Euroclear cash account only as of the business day
following settlement in DTC.
Purchases of certificates under the DTC system must be made by or
through an organization participating in DTC, which organization will receive a
credit for the certificates on DTC's records. The ownership interests of the
beneficial owners of the certificates are in turn to be recorded on the records
of that organization or, in the case of a purchase made indirectly through an
organization participating in DTC, on the records of the indirect participant.
The beneficial owners of the certificates will not receive written confirmation
from DTC of their purchase, but they are expected to receive written
confirmations providing details of the transaction, as well as periodic
statements of their holdings, from the organization through which they entered
into the transaction. Transfers of ownership interests in the certificates are
to be accomplished by entries made on the books of organizations participating
in DTC acting on behalf of the beneficial owners of the certificates.
To facilitate subsequent transfers, all certificates deposited with DTC
by its participating organizations are registered in the name of Cede. The
deposit of certificates with DTC and their registration in the name of Cede
effects no change in beneficial ownership. DTC has no knowledge of the identity
of the beneficial owners of the certificates. DTC's records reflect only the
identity of the organizations participating in DTC to whose accounts the
certificates are credited, which may or may not be the beneficial owners of the
certificates. Those organizations will remain responsible for keeping account of
their holdings on behalf of their customers.
Because DTC can only act on behalf of its participating organizations,
who in turn act on behalf of organizations participating indirectly in DTC and
certain banks, the ability of the beneficial owners of the certificates to
pledge those securities to persons or entities that do not participate in the
DTC system, or otherwise take action in respect of the certificates, may be
limited due to lack of a physical certificate for the certificates.
Conveyance of notices and other communications by DTC to its
participating organizations, by those organizations to indirect participants in
DTC, and by direct or indirect participants in DTC to the beneficial owners of
the certificates will be governed by arrangements among them, subject to any
statutory or regulatory requirements as may be in effect from time to time.
Neither DTC nor Cede will consent or vote with respect to the certificates.
Under its usual procedures, DTC mails an omnibus proxy to the issuer as soon as
possible after the record date, which assigns Cede's consenting or voting rights
to those organizations participating in DTC to whose accounts the certificates
are credited on the record date as identified in a listing attached to the
omnibus proxy. Principal and interest payments on the certificates will be made
to DTC. DTC's practice is to credit the accounts of its participating
organizations on the distribution date in accordance with their respective
holdings shown on DTC's records unless
12
DTC has reason to believe that it will not receive payment on the distribution
date. Payments by organizations participating in DTC to the beneficial owners of
the certificates will be governed by standing instructions and customary
practices, as is the case with securities held for the accounts of customers in
bearer form or registered in street name, and will be the responsibility of
those organizations and not of DTC, the trustee or Saxon Asset Securities
Company, subject to any statutory or regulatory requirements as may be in effect
from time to time. Payment of principal and interest to DTC is the
responsibility of the trustee, as applicable, disbursement of those payments to
organizations participating in DTC is the responsibility of DTC, and
disbursement of those payments to the beneficial owners of the certificates is
the responsibility of those organizations or indirect participants in DTC.
Accordingly, the beneficial owners of the certificates may experience some delay
in their receipt of principal and interest payments.
The information in this section concerning DTC and DTC's book-entry
system has been obtained from sources that the depositor believes to be
reliable, but the depositor assumes no responsibility for its accuracy.
Clearstream and Euroclear
Clearstream Banking, societe anonyme, is incorporated under the laws of
Luxembourg as a professional depository. Clearstream holds securities for its
participating organizations and facilitates the clearance and settlement of
securities transactions between those organizations through electronic
book-entry changes in their accounts. The electronic book-entry system
eliminates the need for physical movement of certificates. Transactions may be
settled by Clearstream in any of 36 currencies, including United States dollars.
Clearstream provides to its participating organizations services for
safekeeping, administration, clearance and settlement of internationally traded
securities and securities lending and borrowing. Clearstream interfaces with
domestic markets in several countries. As a registered bank in Luxembourg,
Clearstream is subject to regulation by the Commission de Surveillance du
Secteur Financier. Organizations participating in Clearstream are world-wide
financial institutions, including underwriters, securities brokers and dealers,
banks, trust companies, clearing corporations and other organizations and may
include the underwriters of the certificates. Indirect access to Clearstream is
also available to others, including banks, brokers, dealers and trust companies,
that clear through or maintain a custodial relationship with an organization
participating in Clearstream, either directly or indirectly. Clearstream has
established an electronic bridge with Morgan Guaranty Trust Company of New York,
as operator of the Euroclear system, in Brussels, Belgium to facilitate
settlement of trades between Clearstream and Euroclear.
The Euroclear system was created in 1968 to hold securities for
organizations participating in the Euroclear system and to clear and settle
transactions between those organizations through simultaneous electronic
book-entry delivery against payment. The electronic book-entry system eliminates
the need for physical movement of certificates and any risk from lack of
simultaneous transfers of securities and cash. Transactions may be settled
through the Euroclear system 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 under arrangements generally similar to the arrangements for
cross-market transfers with DTC.
13
The Euroclear system is operated by the Brussels, Belgium office of
Morgan Guaranty Trust Company of New York under a contract with Euroclear
Clearance System, S.C., a Belgian cooperative corporation. All operations are
conducted by that office, and all Euroclear securities clearance accounts and
Euroclear cash accounts are maintained with that office, not Euroclear Clearance
System, S.C. Euroclear Clearance System, S.C. establishes policy for the
Euroclear system on behalf of organizations participating in the Euroclear
system. Those organizations include banks, including central banks, securities
brokers and dealers and other professional financial intermediaries and may
include the underwriters of the certificates. Indirect access to the Euroclear
system is also available to other firms that clear through or maintain a
custodial relationship with organizations participating in the Euroclear system,
either directly or indirectly.
Morgan Guaranty is a New York banking corporation and a member bank of
the Federal Reserve System. Morgan Guaranty is regulated and examined by the
Board of Governors of the Federal Reserve System and the New York State Banking
Department. The Brussels, Belgium office of Morgan Guaranty is regulated and
examined by the Belgian Banking Commission.
The Terms and Conditions Governing Use of Euroclear, the related
Operating Procedures of the Euroclear system and applicable Belgian law govern
the securities clearance accounts and cash accounts maintained with the operator
of the Euroclear system, 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 operator of
the Euroclear system acts only on behalf of organizations participating in the
Euroclear system and has no record of or relationship with persons holding
through those organizations.
Distributions with respect to certificates held through Clearstream or
Euroclear will be credited to the cash accounts of organizations participating
in Clearstream or Euroclear in accordance with the relevant system's rules and
procedures, to the extent received by its depositary. These distributions will
be subject to tax reporting in accordance with relevant United States tax laws
and regulations. Clearstream or the operator of the Euroclear system, as the
case may be, will take any other action permitted to be taken by a
certificateholder under the applicable agreement on behalf of an organization
participating in Clearstream or the Euroclear system only in accordance with its
relevant rules and procedures and subject to its depositary's ability to effect
those actions on its behalf through DTC.
Although DTC, Clearstream and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of the certificates among
participants in DTC, Clearstream and the Euroclear system, they are under no
obligation to perform or continue to perform these procedures, and these
procedures may be discontinued at any time.
The information in this section concerning Clearstream, Euroclear and
DTC has been obtained from sources that the depositor believes to be reliable,
but the depositor assumes no responsibility for its accuracy.
14
Global Clearance, Settlement and Tax Documentation Procedures
The globally-offered securities to be issued from time to time will
initially be available only in book-entry form. Investors in the
globally-offered securities may hold those securities through any of DTC,
Clearstream or Euroclear. The globally-offered 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 globally-offered
securities through Clearstream and Euroclear will be conducted in accordance
with their normal rules and operating procedures and in accordance with
conventional eurobond practice.
Secondary market trading between investors holding globally-offered
securities through DTC will be conducted in accordance with the rules and
procedures applicable to U.S. corporate debt obligations.
Secondary cross-market trading between Clearstream or Euroclear and
organizations participating in DTC that hold offered securities will be effected
on a delivery-against-payment basis through the respective depositaries of
Clearstream and Euroclear, in such capacity, and as DTC participants.
Initial Settlement. All globally-offered securities will be held in the
book-entry form by DTC in the name of Cede as nominee of DTC. Investors'
interests in the globally-offered securities will be represented through
financial institutions acting on their behalf as direct and indirect
participants in DTC. As a result, Clearstream and Euroclear will hold positions
on behalf of their participants through their respective depositaries, which in
turn will hold positions in accounts as DTC participants. Investors electing to
hold globally-offered securities through DTC will follow the settlement
practices applicable to U.S. corporate debt obligations. Investors' securities
custody accounts will be credited with their holdings against payment in
same-day funds on the settlement date. Investors electing to hold
globally-offered securities through Clearstream or Euroclear accounts will
follow the settlement procedures applicable to conventional eurobonds, except
that there will be no temporary global security and no distribution compliance
period. All globally-offered securities will be credited to the securities
custody accounts on the settlement date against payment in same-day funds.
Establishing Place of Delivery. 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
organizations participating in DTC will be settled using the procedures
applicable to U.S. corporate debt obligations in same-day funds.
Trading Between Clearstream and/or Euroclear Participants. Secondary
market trading between organizations participating in Clearstream or the
Euroclear system will be settled using the procedures applicable to conventional
eurobonds in same-day funds.
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Trading Between DTC Seller and Clearstream or Euroclear Purchaser. When
globally-offered securities are to be transferred from the account of an
organization participating in DTC to the account of an organization
participating in Clearstream or the Euroclear system, the purchaser will send
instructions to Clearstream or Euroclear through a Clearstream participant or a
Euroclear system participant at least one business day prior to settlement.
Clearstream or Euroclear will instruct the respective depositary to receive the
globally-offered securities against payment. Payment will include interest
accrued on the globally-offered securities from and including the last coupon
payment date to and excluding the settlement date. Payment will then be made by
the respective depositary to the account of the DTC participant against delivery
of the globally-offered securities. After settlement has been completed, the
globally-offered securities will be credited to the respective clearing system
and by the clearing system, in accordance with its usual procedures, to the
account of the Clearstream participant or the Euroclear system participant. The
globally-offered securities credit will appear the next day, European Time, and
the cash debit will be back-valued to, and the interest on the globally-offered
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, the Clearstream or Euroclear cash debit will be valued
instead as of the actual settlement date.
Organizations participating in Clearstream or the Euroclear system 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
pre-position funds for settlement, either from cash on hand or existing lines of
credit, as they would for any settlement occurring within Clearstream or
Euroclear. Under this approach, they may take on credit exposure to Clearstream
or Euroclear until the globally-offered securities are credited to their
accounts one day later.
As an alternative, if Clearstream or Euroclear has extended a line of
credit to them, organizations participating in Clearstream or the Euroclear
system can elect not to pre-position funds that allow that credit line to be
drawn upon to finance settlement. Under this procedure, Clearstream participants
or Euroclear system participants purchasing globally-offered securities would
incur overdraft charges for one day, assuming they cleared the overdraft when
the securities were credited to their accounts. However, interest on the
globally-offered securities would accrue from the value date. Therefore, in many
cases the investment income on the globally-offered securities earned during the
one-day period may substantially reduce or offset the amount of these overdraft
charges, although this result will depend on the particular cost of funds of the
organization participating in Clearstream or the Euroclear system.
Since the settlement is taking place during New York business hours,
organizations participating in DTC can employ their usual procedures for sending
globally-offered securities to the respective depositary for the benefit of
organizations participating in Clearstream or the Euroclear system. The sale
proceeds will be available to the DTC seller on the settlement date. Thus, to
the DTC participant, a cross-market transaction will settle no differently than
a trade between two DTC participants.
Trading Between Clearstream or Euroclear Seller and DTC Purchaser. Due
to time zone differences in their favor, organizations participating in
Clearstream or the Euroclear
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system may employ their customary procedures for transactions in which
globally-offered securities are to be transferred by the respective clearing
system, through the respective depositary, to an organization participating in
DTC. The seller will send instructions to Clearstream or Euroclear through a
Clearstream participant or Euroclear system participant at least one business
day prior to settlement. In these cases, Clearstream or Euroclear will instruct
the respective depositary, as appropriate, to deliver the globally-offered
securities to the account of the DTC participant against payment. Payment will
include interest accrued on the globally-offered securities from and including
the last coupon payment date to and excluding the settlement date. The payment
will then be reflected in the account of the Clearstream participant or the
Euroclear system participant the following day, and receipt of the cash proceeds
in the account of the Clearstream participant or Euroclear system participant
would be back-valued to the value date, which would be the preceding day, when
settlement occurred in New York. Should the Clearstream participant or Euroclear
system participant have a line of credit with its respective clearing system and
elect to be in debit in anticipation of receipt of the sale proceeds in its
account, the back-valuation will extinguish any overdraft charges incurred over
that one-day period. If settlement is not completed on the intended value date,
receipt of the cash proceeds in the account of the Clearstream participant or
Euroclear system participant would instead be valued as of the actual settlement
date.
Finally, day traders that use Clearstream or Euroclear and that
purchase globally-offered securities from organizations participating in DTC for
delivery to organizations participating in Clearstream or the Euroclear system
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:
o borrowing through Clearstream or Euroclear for one day, until the
purchase side of the day trade is reflected in their Clearstream
or Euroclear accounts, in accordance with the clearing system's
customary procedures;
o borrowing the globally-offered securities in the U.S. from a DTC
participant no later than one day prior to settlement, which would
give the globally-offered securities sufficient time to be
reflected in their Clearstream or Euroclear accounts in order to
settle the sale side of the trade; or
o staggering the value dates for the buy and sell sides of the trade
so that the value date for the purchase form the DTC participant
is at least one day prior to the value date for the sale to the
Clearstream participant or the Euroclear system participant.
The information in this section concerning Clearstream, Euroclear and
DTC has been obtained from sources that the depositor believes to be reliable,
but the depositor assumes no responsibility for its accuracy. The Settlement
procedures described in this Section are subject to change at any time. The
Depositor assumes no responsibility for any losses that may result from any
disruption in the operations of the Settlement Systems and procedures described
in this Prospectus.
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Material U.S. Federal Income Tax Documentation Requirements
A holder that is not a United States person (as defined under "Material
Federal Income Tax Consequences - REMIC Certificates - Foreign Investors in
REMIC Certificates") holding a book-entry certificate through Clearstream,
Euroclear or DTC may be subject to U.S. withholding tax at a rate of 30% unless
such holder provides certain documentation to the trustee or to the U.S. entity
required to withhold tax (the "U.S. withholding agent") establishing an
exemption from withholding. A holder that is not a United States person may be
subject to 30% withholding unless:
I. the trustee or the U.S. withholding agent receives a
statement -
(a) from the holder on Internal Revenue Service ("IRS")
Form W-8BEN (or any successor form) that -
(i) is signed by the certificateholder under
penalty of perjury,
(ii) certifies that such owner is not a United
States person, and
(iii) provides the name and address of the
certificateholder, or
(b) from a securities clearing organization, a bank or
other financial institution that holds customers' securities
in the ordinary course of its trade or business that -
(i) is signed under penalties of perjury by an
authorized representative of the financial
institution,
(ii) states that the financial institution has
received an IRS Form W-8BEN (or any successor form)
from the certificateholder or that another financial
institution acting on behalf of the certificateholder
has received such IRS Form W-8BEN (or any successor
form),
(iii) provides the name and address of the
certificateholder, and
(iv) attaches the IRS Form W-8BEN (or any
successor form) provided by the certificateholder;
II. the holder claims an exemption or reduced rate based on a
treaty and provides a properly executed IRS Form W-8BEN (or any
successor form) to the Trustee or the U.S. withholding agent;
III. the holder claims an exemption stating that the income is
effectively connected to a U.S. trade or business and provides a
properly executed IRS Form W-8ECI (or any successor form) to the
Trustee or the U.S. withholding agent; or
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IV. the holder is a "nonwithholding partnership" and provides a
properly executed IRS Form W-8IMY (or any successor form) with all
necessary attachments to the Trustee or the U.S. withholding agent.
Certain pass-through entities that have entered into agreements with
the Internal Revenue Service (for example "qualified intermediaries")
may be subject to different documentation requirements; it is
recommended that such holders consult with their tax advisors when
purchasing the Certificates.
A holder holding book-entry certificates through Clearstream or
Euroclear provides the forms and statements referred to above by submitting them
to the person through which he holds an interest in the book-entry certificates,
which is the clearing agency, in the case of persons holding directly on the
books of the clearing agency. Under certain circumstances a Form W-8BEN, if
furnished with a taxpayer identification number, ("TIN"), will remain in effect
until the status of the beneficial owner changes, or a change in circumstances
makes any information on the form incorrect. A Form W-8BEN, if furnished without
a TIN, and a FormW-8ECI will remain in effect for a period starting on the date
the form is signed and ending on the last day of the third succeeding calendar
year, unless a change in circumstances makes any information on the form
incorrect.
In addition, all holders holding book-entry certificates through
Clearstream, Euroclear or DTC may be subject to backup withholding unless the
holder:
I. provides a properly executed IRS Form W-8BEN, Form W-8ECI or
Form W-8IMY(or any successor forms) if that person is not a United
States person;
II. provides a properly executed IRS Form W-9 (or any substitute
form) if that person is a United States person; or
III. is a corporation, within the meaning of Section 7701(a) of the
Internal Revenue Code of 1986, or otherwise establishes that it is a
recipient exempt from United States backup withholding.
This summary does not deal with all aspects of federal income tax
withholding or backup withholding that may be relevant to investors that are not
United States persons. If you are not a United States person, we recommend that
you consult your own tax advisors for specific tax advice concerning their
holding and disposing of the book-entry certificates.
This summary does not deal with all aspects of U.S. federal
income tax withholding that may be relevant to foreign holders of the
globally-offered securities. The depositor suggests that you consult your own
tax advisors with respect to the tax consequences of holding or disposing of the
globally-offered securities.
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Definitive Securities
Book-entry certificates will be issued in fully registered,
certificated form to the beneficial owners of the certificates or their
respective nominees, rather than to DTC or its nominee, only if:
o DTC or the depositor advise in writing that DTC is no longer
willing or able to discharge properly its responsibilities as a
nominee and depository with respect to the book-entry certificates
and the depositor or the trustee is unable to locate a qualified
successor;
o the depositor elects, at its sole option, to terminate the
book-entry system through DTC; or
o DTC, at the direction of the depositary participants to whose
accounts are credited a majority of the outstanding book-entry
certificates, advises the trustee in writing that the
continuation of a book-entry system through DTC, or a successor to
DTC, is no longer in the best interests of the beneficial owners
of the certificates.
Upon the occurrence of any of the events described in the preceding
paragraph, the trustee will be required to notify the applicable beneficial
owners of the certificates, through organizations participating in DTC, of the
availability of fully registered certificates. Upon surrender by DTC of the
certificates representing the certificates and the receipt of instructions for
re-registration, the trustee will issue fully registered certificates to the
beneficial owners of the certificates.
Allocation of Distributions
The prospectus supplement for each series of certificates will specify:
o whether distributions on the certificates will be made monthly,
quarterly, semi-annually or at other intervals,
o the distribution date for each distribution, and
o the amount of each distribution allocable to principal and
interest.
All distributions with respect to each certificate of a series will be
made to the person in whose name the certificate is registered as of the close
of business on the record date specified in the related prospectus supplement.
The amount available to be distributed on each distribution date with
respect to each series of certificates will be determined as set forth in the
related agreement and will be described in the related prospectus supplement
and, in general, will be equal to the amount of principal and interest actually
collected, advanced or received during the related due period or prepayment
period, net of applicable servicing fees, master servicing fees, special
servicing fees, administrative and guarantee fees, insurance premiums, amounts
required to reimburse any unreimbursed advances and any other amounts specified
in the related prospectus supplement. The amount distributed will be allocated
among the classes of certificates in the proportion and order of application set
forth in the related agreement and described in the related prospectus
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supplement. If so specified in the related prospectus supplement, amounts
received in respect of the properties securing the mortgage loans representing
excess interest may be applied in reduction of the principal balance of one or
more specified classes.
A due period is, with respect to any distribution date, the period
commencing on the second day of the calendar month preceding the calendar month
in which the distribution date occurs and continuing through the first day of
the calendar month in which the distribution date occurs, or any other period
specified in the related prospectus supplement.
A prepayment period is, with respect to any distribution date, the time
period or periods specified in the servicing agreement for each servicer to
identify prepayments or other unscheduled payments of principal or interest
received with respect to mortgage assets that will be used to pay
certificateholders of such series on the distribution date.
The prospectus supplement for each series of certificates will specify
the pass through rate, or the method for determining the pass through rate, for
each applicable class of certificates. One or more classes of certificates may
be represented by a notional principal amount. The notional principal amount is
used solely for purposes of determining interest distributions and some other
rights and obligations of the holders of certificates and does not represent a
beneficial interest in principal payments on the property securing the mortgage
loans in the related trust. One or more classes of certificates, known as
compound interest certificates, may provide for interest that accrues but is not
currently payable. Any interest that has accrued but is not paid with respect to
a compound interest certificate on any distribution date will be added to the
principal balance of the compound interest certificate on such distribution
date.
The prospectus supplement for each series of certificates will specify
the method by which the amount of principal to be distributed on each
distribution date will be calculated and the manner in which such amount will be
allocated among the classes of certificates of the series entitled to
distributions of principal. The aggregate original principal balance of the
certificates of each series will equal the aggregate distributions allocable to
principal that the certificates will be entitled to receive. One or more classes
of certificates may be entitled to payments of principal in specified amounts on
specified distribution dates, to the extent of the amount available on those
distribution dates, or may be entitled to payments of principal from the amount
by which the available amount exceeds specified amounts. One or more classes of
certificates may be subordinated in right to receive distributions and may be
subject to allocation of losses in favor of one or more other classes of
certificates of the same series as specified in the related prospectus
supplement.
Allocation of Losses and Shortfalls
The prospectus supplement for each series of certificates will specify
the method by which realized losses or interest shortfalls will be allocated. A
loss may be realized with respect to a mortgage loan as a result of:
o the final liquidation of the mortgage loan through foreclosure
sale, disposition of the related property securing the mortgage
loan if acquired by deed-in-lieu of foreclosure, disposition of
the defaulted mortgage loan or otherwise,
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o the reduction of the unpaid principal balance of the mortgage
loan or the modification of the payment terms of the mortgage
loan in connection with a proceeding under the federal Bankruptcy
Code or otherwise,
o the reduction of the unpaid principal balance of the mortgage
loan upon a determination by the servicer that unpaid principal is
unlikely to be recoverable, or is unlikely to be recoverable in
amounts sufficient to offset related collection expenditures,
o physical damage to the related property securing the mortgage loan
of a type not covered by standard hazard insurance policies, or
o fraud, dishonesty or misrepresentation in the origination of the
mortgage loan.
An interest shortfall may occur with respect to a mortgage loan as a
result of a failure by the servicer, master servicer or trustee to advance funds
to cover delinquent payments of principal or interest on such mortgage loan or
the prepayment, of the mortgage loan and, in the case of a prepayment in full,
the failure of the servicer or, in some instances, the master servicer to make a
compensating interest payment. An interest shortfall may also occur as a result
of the application of the Soldiers' and Sailors' Civil Relief Act of 1940.
Unless otherwise provided in a prospectus supplement, neither the servicer nor
the master servicer is obligated to advance funds to cover shortfalls resulting
resulting from application of the Soldiers' and Sailors' Civil Relief Act of
1940.
Mortgage Assets
The scheduled principal balance of the mortgage assets and the amount
of any other assets included in the trust for each series of certificates
(including amounts held in any pre-funding account for the series) will
generally equal or exceed the aggregate original principal balance of the
certificates of the series.
Scheduled principal balance means, with respect to any mortgage loan as
of any date of determination, the scheduled principal balance of the mortgage
loan as of the date specified in the related prospectus supplement increased by
the amount of negative amortization, if any, with respect thereto and reduced
by:
o the principal portion of all scheduled monthly payments due on or
before the date of determination, whether or not received,
o all amounts allocable to unscheduled principal payments received
on or before the last day of the preceding prepayment period, and
o without duplication, the amount of any realized loss that has
occurred with respect to the mortgage loan on or before the date
of determination.
Optional Termination
To the extent and under the circumstances specified in the prospectus
supplement for a series, the certificates of the series may be terminated at the
option of the depositor or any other party as specified in the related
prospectus supplement for a purchase price specified in the prospectus
supplement. Upon termination of the certificates, at the option of the
terminating
22
party, the related trust may be terminated, thereby causing the sale of the
remaining trust property, or the certificates may be held or resold by the
redeeming party. If so specified in the prospectus supplement for a series, the
right to redeem the certificates of a series will be conditioned upon the
passage of a certain date specified in the prospectus supplement or the
scheduled principal balance of the mortgage loans in the trust or the
outstanding principal balance of a specified class of certificates at the time
of purchase aggregating less than a percentage, specified in such prospectus
supplement. Notice will be given to certificateholders as provided in the
related agreement.
MATURITY, PREPAYMENT AND YIELD CONSIDERATIONS
The prepayment experience of the mortgage loans will affect (1) the
average life of each class of certificates issued by the related trust and (2)
for certificates purchased at a price other than par, the effective yield on the
certificates.
Prepayments on mortgage loans are commonly measured relative to a
prepayment standard or model, such as the single monthly prepayment model, the
constant prepayment rate model or the prepayment speed assumption model. The
prospectus supplement for a series may contain a table setting forth percentages
of the original principal amount of each class of certificates of the series to
be outstanding after each of the dates shown in the table based on the
prepayment assumption model. It is unlikely that the prepayment of the property
securing the mortgage loans of any trust will conform to any of the percentages
of the prepayment assumption model described in any table set forth in the
related prospectus supplement.
A number of social, economic, tax, geographic, demographic, legal and
other factors may influence prepayments, including:
o the age of the mortgage loans,
o the geographic distribution of the mortgaged premises,
o the payment terms of the mortgage loans,
o the characteristics of the borrowers,
o homeowner mobility,
o economic conditions generally and in the geographic area in which
the mortgaged premises are located,
o enforceability of due-on-sale clauses,
o servicing decisions,
o prevailing mortgage market interest rates in relation to the
interest rates on the mortgage loans,
o the availability of mortgage funds,
o the use of second or home equity loans by borrowers,
o the availability of refinancing opportunities,
23
o the use of the mortgaged premises as second or vacation homes,
o the net equity of the borrowers in the mortgaged premises, and
o if the mortgage loans are secured by investment properties,
tax-related considerations and the availability of other
investments.
The prepayment rate may also be subject to seasonal variations.
The prepayment rate on pools of conventional housing loans has
fluctuated significantly in recent years. In general, if prevailing interest
rates were to fall significantly below the interest rates on a pool of mortgage
loans, the mortgage loans in that pool would be expected to prepay at higher
rates than if prevailing interest rates were to remain at or above the interest
rates on those mortgage loans. Conversely, if interest rates were to rise above
the interest rates on a pool of the mortgage loans, the mortgage loans in that
pool would be expected to prepay at lower rates than if prevailing interest
rates were to remain at or below interest rates on the mortgage loans. In
general, junior mortgage loans have smaller average principal balances than
senior or first mortgage loans and are not viewed by borrowers as permanent
financing. Accordingly, junior mortgage loans may experience a higher rate of
prepayment than senior or first 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 affect the rate of prepayment of
mortgage loans.
Distributions on the certificates of a series on any distribution date
generally will include interest accrued through a date specified in the related
prospectus supplement that may precede the distribution date. Because interest
generally will not be distributed to the certificateholders of the series until
the distribution date, the effective yield to the certificateholders will be
lower than the yield otherwise produced by the applicable pass through rate and
purchase price for the certificates.
The yield to maturity of any certificate will be affected by the rate
of interest and, in the case of certificates purchased at a price other than
par, timing of payments of principal on the mortgage loans. If the purchaser of
a certificate offered at a discount calculates the anticipated yield to maturity
of the certificate based on an assumed rate of payment of principal that is
faster than that actually received on the mortgage loans, or on the mortgage
loans underlying mortgage backed securities, the actual yield to maturity will
be lower than that so calculated. Conversely, if the purchaser of a certificate
offered at a premium calculates the anticipated yield to maturity of the
certificate based on an assumed rate of payment of principal that is slower than
that actually received on the mortgage loans, or on the mortgage loans
underlying mortgage backed securities, the actual yield to maturity will be
lower than that so calculated.
If so specified in a related prospectus supplement, amounts received in
respect of the property securing the mortgage loans representing excess interest
may be applied in reduction of the principal balance of one or more specified
classes. The amount of excess interest required so to be applied may affect the
weighted average life of the related series of certificates.
The timing of changes in the rate of prepayments on the mortgage loans
may significantly affect an investor's actual yield to maturity, even if the
average rate of principal payments
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experienced over time is consistent with such investor's expectation. In
general, the earlier a prepayment of principal on the mortgage loans, or on the
mortgage loans underlying mortgage backed securities, the greater will be the
effect on the investor's yield to maturity. As a result, the effect on an
investor's yield of principal payments occurring at a rate higher, or lower,
than the rate anticipated by the investor during the period immediately
following the issuance of the certificates would not be fully offset by a
subsequent like reduction, or increase, in the rate of principal payments.
Because the rate of principal payments, including prepayments on the mortgage
loans or on the mortgage loans underlying mortgage backed securities, will
significantly affect the weighted average life and other characteristics of any
class of certificates, prospective investors are urged to consider their own
estimates as to the anticipated rate of future prepayments and the suitability
of the certificates to their investment objectives.
Under some circumstances, the master servicer, certain insurers, the
holders of REMIC residual certificates or other entities specified in the
related prospectus supplement may have the option to effect earlier retirement
of the related series of certificates.
Factors other than those identified in this prospectus and in the
related prospectus supplement could significantly affect principal prepayments
at any time and over the lives of the certificates. The relative contribution of
the various factors affecting prepayment may also vary from time to time. There
can be no assurance as to the rate of payment of principal at any time or over
the lives of the certificates.
THE TRUSTS
Assignment of Mortgage Assets
Under the terms of the applicable agreement, the depositor will cause
the mortgage assets and other assets to be included in the related trust to be
assigned and transferred to the trustee or a custodian acting on the trustee's
behalf, together with all principal and interest paid on the mortgage assets
from the date or dates specified in the related prospectus supplement. The
trustee will deliver to the order of the depositor, in exchange for the mortgage
assets so transferred, certificates of the related series in authorized
denominations registered in the names requested by the depositor representing
the beneficial ownership interest in the related trust. Each mortgage loan or
mortgage backed security included in a trust will be identified in a schedule
appearing as an exhibit to the related agreement. The schedule will include
information as to the scheduled principal balance of each mortgage loan or
mortgage backed security as of the specified date and its interest rate, its
original principal balance and other specified information.
Except any mortgage loans in which the trustee or a document custodian
acting on behalf of the trustee is named as the original mortgagee or
beneficiary, each mortgage loan or mortgage backed security transferred to the
trustee will be assigned of record either to the trustee, the servicer of the
loan, or to a document custodian acting on behalf of the trustee. As to each
mortgage loan, the depositor will deliver or cause to be delivered to the
trustee the related mortgage note endorsed to the order of the trustee or a
document custodian acting on its behalf. In some instances, loans will be
assigned, and the related mortgage note endorsed, directly from the seller or
from the originator that transferred the loan to the seller, directly to the
custodian, in
25
accordance with the seller's loan purchase guidelines. The depositor will
deliver or cause to be delivered to the trustee evidence of recording of each
mortgage or deed of trust, and any related assignment, together with the other
original documents evidencing or relating to the mortgage loan. To the extent
not required in any jurisdiction to protect the interest of certificateholders,
the assignments of the mortgages will not be recorded. The original mortgage
documents will be held by the trustee or a custodian acting on its behalf except
to the extent released to the servicer or the master servicer from time to time
in connection with servicing the mortgage loans.
The seller or other sellers of mortgage assets may make customary
representations and warranties with respect to the mortgage assets in the sales
agreement pursuant to which the mortgage assets are assigned and transferred to
the depositor. The right of the depositor to enforce these representations and
warranties will be assigned to the trustee under the related agreement. If any
representation or warranty is breached, and the breach adversely affects the
interest of the certificateholders, the depositor or the seller will be
required, subject to the terms imposed under the related agreement or sales
agreement:
o to cure the breach,
o to substitute other mortgage assets for the affected mortgage
assets, or
o to repurchase the affected mortgage assets at a price generally
equal to the unpaid principal balance of the mortgage assets,
together with accrued and unpaid interest on the mortgage assets
at the rate in the related mortgage note.
Neither the depositor nor the master servicer will be obligated to
substitute mortgage assets or to repurchase mortgage assets, and no assurance
can be given that the seller will perform its obligations with respect to
mortgage assets.
The following is a brief description of the mortgage assets expected to
be included in the trusts. If specific information respecting the mortgage
assets is not known at the time the related series of certificates is initially
offered, more general information of the nature described below will be provided
in the prospectus supplement and specific information will be set forth in a
report on Form 8-K to be filed with the Securities and Exchange Commission
within 15 days after the initial issuance of the certificates. A copy of the
agreement with respect to each series of certificates will be attached to the
Form 8-K and will be available for inspection at the corporate trust office of
the trustee specified in the related prospectus supplement.
The Mortgage Loans--General
The mortgage loans will be evidenced by promissory notes and will be
secured by first, second or more junior liens on the related real property or
leasehold interest, together with improvements thereon, or with respect to
cooperative loans, the shares issued by the related cooperative.
The payment terms of the mortgage loans to be included in the trust for
any series will be described in the related prospectus supplement and may
include any of the following features or combinations of these features or any
other features described in the prospectus supplement:
26
o Interest may be payable at a fixed rate or may be payable at a
rate that is adjustable from time to time on specified adjustment
dates by adding a specified fixed percentage to a specified index,
which sum may be rounded, that otherwise varies from time to
time, that is fixed for a period of time or under certain
circumstances and is followed by a rate that is adjustable from
time to time as described above or that otherwise varies from
time to time or that is convertible from an adjustable rate to a
fixed rate. Changes to an adjustable rate may be subject to
periodic limitations, maximum rate, a minimum rate or a
combination of these limitations. Accrued interest may be
deferred and added to the principal of a mortgage loan for
specified periods and under various circumstances as may be set
forth in the related prospectus supplement. Mortgage loans may
permit the payment of interest at a rate lower than the interest
rate on the related mortgage note for a period of time or for the
life of the mortgage loan, and the amount of any difference may be
contributed from funds supplied by the seller of the related
property or interest securing the mortgage loan or another source
or may be treated as accrued interest and added to the principal
balance of the mortgage loan.
o Principal may be payable on a level basis to amortize fully 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 of the mortgage loan or on an interest rate that
is different from the rate in the related mortgage note 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 at maturity. Principal may include interest that has been
deferred and added to the principal balance of the mortgage loan.
o Payments 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 adjust or
decline over time. Other mortgage loans may permit prepayments
without payment of a prepayment fee. The mortgage loans may
include due-on-sale clauses that permit the mortgagee to demand
payment of the entire mortgage loan in connection with the sale or
certain other transfers of the property or interest securing the
related mortgage loan. Other mortgage loans may be assumable by
persons meeting the then applicable underwriting standards of the
originator.
The property or interest securing the related mortgage loan, and, with
respect to cooperative loans, the buildings owned by cooperatives, may be
located in any state, territory or possession of the United States, including
the District of Columbia or Puerto Rico. The property or interest securing the
related mortgage loan generally will be covered by standard hazard insurance
policies insuring against losses due to fire and various other causes. The
mortgage loans may be covered by primary mortgage insurance policies insuring
against all or a part of any loss sustained by reason of nonpayments by
borrowers to the extent specified in the related prospectus supplement.
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The prospectus supplement for each series of certificates will contain
information with respect to the mortgage loans expected to be included in the
related trust. This information may include:
o the expected aggregate outstanding principal balance and the
expected average outstanding principal balance of the mortgage
loans as of the date set forth in the prospectus supplement,
o the largest expected principal balance and the smallest expected
principal balance of any of the mortgage loans,
o the types of assets securing the mortgage loans,
o the original terms to maturity of the mortgage loans,
o the expected weighted average term to maturity of the mortgage
loans as of the date set forth in the prospectus supplement and
the expected range of the terms to maturity,
o the expected aggregate outstanding principal balance of mortgage
loans having loan-to-value ratios at origination exceeding 80%,
o the expected mortgage interest rates and the range of mortgage
interest rates,
o in the case of ARM loans, the expected weighted average of the
adjustable rates,
o the expected aggregate outstanding scheduled principal balance, if
any, of buy-down loans as of the date set forth in the prospectus
supplement,
o the expected aggregate outstanding principal balance, if any, of
GPM loans as of the date set forth in the prospectus supplement,
o the amount of any mortgage pool insurance policy, special hazard
insurance policy or bankruptcy bond to be maintained with respect
to the related trust,
o to the extent different from the amounts described in this
prospectus, the amount of any standard hazard insurance policy
required to be maintained with respect to each mortgage loan,
o the amount, if any, and terms of any other credit enhancement to
be provided with respect to all or a material portion of the
mortgage loans, and
o the expected geographic location of the property or interest
securing the mortgage loans, or, in the case of a cooperative
loan, the building owned by the related cooperative.
If specific information respecting the mortgage loans is not known to
the depositor at the time the related certificates are initially offered, more
general information of the nature described above will be provided in the
prospectus supplement.
ARM loans are mortgage loans providing for periodic adjustments to the
related mortgage interest rate to equal the sum, which may be rounded, of a
gross margin and an index.
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Buy-down loans are mortgage loans as to which funds have been provided,
and deposited into an escrow account, to reduce the monthly payments of the
borrowers during the early years of such mortgage loans.
GPM loans are mortgage loans providing for monthly payments during the
early years of the mortgage loans which are or may be less than the amount of
interest due on the mortgage loans and as to which unpaid interest is added to
the principal balance of the mortgage loans, resulting in negative amortization,
and paid, together with interest, in later years. GPM loans may also include
loans that provide for the interest rate to decline at certain intervals in the
event the borrower has made timely payment of all loan payments during the
preceding interval.
No assurance can be given that values of the properties or interests
securing the mortgage loans have remained or will remain at their levels on the
dates of origination of the related mortgage loans. If the real estate market
should experience an overall decline in property values so that the outstanding
principal balances of the mortgage loans, plus any additional financing by other
lenders on the same properties or interests securing the mortgage loans, in the
related trust become equal to or greater than the value of the properties or
interests securing the mortgage loans, the actual rates of delinquencies,
foreclosures and losses could be higher than those now generally experienced in
the mortgage lending industry.
If specified in the prospectus supplement for a series, the mortgage
assets in the related trust may include mortgage loans that are delinquent upon
the issuance of the related certificates. The inclusion of delinquent mortgage
loans in the trust for a series may cause the rate of defaults and prepayments
on the mortgage loans to increase and, in turn, may cause losses to exceed the
available credit enhancement for the series and affect the yield on the
certificates of the series.
Single Family Loans
Single family loans will consist of mortgage loans secured by liens on
one- to four-family residential and mixed use properties. The properties that
secure single family loans will consist of detached or semi-detached one- to
four-family dwelling units, townhouses, row houses, individual condominium units
in condominium buildings, individual units in planned unit developments, and
certain mixed use and other dwelling units. The properties may include vacation
and second homes or investment properties. A portion of a dwelling unit may
contain a commercial enterprise.
Cooperative Loans
Cooperative loans generally will be secured by certificate interests in
or similar liens on stock, shares or membership certificates issued by
cooperatives and in the related proprietary leases or occupancy agreements
granting exclusive rights to occupy specific dwelling units in the buildings
owned by the cooperatives. A cooperative is owned by tenant-stockholders who,
through ownership of stock, shares or membership certificates in the
corporation, receive proprietary leases or occupancy agreements that confer
exclusive rights to occupy specific apartments or units. In general, a
tenant-stockholder of a cooperative must make a monthly payment to the
cooperative representing the tenant-stockholder's pro rata share of the
cooperative's payments for its mortgage loans, real property taxes, maintenance
expenses and
29
other capital or ordinary expenses. Those payments are in addition to any
payments of principal and interest the tenant-stockholder must make on any loans
to the tenant-stockholder secured by its shares in the cooperative. The
cooperative is directly responsible for management and, in most cases, payment
of real estate taxes and hazard and liability insurance. A cooperative's ability
to meet debt service obligations on a mortgage loan on the building owned by the
cooperative, as well as all other operating expenses, will depend in large part
on the receipt of maintenance payments from the tenant-stockholders, as well as
any rental income from units or commercial areas the cooperative might control.
Unanticipated expenditures may in some cases have to be paid by special
assessments on the tenant-stockholders.
Multi-Family Loans
Multi-family loans will consist of mortgage loans secured by liens on
rental apartment buildings or other projects containing five or more residential
units including high-rise, mid-rise and garden apartments and projects owned by
cooperatives.
Junior Mortgage Loans
If specified in the prospectus supplement for a series, the mortgage
loans assigned and transferred to the related trust may include mortgage loans
secured by second or more junior liens on residential properties.
Home Improvement Loans
Home improvement loans will consist of secured loans, the proceeds of
which generally will be used to improve or protect the basic livability or
utility of the property. To the extent set forth in the related prospectus
supplement, home improvement loans will be fully amortizing and will bear
interest at a fixed or variable rate. To the extent a material portion of the
mortgage assets included in a trust consists of home improvement loans, the
related prospectus supplement will describe the material provisions of the
mortgage loans and the programs under which they were originated.
Home Equity Lines of Credit
Home equity lines of credit will consist of lines of credit or
specified balances of those lines of credit secured by mortgages on one- to
four-family residential properties, including condominium units and cooperative
dwellings, or mixed-use properties. The home equity lines of credit may be
subordinated to other mortgages on the properties.
As more fully described in the related prospectus supplement, interest
on each home equity line of credit, excluding introductory rates offered from
time to time during promotional periods, may be computed and payable monthly on
the average daily outstanding principal balance of the loan. Principal amounts
on the home equity lines of credit may be drawn down, up to a maximum amount as
set forth in the related prospectus supplement, or repaid under each home equity
line of credit from time to time. If specified in the related prospectus
supplement, new draws by borrowers under home equity lines of credit
automatically will become part of the trust for a series. As a result, the
aggregate balances of the home equity lines of credit will fluctuate from day to
day as new draws by borrowers are added to the trust and principal
30
payments are applied to those balances, and the amounts usually will differ each
day, as more specifically described in the prospectus supplement. Under the
circumstances more fully described in the related prospectus supplement, a
borrower under a home equity line of credit may choose an interest only payment
option and is obligated to pay only the amount of interest which accrues on the
loan during the billing cycle. An interest only payment option may be available
for a specified period before the borrower may begin paying at least the minimum
monthly payment or a specified percentage of the average outstanding balance of
the loan.
The properties or interests securing mortgage loans relating to home
equity lines of credit will include one- to four-family residential properties,
including condominium units and cooperative dwellings, and mixed-use properties.
Mixed-use properties will consist of one- to four-family residential dwelling
units and space used for retail, professional or other commercial uses. The
properties or interests securing mortgage loans may consist of detached
individual dwellings, individual condominiums, townhouses, duplexes, row houses,
individual units in planned unit developments and other attached dwelling units.
Each one- to four-family dwelling unit will be located on land owned in fee
simple by the borrower or, if so specified in the related prospectus supplement,
on land leased by the borrower for a term of at least ten years greater than the
term of the related home equity lines of credit. 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 aggregate principal balance of home equity lines of credit secured
by properties or interests securing mortgage loans that are owner-occupied will
be disclosed in the related prospectus supplement. If so specified in the
related prospectus supplement, the sole basis for a representation that a given
percentage of the home equity lines of credit are secured by one- to four-family
dwelling units that are owner-occupied will be either:
o the making of a representation by the borrower at origination of
the home equity line of credit either that the underlying
properties or interests securing the mortgage loan will be used by
the borrower for a period of at least six months every year or
that the borrower intends to use the properties or interests
securing the mortgage loans as a primary residence or
o a finding that the address of the underlying properties or
interests securing the mortgage loan is the borrower's mailing
address as reflected in the master servicer's records.
If so specified in the related prospectus supplement, the mortgaged
premises may include non-owner occupied investment properties and vacation and
second homes.
Repurchase of Converted Mortgage Loans
Unless otherwise specified in the prospectus supplement for a series,
the trust for the series may include mortgage loans with respect to which the
related mortgage interest rate is convertible from an adjustable rate to a fixed
rate at the option of the borrower upon the fulfillment of certain conditions.
If so specified in the prospectus supplement, the applicable servicer, or other
party specified in the prospectus supplement, may be obligated to repurchase
31
from the trust any mortgage loan with respect to which the related mortgage
interest rate has been converted from an adjustable rate to a fixed rate at a
purchase price equal to the unpaid principal balance of the converted mortgage
loan plus 30 days of interest thereon at the applicable mortgage interest rate.
If the applicable servicer, other than a successor servicer, is not obligated to
purchase converted mortgage loans, the master servicer may be obligated to
purchase the converted mortgage loans to the extent provided in the prospectus
supplement. The purchase price specified in the prospectus supplement will be
treated as a prepayment of the related mortgage loan.
Repurchase or Disposition of Delinquent Mortgage Loans
If so specified in the prospectus supplement for a series, the master
servicer may, but will not be obligated to, repurchase from the trust any
mortgage loan as to which the borrower is delinquent in payments by 90 days or
more at a purchase price generally equal to the unpaid principal balance of the
delinquent mortgage loan plus interest thereon at the applicable mortgage
interest rate (or in the case of any loan determined to be a "nonrecoverable
mortgage loan" under the agreement, at a purchase price determined to reflect
the fair market value of such loan). The purchase price specified in the
prospectus supplement will be treated as a prepayment of the related mortgage
loan. Alternatively, if the servicer or master servicer recommends such a sale
as being in the best interests of the certificateholders, the trust will sell
delinquent mortgage loans to other purchasers, with the net sale proceeds
treated as prepayments of the related mortgage loans. Under the agreement, the
servicer shall not be required to initiate any foreclosure action or other
collection effort that in the servicer's judgment is unlikely to result in
recoveries in excess of the related costs of collection.
Substitution of Mortgage Loans
If so specified in the prospectus supplement for a series, the
depositor or seller may deliver to the trustee other mortgage loans in
substitution for any one or more mortgage loans initially included in the trust
for the series. In general, any substitute mortgage loan must, on the date of
the substitution:
o have an unpaid principal balance not greater than (and not more
than 10% less than) the unpaid principal balance of any deleted
mortgage loan,
o with respect to a fixed rate mortgage loan, have a mortgage
interest rate not less than, and not more than one percentage
point in excess of, the mortgage interest rate of the deleted
mortgage loan,
o with respect to an ARM loan, provide for a lowest possible net
rate and a highest possible net rate that is not lower than the
respective net rate for the deleted mortgage loan, and have a
gross margin that is not less than the gross margin of the
deleted mortgage loan,
o have a net rate that is not less than the net rate of the deleted
mortgage loan, and
o comply with each applicable representation, warranty and covenant
pertaining to an individual mortgage loan set forth in the
applicable agreement, was underwritten on the basis of credit
underwriting standards at least as strict as the credit
underwriting
32
standards used with respect to the deleted mortgage loan and, if a
seller is effecting the substitution, comply with each applicable
representation, warranty or covenant pertaining to an individual
mortgage loan set forth in the related sales agreement or
subsequent sales agreement.
If more than one mortgage loan is substituted for one or more deleted
mortgage loans, the amounts, rates, margins, terms and ratios described above
shall be determined on a weighted average basis.
Mortgage-Backed Securities
The mortgage-backed securities may include private, that is not
guaranteed or insured by the United States or any agency or instrumentality
thereof, mortgage participation or pass through certificates or other
mortgage-backed securities or, representing either debt or equity, and
certificates insured or guaranteed by Fannie Mae, Freddie Mac or GNMA. Private
mortgage-backed securities will not include participations in previously issued
mortgage-backed securities unless such securities have been previously
registered under the Securities Act of 1933, as amended, or held for the
required holding period under Rule 144(k) thereunder or were acquired in a bona
fide secondary market transaction from someone other than an affiliate of the
depositor. Private mortgage-backed securities will have been issued in
accordance with a private mortgage-backed securities agreement.
The related prospectus supplement for a series of certificates that
evidence interests in mortgage-backed securities will specify:
o the approximate aggregate principal amount and type of any
mortgage-backed securities to be included in the trust,
o to the extent known to the depositor, certain characteristics of
the mortgage loans underlying the mortgage-backed securities
including:
o the payment features of the mortgage loans,
o the approximate aggregate principal balance, if known, of
underlying mortgage loans insured or guaranteed by a
governmental entity,
o the servicing fee or range of servicing fees with respect to
the underlying mortgage loans, and
o the minimum and maximum stated maturities of the underlying
mortgage loans at origination,
o the maximum original term-to-stated maturity of the
mortgage-backed securities,
o the weighted average term-to-stated maturity of the
mortgage-backed securities,
o the pass through or certificate rate of the mortgage-backed
securities,
o the weighted average pass through or certificate rate of the
mortgage-backed securities,
o the issuer, servicer and trustee of the mortgage-backed
securities,
33
o characteristics of credit support, if any, including reserve
funds, insurance policies, surety bonds, letters of credit or
guaranties, relating to the mortgage loans underlying the
mortgage-backed securities or to the mortgage-backed securities
themselves,
o the terms on which the underlying mortgage loans may, or are
required to, be repurchased prior to their stated maturity or the
stated maturity of the mortgage-backed securities, and
o the terms on which other mortgage loans may be substituted for
those originally underlying the mortgage-backed securities.
Pre-Funding Account
If so specified in the related prospectus supplement, a trust may enter
into a pre-funding agreement with the depositor under which the depositor will
transfer additional mortgage assets to the trust following the closing date. Any
pre-funding agreement will require that any mortgage loans so transferred
conform to the requirements specified in the pre-funding agreement. If a
pre-funding agreement is used, the related trustee will be required to deposit
in a segregated account upon receipt a portion of the proceeds received by the
trustee in connection with the sale of certificates of the related series. The
additional mortgage assets will thereafter be transferred to the related trust
in exchange for money released to the depositor from the related pre-funding
account. Each pre-funding agreement will specify a period during which any
transfer must occur. If all moneys originally deposited in the pre-funding
account are not used by the end of such specified period, then any remaining
moneys will be applied as a mandatory prepayment of one or more class of
certificates as specified in the related prospectus supplement. The specified
period for the acquisition by a trust of additional mortgage loans will not
exceed three months from the date the trust is established.
Distribution Accounts
Unless otherwise specified in the prospectus supplement for a series,
payments on the mortgage loans included in the related trust will be remitted to
the collection account and/or the master servicer custodial account and then to
the distribution account for the series, net of amounts required to pay
servicing fees and any amounts that are to be included in any reserve fund
account or other fund or account for the series. All payments received on
mortgage-backed securities included in the trust for a series will be remitted
to the distribution account. All or a portion of the amounts in the distribution
account, together with reinvestment income if payable to the certificateholders,
will be available, to the extent specified in the related prospectus supplement,
for the payment of trustee fees, and any other fees or expenses to be paid
directly by the trustee and to make distributions with respect to certificates
of the series in accordance with the respective allocations set forth in the
related prospectus supplement.
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CREDIT ENHANCEMENT
General
If so specified in the prospectus supplement for a series, the related
trust may include, or the related certificates may be entitled to the benefits
of, specified ancillary or incidental assets intended to provide credit
enhancement for the ultimate or timely distribution of proceeds from the
mortgage assets to the holders of the certificates, including reserve accounts,
insurance policies, guaranties, surety bonds, letters of credit, guaranteed
investment contracts, swap agreements and option agreements. In addition, if so
specified in the prospectus supplement for a series, one or more classes of
certificates of the series may be entitled to the benefits of other credit
enhancement arrangements, including subordination, overcollateralization or
cross support. The protection against losses or delays afforded by any such
assets or credit enhancement arrangements may be limited.
Credit enhancement will not provide protection against all risks of
loss and will not guarantee repayment of the entire principal balance of the
certificates and interest thereon. If losses exceed the amount covered by credit
enhancement or are not covered by credit enhancement, holders of one or more
lasses of certificates will bear their allocable share of any resulting losses.
If a form of credit enhancement applies to several classes of certificates, and
if distributions with respect to principal equal to the aggregate principal
balances of particular classes of certificates are distributed prior to the
distributions to other classes of certificates, the classes of certificates
which receive distributions at a later time are more likely to bear any losses
which exceed the amount covered by credit enhancement. In some cases, credit
enhancement may be canceled or reduced if the cancellation or reduction would
not adversely affect the rating of the related certificates.
Subordination
If so specified in the related prospectus supplement, a series may
include one or more classes of certificates that are subordinated in right to
receive distributions or subject to the allocation of losses in favor of one or
more other classes of certificates of the series. If so specified in the
prospectus supplement, distributions in respect of scheduled principal,
principal prepayments, interest or any combination thereof that otherwise would
have been payable to one or more classes of subordinated certificates of a
series may instead be payable to one or more classes of senior certificates of
the series under the circumstances and to the extent specified in the prospectus
supplement. If so specified in the prospectus supplement, delays in receipt of
scheduled payments on the mortgage assets and losses with respect to those
mortgage assets will be borne first by classes of subordinated certificates and
thereafter by one or more classes of senior certificates, under the
circumstances and subject to the limitations specified in such prospectus
supplement. The aggregate distributions in respect of delinquent payments on the
mortgage assets over the lives of the certificates or at any time, the aggregate
losses which must be borne by the subordinated certificates by virtue of
subordination and the amount of the distributions otherwise payable to the
subordinated certificates that will be payable to the senior certificates on any
distribution date may be limited as specified in the prospectus supplement. If
aggregate distributions in respect of delinquent payments on the mortgage assets
or aggregate losses were to exceed the total amounts payable and available for
distribution to holders of
35
subordinated certificates or, if applicable, were to exceed a specified maximum
amount, holders of senior certificates could experience losses on the
certificates.
If so specified in the related prospectus supplement, all or any
portion of distributions otherwise payable to the holders of subordinated
certificates on any distribution date may instead be deposited into one or more
reserve accounts established by the trustee for specified periods or until the
balance in any the reserve account has reached a specified amount and, following
payments from the reserve account to the holders of senior certificates or
otherwise, thereafter to the extent necessary to restore the balance of the
reserve account to required levels. If so specified in the prospectus
supplement, amounts on deposit in any designated reserve account may be released
to the depositor or the seller or the holders of any class of certificates at
the times and under the circumstances specified in the prospectus supplement.
If so specified in the related prospectus supplement, one or more
classes of certificates may bear the risk of losses not covered by credit
enhancement prior to other classes of certificates. Subordination might be
effected by reducing the principal balance of the subordinated certificates on
account of the losses, thereby decreasing the proportionate share of
distributions allocable to the certificates, or by another means specified in
the prospectus supplement.
If so specified in the related prospectus supplement, various classes
of senior certificates and subordinated certificates may themselves be
subordinate in their right to receive distributions to other classes of senior
certificates and subordinated certificates, respectively, through a
cross-support mechanism or otherwise. If so set forth in the prospectus
supplement, the same class of certificates may constitute senior certificates
with respect to specified types of payments or losses and subordinated
certificates with respect to other types of payments or losses.
Distributions may be allocated among classes of senior certificates and
classes of subordinated certificates
o in the order of their scheduled final distribution dates,
o in accordance with a schedule or formula,
o in relation to the occurrence of events, or
o otherwise, in each case as specified in the prospectus supplement.
As between classes of subordinated certificates, payments to holders of senior
certificates on account of delinquencies or losses and payments to any reserve
account will be allocated as specified in the prospectus supplement.
36
Certificate Guaranty Insurance Policies
If so specified in the related prospectus supplement, one or more
certificate guaranty insurance policies will be obtained and maintained for one
or more classes or series of certificates. The issuer of any specified
certificate guaranty insurance policy will be named in the related prospectus
supplement. In general, certificate guaranty insurance policies unconditionally
and irrevocably guarantee that the full amount of the distributions of principal
and interest to which the holders of the related certificates are entitled under
the related agreement, as well as any other amounts specified in the related
prospectus supplement, will be received by an agent of the trustee for
distribution by the trustee to those holders.
The specific terms of any certificate guaranty insurance policy will be
set forth in the related prospectus supplement. Certificate guaranty insurance
policies may have limitations including, but not limited to, limitations on the
obligation of the certificate insurer to guarantee any servicer's obligation to
repurchase or substitute for any mortgage loans, to guarantee any specified rate
of prepayments or to provide funds to redeem certificates on any specified date.
The certificate insurer may be subrogated to the rights of the holders of the
related certificates to receive distributions to which they are entitled, as
well as other amounts specified in the related prospectus supplement, to the
extent of any payments made by the certificate Insurer under the related
certificate guaranty insurance policy.
Overcollateralization
If so specified in the related prospectus supplement, the aggregate
principal balance of the mortgage assets included in a trust may exceed the
original principal balance of the related certificates. In addition, if so
provided in the related prospectus supplement, specified classes of certificates
may be entitled to receive distributions of excess cash as an additional payment
of principal, thereby creating a limited acceleration of the payment of the
principal of the certificates relative to the amortization of the related
mortgage assets. This acceleration feature may continue for the life of the
applicable classes of certificates or may be limited. In the case of limited
acceleration, once the required level of overcollateralization is reached, and
subject to certain provisions specified in the related prospectus supplement,
the acceleration feature will cease unless necessary to maintain the required
overcollateralization level.
Cross Support
If so specified in the related prospectus supplement, the interests in
separate trusts or separate groups of assets may be evidenced by separate
classes of the related series of certificates. In that case, credit enhancement
may be provided by a cross-support feature which requires that distributions be
made with respect to specified certificates evidencing interests in one or more
trusts or asset groups prior to distributions to other certificates evidencing
interests in other trusts or asset groups. If so specified in the related
prospectus supplement, the coverage provided by one or more forms of credit
enhancement may apply concurrently to two or more separate trusts or asset
groups, without priority among the trusts or asset groups, until the credit
enhancement is exhausted. If applicable, the prospectus supplement will identify
the trusts or asset groups to which the credit enhancement relates and the
manner of determining the amount
37
of the coverage provided by the credit enhancement and of the application of the
coverage to the identified trusts or asset groups.
Mortgage Pool Insurance Policies
If so specified in the related prospectus supplement, one or more
mortgage pool insurance policies insuring, subject to their provisions and
limitations, against defaults on the related mortgage loans will be obtained and
maintained for the related series in an amount specified in the prospectus
supplement. The issuer of a mortgage pool insurance policy will be named in the
related prospectus supplement. A mortgage pool insurance policy for a series
will not be a blanket policy against loss because claims under the policy may
only be made for particular defaulted mortgage loans and only upon satisfaction
of specified conditions precedent described in the related prospectus
supplement. A mortgage pool insurance policy generally will not cover losses due
to a failure to pay or denial of a claim under a primary mortgage insurance
policy.
A mortgage pool insurance policy will generally not insure, and many
primary mortgage insurance policies may not insure, against special hazard
losses or losses sustained by reason of a default arising from, among other
things,
o fraud or negligence in the origination or servicing of a mortgage
loan, including misrepresentation by the borrower or persons
involved in the origination of the loan,
o failure to construct mortgaged premises in accordance with plans
and specifications, or
o a claim in respect of a defaulted mortgage loan occurring when the
servicer of the mortgage loan, at the time of default or after
that time, was not approved by the pool insurer.
A failure of coverage attributable to one of the foregoing events might
result in a breach of the representations and warranties of the seller or the
servicer and, in that event, subject to certain limitations, might give rise to
an obligation on the part of the seller or servicer to purchase the defaulted
mortgage loan if the breach cannot be cured.
The original amount of coverage under any mortgage pool insurance
policy assigned to the trust for a series will be reduced over the life of the
certificates of the series by the aggregate dollar amount of claims paid less
the aggregate of the net amounts realized by the pool insurer upon disposition
of all foreclosed mortgaged premises covered by the policy. The amount of claims
paid includes certain expenses incurred by the servicer or the master servicer
of the defaulted mortgage loan, as well as accrued interest on delinquent
mortgage loans to the date of payment of the claim. The net amounts realized by
the pool insurer will depend primarily on the market value of the mortgaged
premises securing the defaulted mortgage loan. The market value of the mortgaged
premises will be determined by a variety of economic, geographic, social,
environmental and other factors and may be affected by matters that were unknown
and could not reasonably have been anticipated at the time the original mortgage
loan was made. If aggregate net claims paid under a mortgage pool insurance
policy reach the original policy limit, any further losses may affect adversely
distributions to holders of the certificates of the series. The original amount
of coverage under a mortgage pool insurance policy assigned to the trust for
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a series may also be reduced or canceled to the extent each rating agency that
provides, at the request of the depositor, a rating for the certificates of the
series confirms that the reduction or cancellation will not result in a lowering
or withdrawal of the rating.
If so specified in the related prospectus supplement, a mortgage pool
insurance policy may insure against losses on mortgage loans that secure other
mortgage-backed securities or collateralized mortgage obligations; provided,
however, that any subsequent extension of coverage, and the corresponding
assignment of the mortgage pool insurance policy, to the other securities or
obligations does not, at the time of the extension, result in the downgrade or
withdrawal of any credit rating assigned, at the request of the depositor, to
the outstanding certificates of the series.
Special Hazard Insurance Policies
If so specified in the related prospectus supplement, one or more
special hazard insurance policies insuring, subject to their provisions and
limitations, against specified losses not covered by standard hazard insurance
policies will be obtained and maintained for the related series in an amount
specified in the prospectus supplement. The issuer of any special hazard
insurance policy will be named in the related prospectus supplement. A special
hazard insurance policy will, subject to the limitations described below,
protect the holders of the certificates of such series from
o loss by reason of damage to the mortgaged premises underlying
defaulted mortgage loans caused by specified hazards, including
vandalism and earthquakes and, except where the borrower is
required to obtain flood insurance, floods and mudflows, not
covered by the standard hazard insurance policies with respect to
the mortgage loans and
o loss from partial damage to the mortgaged premises caused by
reason of the application of the coinsurance clause contained in
the standard hazard insurance policies.
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A special hazard insurance policy for a series will not, however, cover
losses occasioned by war, nuclear reaction, nuclear or atomic weapons,
insurrection, normal wear and tear or certain other risks.
Subject to the foregoing limitations, the special hazard insurance
policy with respect to a series will provide that, when there has been damage to
the mortgaged premises securing a defaulted mortgage loan and the damage is not
covered by the standard hazard insurance policy maintained by the borrower or
the servicer or the master servicer with respect to the mortgage loan, the
special hazard insurer will pay the lesser of the cost of repair of the
mortgaged premises or upon transfer of the mortgaged premises to it, the unpaid
principal balance of the mortgage loan at the time of the acquisition of the
mortgaged premises, plus accrued interest to the date of claim settlement,
excluding late charges and penalty interest, and certain expenses incurred in
respect of the mortgaged premises. No claim may be validly presented under a
special hazard insurance policy unless
o hazard insurance on the mortgaged premises securing the defaulted
mortgage loan has been kept in force and other reimbursable
protection, preservation and foreclosure expenses have been paid,
all of which must be approved in advance as necessary by the
special hazard insurer, and
o the insured has acquired title to the mortgaged premises as a
result of default by the borrower.
If the sum of the unpaid principal amount plus accrued interest and
specified expenses is paid by the special hazard insurer, that amount of further
coverage under the special hazard insurance policy will be reduced by that
amount less any net proceeds from the sale of the mortgaged premises. Any amount
paid as the cost of repair of the mortgaged premises will reduce coverage by
that amount.
The terms of the agreement with respect to a series will require the
master servicer to maintain the special hazard insurance policies for the series
in full force and effect throughout the term of the agreement, subject to
specified conditions contained in the agreement, present claims under the
policies on behalf of the depositor, the trustee and the holders of the
certificates of the series for all losses not otherwise covered by the
applicable standard hazard insurance policies and take all reasonable steps
necessary to permit recoveries on the claims. To the extent specified in the
prospectus supplement for a series, a deposit may be made of cash, an
irrevocable letter of credit or any other instrument acceptable to each rating
agency that provides, at the request of the depositor, a rating for the
certificates of the series in the related trust to provide protection in lieu of
or in addition to that provided by a special hazard insurance policy.
If so specified in the related prospectus supplement, a special hazard
insurance policy may insure against losses on mortgage loans that secure other
mortgage-backed securities or collateralized mortgage obligations; provided,
however, that any subsequent extension of coverage, and the corresponding
assignment of the special hazard insurance policy, to any other series or other
securities or obligations does not, at the time of the extension, result in the
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downgrade or withdrawal of the credit rating assigned, at the request of the
depositor, to the outstanding certificates of the series.
Bankruptcy Bonds
If so specified in the related prospectus supplement, one or more
mortgagor bankruptcy bonds covering losses resulting from proceedings under the
federal Bankruptcy Code will be obtained and maintained for the related series
in an amount specified in such prospectus supplement. The issuer of any
bankruptcy bond will be named in the related prospectus supplement. Each
bankruptcy bond will cover certain losses resulting from a reduction by a
bankruptcy court of scheduled payments of principal and interest on a mortgage
loan or a reduction by the court of the principal amount of a mortgage loan and
will cover certain unpaid interest on the amount of the principal reduction from
the date of the filing of a bankruptcy petition. To the extent specified in the
prospectus supplement for a series, a deposit may be made of cash, an
irrevocable letter of credit or any other instrument acceptable to each rating
agency that provides, at the request of the depositor, a rating for the
certificates of the series in the related trust to provide protection in lieu of
or in addition to that provided by a bankruptcy bond.
Reserve Funds
If so specified in the related prospectus supplement, cash, U.S.
Treasury securities, instruments evidencing ownership of principal or interest
payments thereon, letters of credit, surety bonds, demand notes, certificates of
deposit or a combination thereof in the aggregate amount specified in the
prospectus supplement will be deposited by the depositor in one or more reserve
fund accounts established and maintained with the trustee. In addition, if so
specified in the related prospectus supplement, a reserve fund account may be
funded with all or a portion of the interest payments on the related mortgage
assets not needed to make required distributions. Cash and the principal and
interest payments on other investments will be used to enhance the likelihood of
timely payment of principal of, and interest on, or, if so specified in the
prospectus supplement, to provide additional protection against losses in
respect of, the assets in the related trust, to pay the expenses of the trust or
for other purposes as may be specified in the prospectus supplement. If a letter
of credit is deposited with the trustee, it will be irrevocable. Any instrument
deposited in a reserve funds account will name the trustee as a beneficiary and
will be issued by an entity acceptable to each rating agency that provides, at
the request of the depositor, a rating for the certificates of the series.
Additional information with respect to the instruments deposited in the reserve
funds accounts may be set forth in the related prospectus supplement.
Other Credit Enhancement
If so provided in the prospectus supplement for a series, the related
trust may include, or the related certificates may be entitled to the benefits
of, other specified assets including reserve accounts, insurance policies,
guaranties, surety bonds, letters of credit, guaranteed investment contracts or
similar arrangements:
o for the purpose of maintaining timely payments or providing
additional protection against losses on the assets included in
such trust,
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o for the purpose of paying administrative expenses,
o for the purpose of establishing a minimum reinvestment rate on the
payments made in respect of such assets or principal payment rates
on such assets,
o for the purpose of guaranteeing timely distributions with respect
to the certificates, or
o for the other purposes as may be specified in such prospectus
supplement. These arrangements may be in addition to or in
substitution for any forms of credit enhancement described in
this prospectus.
Any of these arrangements must be acceptable to each rating agency that
provides, at the request of the depositor, a rating for the certificates of the
related series.
ORIGINATION OF MORTGAGE LOANS
General
In originating a mortgage loan, the originator will follow either :
o its own credit approval process, to the extent that such process
conforms to underwriting standards generally acceptable to Fannie
Mae or Freddie Mac, or
o credit, appraisal and underwriting standards and guidelines
approved by the depositor, which may not conform to Fannie Mae or
Freddie Mac guidelines.
The underwriting guidelines with respect to loan programs approved by
the depositor may be less stringent than those of Fannie Mae or Freddie Mac. For
example, they may permit the borrower to have a higher debt-to-income ratio and
a larger number of derogatory credit items than do the guidelines of Fannie Mae
or Freddie Mac. These underwriting guidelines are intended to provide for the
origination of single family mortgage loans for non-conforming credits. A
mortgage loan made to a non-conforming credit means a mortgage loan that is
ineligible for purchase by Fannie Mae or Freddie Mac due to borrower credit
characteristics that do not meet Fannie Mae or Freddie Mac underwriting
guidelines, including a loan made to a borrower whose creditworthiness and
repayment ability do not satisfy Fannie Mae or Freddie Mac underwriting
guidelines or a borrower who may have a record of major derogatory credit items
including default on a prior mortgage loan, credit write-offs, outstanding
judgments and prior bankruptcies. Accordingly, mortgage loans underwritten
according to these guidelines are likely to experience rates of delinquency and
foreclosure that are higher, and may be substantially higher, than mortgage
loans originated in accordance with Fannie Mae or Freddie Mac underwriting
guidelines.
In general, a prospective borrower is required to complete a detailed
application designed to provide pertinent credit information. The prospective
borrower generally is required to provide a current list of assets as well as an
authorization for a credit report which summarizes the borrower's credit history
with merchants and lenders as well as any suits, judgments or bankruptcies that
are of public record. The borrower may also be required to authorize
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verification of deposits at financial institutions where the borrower has demand
or savings accounts.
In determining the adequacy of the mortgaged premises as collateral, an
appraisal is made of each property considered for financing by a qualified
independent appraiser. The appraiser is required to inspect the property and
verify that it is in good repair and that construction, if new, has been
completed. The appraisal is based on the market value of comparable homes and,
if considered applicable by the appraiser, the estimated rental income of the
property and a replacement cost and analysis based on the current cost of
constructing a similar home. All appraisals generally are expected to conform to
Fannie Mae or Freddie Mac appraisal standards then in effect.
Once all applicable employment, credit and property information is
received, a determination generally is made as to whether the prospective
borrower has sufficient monthly income available to meet the borrower's monthly
obligations on the proposed mortgage loan, generally determined on the basis of
the monthly payments due in the year of origination, and other expenses related
to the mortgaged premises including property taxes and insurance premiums, and
to meet other financial obligations and monthly living expenses. The
underwriting standards applied, particularly with respect to the level of income
and debt disclosure on the application and verification, may be adjusted in
appropriate cases where factors such as low loan-to-value ratios or other
favorable compensating factors exist.
A prospective borrower applying for a loan pursuant to the full
documentation program is required to provide, in addition to the above, a
statement of income, expenses and liabilities, existing or prior. An employment
verification is obtained from an independent source, typically the prospective
borrower's employer, which verification generally reports the length of
employment with that organization, the prospective borrower's current salary and
whether it is expected that the prospective borrower will continue being
employed in the future. If a prospective borrower is self-employed, the borrower
may be required to submit copies of signed tax returns. For other than
self-employed borrowers, income verification may be accomplished by W-2 forms or
pay stubs that indicate year to date earnings.
Under the limited documentation program or stated income program,
certain documentation requirements concerning income and employment verification
is therefore waived in appropriate circumstances pursuant to the applicable
program. Accordingly, the maximum permitted loan-to-value ratios for loans
originated under those programs are generally lower than those permitted for
other similar loans originated pursuant to the full documentation program.
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Representations and Warranties
The depositor generally will acquire the mortgage loans from the
seller. The seller will make customary representations and warranties with
respect to the mortgage loans in the sales agreement by which the seller
transfers its interest in the mortgage loans to the depositor. The seller will
represent and warrant, among other things:
o that each mortgage loan has been originated in compliance with all
applicable laws, rules and regulations,
o that each primary mortgage insurance policy is issued by the
related mortgage insurer,
o that each note and security instrument has been executed and
delivered by the borrower and the security instrument has been
duly recorded where the mortgaged premises are located in order to
make effective the lien on the related mortgaged premises, and
o that upon foreclosure on the mortgaged premises, the holders of
the mortgage loan will be able to deliver good and merchantable
title to the mortgaged premises.
In general, the seller will submit to the trustee with each mortgage loan a
mortgagee title insurance policy, title insurance binder, preliminary title
report, or other satisfactory evidence of title insurance, and, if a preliminary
title report is delivered initially, the seller is required to deliver a final
title insurance policy or satisfactory evidence of the existence of such a
policy; however, for second mortgage loans with a balance of less than $50,000,
the seller will generally not obtain a mortgage title insurance policy.
If the seller breaches a representation or warranty made with respect
to a mortgage loan or if any principal document executed by the borrower
relating to a mortgage loan is found to be defective in any material respect and
the breach or defect is material and cannot be cured as specified in the
agreement, the trustee may require the seller or depositor to purchase the
mortgage loan from the related trust upon deposit with the trustee of funds
equal to the then unpaid principal balance of the mortgage loan plus accrued
interest thereon at the related mortgage interest rate through the end of the
month in which the purchase occurs. In the event of a material breach by the
seller of a representation or warranty with respect to a mortgage loan or the
delivery by the seller to the trustee of a materially defective document with
respect to a mortgage loan, the seller or depositor may under specified
circumstances, in lieu of repurchasing the mortgage loan, substitute a mortgage
loan having characteristics substantially similar to those of the defective
mortgage loan. The seller's obligation to purchase a mortgage loan will not be
guaranteed by the depositor or any other party.
SERVICING OF MORTGAGE LOANS
Each servicer generally will be approved or will utilize a sub-servicer
that is approved by Fannie Mae or Freddie Mac as a servicer of mortgage loans
and must be approved by the master servicer. The depositor expects that most or
all of the mortgage loans will be serviced by Meritech Mortgage Services, Inc.,
an affiliate of the seller. In determining whether to approve a servicer, the
master servicer will review the credit of the servicer and, if necessary for the
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approval of the servicer, the sub-servicer, including capitalization ratios,
liquidity, profitability and other similar items that indicate ability to
perform financial obligations. In addition, the master servicer will review the
servicer's and, if necessary, the sub-servicer's servicing record and will
evaluate the ability of the servicer and, if necessary, the sub-servicer to
conform with required servicing procedures. Generally, the master servicer will
not approve a servicer unless either the servicer or the sub-servicer, if any:
o has serviced conventional mortgage loans for a minimum of two
years,
o maintains a loan servicing portfolio of at least $300,000,000, and
o has tangible net worth, determined in accordance with generally
accepted accounting principles, of at least $3,000,000.
The master servicer will continue to monitor on a regular basis the credit and
servicing performance of the servicer and, to the extent the servicer does not
meet the foregoing requirements, any sub-servicer.
The duties to be performed by the servicers with respect to the
mortgage loans included in the trust for each series will include the
calculation, collection and remittance of principal and interest payments on the
mortgage loans, the administration of mortgage escrow accounts, as applicable,
the collection of insurance claims, the administration of foreclosure procedures
and, if necessary, the advance of funds to the extent certain payments are not
made by the borrowers and are recoverable from late payments made by the
borrowers, under the applicable insurance policies with respect to the series or
from proceeds of the liquidation of the mortgage loans. Each servicer also will
provide accounting and reporting services as necessary to enable the master
servicer to provide required information to the depositor and the trustee with
respect to the mortgage loans. Each servicer is entitled to a periodic servicing
fee equal to a specified percentage of the outstanding principal balance of each
mortgage loan serviced by the servicer and certain other fees, including, but
not limited to, late payments, conversion or modification fees and assumption
fees. Servicing obligations of a servicer may be delegated to an approved
sub-servicer; provided, however, that the servicer remains fully responsible and
liable for all its obligations under the servicing agreement. The rights of the
depositor under each servicing agreement with respect to a series will be
assigned to the trust for the series.
Payments on Mortgage Loans
The agreement with respect to a series will require the related
servicer to establish and maintain one or more separate, insured, to the
available limits, collection accounts into which the servicer will be required
to deposit on a daily basis payments of principal and interest received with
respect to mortgage loans serviced by the servicer included in the trust for the
series. To the extent deposits in each collection account are required to be
insured by the FDIC, if at any time the sums in any account exceed the limits of
insurance on the account, the servicer will be required within one business day
to withdraw the excess funds from the account and remit the amounts to a account
maintained by the trustee or master servicer or to the trustee or the master
servicer for deposit in the distribution account for the series. The amount on
deposit in any account will be invested in or collateralized as described
herein.
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The agreement with respect to a series will require the related
servicer, not later than the day of the month specified in the servicing
agreement, to remit to the master servicer custodial account amounts
representing scheduled installments of principal and interest on the mortgage
loans included in the trust for the series received or advanced by the servicer
that were due during the related due period and principal prepayments, insurance
proceeds, guarantee proceeds and liquidation proceeds, including amounts paid in
connection with the withdrawal from the related trust of defective mortgage
loans or the purchase from the related trust of converted mortgage loans,
received during the prepayment period specified in the agreement, with interest
to the date of prepayment or liquidation, subject to specified limitations.
However, each servicer may deduct from the remittance all applicable servicing
fees, insurance premiums, amounts required to reimburse any unreimbursed
advances and any other amounts specified in the related agreement. On or before
each distribution date, the master servicer will withdraw from the master
servicer custodial account and remit to the distribution account those amounts
available for distribution on the distribution date. In addition, there will be
deposited in the distribution account for the series any advances of principal
and interest made by the master servicer or the trustee pursuant to the
agreement to the extent the amounts were not advanced by the servicer.
Prior to each distribution date for a series, the master servicer will
furnish to the trustee a statement setting forth certain information with
respect to the mortgage loans included in the trust for the series.
Advances
If so specified in the prospectus supplement for a series, the
Agreement with respect to each series will provide that the related servicer
will be obligated to advance funds to cover, to the extent that the amounts are
deemed to be recoverable from any subsequent payments on the mortgage loans:
o delinquent payments of principal or interest on the mortgage
loans,
o delinquent payments of taxes, insurance premiums or other escrowed
items and
o foreclosure costs, including reasonable attorney's fees.
The servicer's obligation to advance funds with respect to any mortgage
loan as to which a default has occurred and the servicer has entered into a
forbearance or modification agreement will be based on the terms of that
mortgage loans as so modified. The failure of a servicer to make any required
advance under the related agreement constitutes a default for which the servicer
may be terminated. Upon a default by the servicer, the master servicer or the
trustee may be required, if so provided in the agreement, to make advances to
the extent necessary to make required distributions on certain certificates,
provided that such party deems such amounts to be recoverable.
As specified in the related prospectus supplement for a series, the
advance obligation of the master servicer may be further limited to an amount
specified in the agreement that has been approved by each rating agency that
provides, at the request of the depositor, a rating for the certificates of the
series. Any required advances by a servicer, the master servicer or the trustee,
as the case may be, must be deposited into the applicable collection account or
master servicer
46
custodial account or into the distribution account and will be due not later
than the distribution date to which the delinquent payment relates. Any advances
made by a servicer, the master servicer or the trustee with respect to mortgage
loans included in the trust for any series are intended to enable the trustee to
make timely payment of the scheduled distributions on the certificates of the
series. Neither the servicer or the master servicer will insure or guarantee the
certificates of any series or the mortgage loans included in the trust for any
series, and their obligations to advance for delinquent payments will be limited
to the extent that the advances will be recoverable out of future payments on
the mortgage loans, insurance proceeds or liquidation proceeds of the mortgage
loans for which the amounts were advanced. The servicer's obligation to continue
to make advances will terminate under the Agreement upon the good faith
determination that the costs associated with a foreclosure proceeding will
exceed the related proceeds recovered in such proceeding.
Amounts advanced by a servicer, the master servicer or the trustee, as
the case may be, will be reimbursable out of future payments on the mortgage
loans, insurance proceeds or liquidation proceeds of the mortgage loans for
which the amounts were advanced. If an advance made by a servicer, the master
servicer or the trustee, as the case may be, later is determined to be
unrecoverable, the servicer, the master servicer or the trustee, as the case may
be, will be entitled to reimbursement from funds in the collection, master
servicer, custodial or distribution account prior to the distribution of
payments to the certificateholders.
The servicer may enter into financial facilities that allow the
servicer to borrow against, grant security interests in, or sell its rights to
receive servicing fees or reimbursement of advances for payment of principal,
interest, taxes, insurance, or advances for other expenses incurred in servicing
mortgage loans, although no such financial facilities shall reduce or otherwise
affect the servicer's obligations to find such advances.
Collection and Other Servicing Procedures
The agreement with respect to each series will require the related
servicer to make reasonable efforts to collect all payments required under the
mortgage loans included in the related trust and, consistent with such Agreement
and any applicable insurance policies with respect to each mortgage loan, to
follow the collection procedures it normally would follow with respect to
mortgage loans serviced for its own account.
The mortgage note or security instrument used in originating a mortgage
loan may contain a due-on-sale clause. The servicer will be required to use
reasonable efforts to enforce due-on-sale clauses with respect to any mortgage
note or security instrument containing such a clause, provided that the coverage
of any applicable insurance policy will not be adversely affected thereby. In
any case in which properties or interests securing mortgage loans have been or
are about to be conveyed by the borrower and the due-on-sale clause has not been
enforced or the related mortgage note is by its terms assumable, the servicer
will be authorized to take or enter into an assumption agreement from or with
the person to whom the mortgaged premises have been or are about to be conveyed,
if that person meets certain loan underwriting criteria, including the criteria
necessary to maintain the coverage provided by the applicable primary mortgage
insurance policies or if otherwise required by law. If the servicer enters into
an assumption agreement in connection with the conveyance of any of the
mortgaged premises, the
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servicer will release the original borrower from liability upon the mortgage
loan and substitute the new borrower as obligor thereon. In no event may an
assumption agreement permit a decrease in the mortgage interest rate or an
increase in the term of a mortgage loan. Fees collected for entering into an
assumption agreement will be retained by the servicer as additional servicing
compensation.
Primary Mortgage Insurance Policies
Each conventional mortgage loan that has an original loan-to-value
ratio of greater than 80% will, to the extent specified in the related
prospectus supplement, be covered by a primary mortgage insurance policy
remaining in force until the principal balance of the mortgage loan is reduced
to 80% of the original fair market value of the related mortgaged premises or,
with the consent of the master servicer and the mortgage insurer, after the
related policy has been in effect for more than two years if the loan-to-value
ratio with respect to the mortgage loan has declined to 80% or less based upon
the current fair market value of the mortgaged premises. With respect to
mortgage loans for which applicable laws require primary mortgage insurance to
be cancelled at earlier dates, or lower loan-to-value ratios, we will comply
with such laws. Other mortgage loans may also be covered by primary mortgage
insurance policies to the extent specified in the related prospectus supplement.
If so specified in the prospectus supplement for a series, the amount
of a claim for benefits under a primary mortgage insurance policy covering a
mortgage loan included in the related trust will consist of the insured portion
of the unpaid principal balance of the covered mortgage loan plus accrued and
unpaid interest on such unpaid principal balance and reimbursement of specified
expenses, less
o all rents or other payments collected or received by the insured,
other than the proceeds of hazard insurance, that are derived
from or are in any way related to the related mortgaged premises,
o hazard insurance proceeds in excess of the amount required to
restore the mortgaged premises and which have not been applied to
the payment of the mortgage loan,
o amounts expended but not approved by the mortgage insurer,
o claim payments previously made by the mortgage insurer, and
o unpaid premiums.
If so specified in the prospectus supplement for a series, the mortgage
insurer will be required to pay to the insured either the mortgage insurance
loss or, at its option under certain of the primary mortgage insurance policies,
the sum of the delinquent scheduled payments plus any advances made by the
insured, both to the date of the claim payment, and, after that date, scheduled
payments in the amount that would have become due under the mortgage loan if it
had not been discharged plus any advances made by the insured until the earlier
of the date the mortgage loan would have been discharged in full if the default
had not occurred and the date of an approved sale. Any rents or other payments
collected or received by the insured which are derived from or are in any way
related to the mortgaged premises securing the mortgage loan will be deducted
from any claim payment.
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Standard Hazard Insurance Policies
Each servicing agreement with respect to a series will require the
related servicer to cause to be maintained a standard hazard insurance policy
covering each mortgaged premises securing each mortgage loan covered by the
servicing agreement. Each standard hazard insurance policy is required to cover
an amount at least equal to the lesser of the outstanding principal balance of
the related mortgage loan, or 100% of the insurable value of the improvements on
the related mortgaged premises, or 100% of the insurable value reasonably
obtainable in the applicable locality under generally available homeowners
insurance policies without payment of extraordinary premiums. All amounts
collected by the servicer or the master servicer under any standard hazard
insurance policy, less amounts to be applied to the restoration or repair of the
mortgaged premises and other amounts necessary to reimburse the servicer or the
master servicer for previously incurred advances or approved expenses, which may
be retained by the servicer or the master servicer, will be deposited to the
applicable collection account maintained with respect to the mortgage loan or
the distribution account.
The standard hazard insurance policies will provide for coverage at
least equal to the applicable state standard form of fire insurance policy with
extended coverage. In general, the standard form of fire and extended coverage
policy will cover physical damage to, or destruction of, the improvements on the
mortgaged premises caused by fire, lightning, explosion, smoke, windstorm, hail,
riot, strike and civil commotion, subject to the conditions and exclusions
specified in each policy. Because the standard hazard insurance policies will be
underwritten by different insurers and will cover mortgaged premises located in
different states, the policies will not contain identical terms and conditions.
The basic terms of the policies, however, generally will be determined by state
law and generally will be similar. Standard hazard insurance policies typically
will not cover 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 or, in certain cases, vandalism. The
foregoing list is merely indicative of some kinds of uninsured risks and is not
intended to be all-inclusive. If mortgaged premises are located in a flood area
identified by HUD pursuant to the National Flood Insurance Act of 1968, as
amended, the applicable servicing agreement will require that the servicer or
the master servicer, as the case may be, cause to be maintained flood insurance
with respect to the mortgaged premises. The depositor may acquire one or more
special hazard insurance policies covering some of the uninsured risks described
above.
The standard hazard insurance policies covering mortgaged premises
securing mortgage loans typically will contain a coinsurance clause which, in
effect, will require the insured at all times to carry insurance of a specified
percentage, generally 80% to 90%, of the full replacement value of the
dwellings, structures and other improvements on the mortgaged premises in order
to recover the full amount of any partial loss. If the insured's coverage falls
below this specified percentage, the coinsurance clause will provide that the
insurer's liability in the event of partial loss will not exceed the greater of:
o the actual cash value, or the replacement cost less physical
depreciation, of the dwellings, structures and other improvements
damaged or destroyed, or
49
o that 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 such dwellings,
structures and other improvements.
A servicer may satisfy its obligation to provide a standard hazard
insurance policy with respect to the mortgage loans it services by obtaining and
maintaining a blanket policy insuring against fire, flood and hazards of
extended coverage on all of the mortgage loans, to the extent that the policy
names the servicer as loss payee and the policy provides coverage in an amount
equal to the aggregate unpaid principal balance on the mortgage loans without
co-insurance. If the blanket policy contains a deductible clause and there is a
loss not covered by the blanket policy that would have been covered by a
standard hazard insurance policy covering the related mortgage loan, then the
servicer will remit to the master servicer from the servicer's own funds the
difference between the amount paid under the blanket policy and the amount that
would have been paid under a standard hazard insurance policy covering the
mortgage loan.
Any losses incurred with respect to mortgage loans included in the
trust for a series due to uninsured risks, including earthquakes, landslides,
mudflows and floods, or insufficient insurance proceeds may reduce the value of
the assets included in the trust for the series to the extent the losses are not
covered by a special hazard insurance policy for the series and could affect
distributions to holders of the certificates of the series.
Maintenance of Insurance Policies; Claims Under Those Policies and Other
Realization Upon Defaulted Mortgage Loans
The master servicer or trustee may be required to maintain with respect
to a series one or more mortgage pool insurance policies, special hazard
insurance policies or bankruptcy bonds in full force and effect throughout the
term of the related trust, subject to payment of the applicable premiums. The
terms and requirements of the policy or bond applicable to any servicer or
master servicer will be described in the related prospectus supplement. If any
mortgage pool insurance policy, special hazard insurance policy or bankruptcy
bond is canceled or terminated for any reason, other than the exhaustion of
total policy coverage, the master servicer or trustee will be obligated to
obtain from another insurer a comparable replacement policy with a total
coverage which is equal to the then existing coverage, or a lesser amount if
each rating agency that provides, at the request of the depositor, a rating for
the certificates of the series confirms that such lesser amount will not impair
the rating on such certificates, of the mortgage pool insurance policy, special
hazard insurance policy or bankruptcy bond. If, however, the cost of any
replacement policy or bond is greater than the cost of the policy or bond which
has been terminated, then the amount of the coverage will be reduced to a level
so that the applicable premium will not exceed the cost of the premium for the
terminated policy or bond or the replacement policy or other credit enhancement
may be secured at such increased cost, so long as the increase in cost will not
adversely affect amounts available to make payments of principal or interest on
the certificates.
If any mortgaged premises securing a defaulted mortgage loan included
in the trust for a series is damaged and the proceeds, if any, from the related
standard hazard insurance policy or any special hazard insurance policy are
insufficient to restore the damaged mortgaged premises to the condition
necessary to permit recovery under the related mortgage pool insurance policy,
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the servicer will not be required to expend its own funds to restore the damaged
mortgaged premises unless it determines that the expenses will be recoverable to
it through insurance proceeds or liquidation proceeds. The agreement with
respect to a series will require the servicer or the master servicer, as the
case may be, to present claims to the insurer under any insurance policy
applicable to the mortgage loans included in the related trust and to take all
reasonable steps necessary to permit recovery under such insurance policies with
respect to defaulted mortgage loans or losses on the mortgaged premises securing
the mortgage loans.
If recovery under any applicable insurance policy is not available, the
servicer or the master servicer nevertheless will be obligated to follow
standard practices and procedures to realize upon the defaulted mortgage loan.
The servicer or the master servicer will sell the mortgaged premises pursuant to
foreclosure or a trustee's sale. Currently, the general practice of the servicer
or master servicer is not to seek to obtain a deficiency judgment against the
borrower or other persons. To the extent that the proceeds of any liquidation
proceeding are less than the unpaid principal balance of the defaulted mortgage
loan, there will be a reduction in the value of the assets of the trust for the
related series that holders of the certificates of the series may not receive
distributions of principal and interest on the certificates in full.
Modification of Mortgage Loans
With respect to a mortgage loan on which a default has occurred or a
payment default is imminent, the related servicer may enter into a forbearance
or modification agreement with the borrower. The terms of any forbearance or
modification agreement may affect the amount and timing of principal and
interest payments on the mortgage loan and, consequently, may affect the amount
and timing of payments on one or more classes of the related series of
certificates. For example, a modification agreement that results in a lower
mortgage interest rate would lower the pass through rate of any related class of
certificates that accrues interest at a rate based on the weighted average net
rate of the mortgage loans.
As a condition to any modification or forbearance related to any
mortgage loan, the servicer and, if required, the master servicer, are required
to determine, in their reasonable business judgment, that the modification,
forbearance or substitution will maximize the recovery on the mortgage loan on a
present value basis. In determining whether to grant a forbearance or a
modification, the servicer and, if required, the master servicer will take into
account the willingness of the borrower to perform on the mortgage loan, the
general condition of the mortgaged premises and the likely proceeds from the
foreclosure and liquidation of the mortgaged premises.
Evidence as to Servicing Compliance
Within 120 days after the end of each of its fiscal years, each
servicer must provide the master servicer or the trustee with a copy of its
audited financial statements for the year and a statement from the firm of
independent public accountants that prepared the financial statements to the
effect that, in preparing the statements, it reviewed the results of the
servicer's servicing operations in accordance with the Uniform Single-Audit
Procedures for mortgage banks developed by the Mortgage Bankers Association. In
addition, the servicer will be required to deliver an officer's certificate to
the effect that it has fulfilled its obligations under the servicing
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agreement during the preceding fiscal year or identifying any ways in which it
has failed to fulfill its obligations during the fiscal year and the steps that
have been taken to correct the failure.
The master servicer or the trustee will review, on an annual basis, the
performance of each servicer and the status of any fidelity bond and errors and
omissions policy required to be maintained by the servicer under the servicing
agreement.
Events of Default and Remedies
Unless otherwise specified in the prospectus supplement for a series,
events of default in respect of the servicer will generally consist of:
o any failure by the servicer to remit to the master servicer
custodial account any payment required to be made by a servicer
under the terms of the Agreement that is not remedied within at
least five business days,
o any failure on the part of a servicer to observe or perform in any
material respect any of its other covenants or agreements
contained in the servicing agreement that continues unremedied for
a specified period after the giving of written notice of such
failure to the servicer by the master servicer,
o specified events of insolvency, readjustment of debt, marshaling
of assets and liabilities or similar proceedings regarding the
servicer, or
o specified actions by or on behalf of the servicer indicating its
insolvency or inability to pay its obligations.
The master servicer will have the right under each servicing agreement
to terminate the related servicer upon the occurrence of an event of default
under the agreement. In the event of termination, the master servicer will
appoint a substitute servicer, which may be the master servicer or the trustee.
Any successor servicer, including the master servicer, will be entitled to
compensation arrangements similar to those provided to the servicer.
Master Servicer Duties
Unless otherwise specified in the prospectus supplement for a series,
the master servicer generally will;
o administer and supervise the performance by each servicer of its
duties and responsibilities under the related servicing
agreement,
o calculate amounts payable to certificateholders on each
distribution date, and
o prepare periodic reports to the trustee or the certificateholders
with respect to the foregoing matters.
In addition, the master servicer will receive, review and evaluate all
reports, information and other data provided by each servicer to enforce the
provisions of the related Agreement, to monitor each servicer's servicing
activities, to reconcile the results of the monitoring with information provided
by the servicer and to make corrective adjustments to records of the
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servicer and the master servicer, as appropriate. The master servicer may engage
the trustee or independent contractors to perform certain of its
responsibilities. However, the master servicer remains fully responsible and
liable for all its obligations under each agreement, other than those
specifically undertaken by a special servicer.
The master servicer will be entitled to a monthly master servicing fee
applicable to each mortgage loan expressed as a fixed percentage of the
remaining scheduled principal balance of the mortgage loan.
The master servicer may terminate a servicer who has failed to comply
with its covenants or breached one or more of its representations and warranties
contained in the related servicing agreement. Upon termination of a servicer by
the master servicer, the master servicer will assume the servicing obligations
of the terminated servicer or, at its option, may appoint a substitute servicer
acceptable to the trustee to assume the servicing obligations of the terminated
servicer. The master servicer's obligation to act as a servicer following the
termination of a servicer will not require the master servicer to:
o purchase mortgage loans from a trust due to a breach by the
servicer of a representation or warranty under the related
servicing agreement,
o purchase from the trust any converted mortgage loan, or
o advance payments of principal and interest on a delinquent
mortgage loan in excess of the master servicer's independent
advance obligation under the related agreement.
The master servicer for a series may resign from its obligations and
duties under the agreement with respect to the series, but no resignation will
become effective until the trustee or a successor master servicer has assumed
the master servicer's obligations and duties.
Special Servicing Agreement
The master servicer may appoint a special servicer to undertake certain
responsibilities of the servicer with respect to certain defaulted mortgage
loans securing a series. The special servicer may engage various independent
contractors to perform certain of its responsibilities. However, the special
servicer must remain fully responsible and liable for all its responsibilities
under the special servicing agreement. As may be further specified in the
related prospectus supplement, the special servicer, if any, may be entitled to
various fees, including, but not limited to:
o a monthly engagement fee applicable to each mortgage loan or
related REO properties as of the first day of the immediately
preceding Due Period,
o a special servicing fee expressed as a fixed percentage of the
remaining scheduled principal balance of each specially serviced
mortgage loan or related REO properties, or
o a performance fee applicable to each liquidated mortgage loan
based upon the related liquidation proceeds.
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THE AGREEMENT
The following summaries describe the material provisions common to each
series of certificates. The summaries do not purport to be complete and are
subject to the related prospectus supplement and the agreement with respect to
the series. The material provisions of a specific agreement will be further
described in the related prospectus supplement. When particular provisions or
terms used in the agreement are referred to, the actual provisions, including
definitions of terms, are incorporated by reference as part of the summaries.
The Trustee
The trustee under each agreement will be named in the related
prospectus supplement. The trustee must be a corporation or a national banking
association organized under the laws of the United States or any state thereof
and authorized under the laws of the jurisdiction in which it is organized to
exercise corporate trust powers. The trustee must also have combined capital and
surplus of at least $50,000,000 and be subject to regulation and examination by
state or federal regulatory authorities. Although the trustee may not be an
affiliate of the depositor or the master servicer, either the depositor or the
master servicer may maintain normal banking relations with the trustee if the
trustee is a depository institution.
The trustee may resign at any time, in which event the depositor will
be obligated to appoint a successor trustee. The depositor will also remove the
trustee if the trustee ceases to be eligible to continue under the agreement or
if the trustee becomes insolvent. The trustee may also be removed at any time by
the holders of outstanding certificates of the related series entitled to at
least 51%, or another percentage specified in the related prospectus supplement,
of the voting rights of the series. Certificate insurers may obtain the right to
exercise all voting rights of holders of certificates. 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.
Administration of Accounts
Funds deposited in or remitted to the distribution account, any reserve
fund or any other funds or accounts for a series are to be invested by the
trustee, as directed by the master servicer, in certain eligible investments,
which may include:
o obligations of the United States or any agency thereof, provided
the obligations are backed by the full faith and credit of the
United States,
o general obligations of or obligations guaranteed by any state of
the United States or the District of Columbia receiving the
highest long-term debt rating of each rating agency, or such
lower rating as will not result in the downgrading or withdrawal
of the ratings then assigned to the certificates by each rating
agency,
o within specified limitations, securities bearing interest or sold
at a discount issued by any corporation, which securities are
rated in the rating category required to support the then
applicable rating assigned to the series,
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o commercial paper which is then rated in the commercial paper
rating category required to support the then applicable rating
assigned to the series,
o demand or time deposits, certificates of deposit, bankers'
acceptances and federal funds sold by any depository institution
or trust company incorporated under the laws of the United States
or of any state thereof, provided that either the senior debt
obligations or commercial paper of the depository institution or
trust company, or the senior debt obligations or commercial paper
of the parent company of the depository institution or trust
company, are then rated in the rating category required to
support the then applicable rating assigned to the series,
o demand and time deposits and certificates of deposit issued by any
bank or trust company or savings and loan association and fully
insured by the FDIC,
o guaranteed reinvestment agreements issued by any bank insurance
company, corporation or other entity acceptable to each rating
agency that provides, at the request of the depositor, a rating
for the certificates of the series at the time of issuance of the
series,
o specified repurchase agreements with respect to United States
government securities,
o units of a taxable money-market portfolio having the highest
rating assigned by each applicable rating agency and restricted to
obligations issued or guaranteed by the United States of America
or entities whose obligations are backed by the full faith and
credit of the United States of America and repurchase agreements
collateralized by such obligations, and
o such other investments bearing interest or sold at a discount
acceptable to each rating agency as will not result in the
downgrading or withdrawal of the rating then assigned to the
certificates by either rating agency, as evidenced by a signed
writing delivered by each rating agency.
Permitted investments with respect to a series will include only
obligations or securities that mature on or before the date on which the
distribution account, reserve fund and other funds or accounts for the series
are required or may be anticipated to be required to be applied for the benefit
of the holders of the certificates of the series. Any income, gain or loss from
the investments for a series will be credited or charged to the appropriate fund
or account for the series. In general, reinvestment income from permitted
investments will not accrue for the benefit of the certificateholders of the
series.
Reports to Certificateholders
Concurrently with each distribution on the certificates of any series,
there will be made available to the holders of the certificates, either by
posting on a website or by other means specified in the related prospectus
supplement, a statement generally setting forth, to the extent applicable to the
series, among other things:
o the aggregate amount of the distribution allocable to principal,
separately identifying the amount allocable to each class of
certificates,
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o the aggregate amount of the distribution allocable to interest,
separately identifying the amount allocable to each class of
certificates,
o the aggregate principal balance of each class of certificates
after giving effect to distributions on the related distribution
date,
o if applicable, the amount otherwise distributable to any class of
certificates that was distributed to any other class of
certificates,
o if any class of certificates has priority in the right to receive
principal prepayments, the amount of principal prepayments in
respect of the related mortgage assets, and
o information regarding the levels of delinquencies and losses on
the mortgage loans.
Customary information considered necessary for certificateholders to
prepare their tax returns will be furnished annually.
Events of Default and Remedies
Unless otherwise specified in the prospectus supplement for a series,
events of default in respect of the master servicer under the related agreement
will generally consist of:
o any material default in the performance or breach of any covenant
or warranty of the master servicer under the agreement which
continues unremedied for a specified period after the giving of
written notice of the default or breach to the master servicer by
the trustee or by the holders of certificates entitled to at least
51% of the aggregate voting rights,
o any failure by the master servicer to make required advances with
respect to delinquent mortgage loans in the related trust,
o specified events of insolvency, readjustment of debt, marshaling
of assets and liabilities or similar proceedings regarding the
master servicer, if any, and
o specified actions by or on behalf of the master servicer
indicating its insolvency or inability to pay its obligations.
So long as an event of default by the master servicer under an
agreement remains unremedied, the trustee may, and, at the direction of the
holders of outstanding certificates of a series entitled to at least 51% of the
voting rights, the trustee will, terminate all the rights and obligations of the
master servicer under the related agreement, except that the holders of
certificates may not direct the trustee to terminate the master servicer for its
failure to make advances. Upon termination, the trustee will succeed to all the
responsibilities, duties and liabilities of the master servicer under the
agreement. If the trustee is unwilling or unable to act as successor master
servicer, the trustee may appoint or, if the holders of certificates of a series
entitled to at least 51% of the voting rights of such series, or a certificate
insurer entitled to exercise the voting rights of the holders of certificates,
so request in writing, the trustee shall appoint, or petition a court of
competent jurisdiction for the appointment of, an established mortgage loan
servicing institution acceptable to the rating agencies and having a net worth
of at least $15,000,000 to act as successor to the master servicer under the
agreement. The trustee and
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the successor master servicer may agree upon the servicing compensation to be
paid, which in no event may be greater than the compensation to the master
servicer under the agreement.
The trustee will be under no obligation to exercise any of the trusts
or powers vested in it by the agreement or to make any investigation of matters
arising under the agreement or to institute, conduct or defend any litigation
under or in relation to the agreement at the request, order or direction of any
of the holders of the certificates of the related series unless the
certificateholders have offered to the trustee reasonable security or indemnity
against the costs, expenses and liabilities which may be incurred therein or
thereby.
Amendment
The agreement generally may be amended by the parties to the agreement
with the consent of the holders of outstanding certificates of the related
series entitled to at least 66% of the voting rights of the series.
Nevertheless, no amendment shall:
o reduce in any manner the amount of, or delay the timing of,
payments received on the mortgage assets that are required to be
distributed on any certificate without the consent of the holder
of such certificate,
o adversely affect in any material respect the interests of the
holders of any class of certificates in a manner other than as
described above without the consent of the holders of certificates
of the class evidencing 66% of the voting rights of such class, or
o reduce the aforesaid percentage of certificateholders required to
consent to any amendment unless each holder of a certificate
consents.
A certificate insurer may obtain the right to exercise all voting rights of the
holders of certificates. The agreement may also be amended by the parties to the
agreement without the consent of certificateholders for the purpose of, among
other things:
o curing any ambiguity,
o to cause the provisions of the agreement to conform to or be
consistent with or in furtherance of the statements made with
respect to the certificates, the trust fund or the Agreement in
any disclosure document pursuant to which any certificates were
offered,
o to correct any defective provision therein or to supplement any
provision therein which may be inconsistent with any other
provision therein,
o to add to the duties of the depositor, the servicer or the master
servicer,
o to add any other provisions with respect to matters or questions
arising thereunder, or
o to modify, alter, amend, add to or rescind any of the terms or
provisions contained in the agreement.
provided in each case that the action shall not adversely affect in any material
respect the interests of any certificateholder. No amendment or supplement shall
be deemed to adversely affect in any material respect any certificateholder if
there is delivered to the trustee written
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notification from each rating agency that provides, at the request of the
depositor, a rating for the certificates of the related series to the effect
that the amendment or supplement will not cause the rating agency to lower or
withdraw the then current rating assigned to the certificates.
Termination
Each agreement and the respective obligations and responsibilities
created by the agreement shall terminate upon the distribution to
certificateholders of all amounts required to be paid to them pursuant to such
related agreement following:
o to the extent specified in the related prospectus supplement, the
purchase of all the mortgage assets in the related trust and all
mortgaged premises acquired in respect of the trust, or
o the later of the final payment or other liquidation of the last
mortgage asset remaining in the trust or the disposition of all
mortgaged premises acquired in respect of the trust.
In no event, however, will any trust continue beyond the expiration of 21 years
from the death of the survivor of persons specified in the related agreement.
Written notice of termination of the agreement will be given to each
certificateholder, and the final distribution will be made only upon surrender
and cancellation of the certificates of the related series at the corporate
trust office of the trustee or its agent.
MATERIAL LEGAL ASPECTS OF MORTGAGE LOANS
General
The following discussion contains summaries of the material legal
aspects of mortgage loans that are general in nature. Because the legal aspects
are governed by applicable state law, which laws may differ substantially, the
summaries do not purport to be complete nor to reflect the laws of any
particular state, nor to encompass the laws of all states in which the security
for the mortgage loans is situated.
The Mortgage Loans
Single Family Loans, Multi-Family Loans, Conventional Home Improvement
Loans, Title I Loans and Home Equity Lines of Credit. The single family loans,
multi-family loans, conventional home improvement loans, Title I Loans and home
equity lines of credit generally will be secured by mortgages, deeds of trust,
security deeds or deeds to secure debt, depending upon the prevailing practice
in the state in which the related mortgaged premises are located. A mortgage
creates a lien upon the real property encumbered by the mortgage, which lien is
generally not prior to liens for real estate taxes and assessments. Priority
between mortgages depends on their terms and generally on any order of recording
with a state or county office. There are two parties to a mortgage: the
mortgagor, who is the borrower and owner of the mortgaged premises, and the
mortgagee, who is the lender. The mortgagor delivers to the mortgagee a note or
bond and the mortgage. Although a deed of trust is similar to a mortgage, a deed
of trust has three parties: the
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trustor, who is the borrower and homeowner, similar to the mortgagor; the
beneficiary, who is the lender, similar to a mortgagee; and the trustee, who is
a third-party grantee. Under a deed of trust, the borrower grants the property,
irrevocably until the debt is paid, in trust, generally with a power of sale, to
the trustee to secure payment of the obligation. A security deed and a deed to
secure debt are special types of deeds that indicate on their face that they are
granted to secure an underlying debt. By executing a security deed or deed to
secure debt, the grantor conveys title to, as opposed to merely creating a lien
upon, the subject property to the grantee until such time as the underlying debt
is repaid. The mortgagee's authority under a mortgage, the trustee's authority
under a deed of trust and the grantee's authority under a security deed or deed
to secure debt are governed by law and, with respect to some deeds of trust, the
directions of the beneficiary.
Condominiums. Particular mortgage loans may be loans secured by
condominium units. The condominium building may include one or more multi-unit
buildings, or a group of buildings whether or not attached to each other,
located on property subject to condominium ownership. Condominium ownership is a
form of ownership of real property wherein each owner is entitled to the
exclusive ownership and possession of his or her individual condominium unit and
also owns a proportionate undivided interest in all parts of the condominium
building, other than the individual condominium units, and all areas or
facilities, if any, for the common use of the condominium units. The condominium
unit owners appoint or elect the condominium association to govern the affairs
of the condominium.
Cooperative Loans. Particular mortgage loans may be cooperative loans.
The cooperative owns all the real property that comprises the project, including
the land and the apartment building comprised of separate dwelling units and
common areas or leases the land generally by a long-term ground lease and owns
the apartment building. The cooperative is directly responsible for project
management and, in most cases, payment of real estate taxes and hazard and
liability insurance. If there is a blanket mortgage on the cooperative or
underlying land, as is generally the case, the cooperative, as project
mortgagor, is also responsible for meeting these mortgage obligations. A blanket
mortgage is ordinarily incurred by the cooperative in connection with the
construction or purchase of the cooperative's apartment building. The interest
of the occupants under proprietary leases or occupancy agreements to which the
cooperative is a party are generally subordinate to the interest of the holder
of the blanket mortgage in that building. If the cooperative is unable to meet
the payment obligations arising under its blanket mortgage, the mortgagee
holding the blanket mortgage could foreclose on that mortgage and terminate all
subordinate proprietary leases and occupancy agreements. In addition, the
blanket mortgage on a cooperative may provide financing in the form of a
mortgage that does not fully amortize with a significant portion of principal
being due in one lump sum at final maturity. The inability of the cooperative to
refinance this mortgage or make the final payment could lead to foreclosure by
the mortgagee providing the financing. A foreclosure in either event by the
holder of the blanket mortgage could eliminate or significantly diminish the
value of, in the case of a trust including cooperative loans, the collateral
securing the cooperative loans.
A cooperative is owned by tenant-stockholders who, through ownership of
stock, shares or membership certificates in the corporation, receive proprietary
leases or occupancy agreements that confer exclusive rights to occupy specific
apartments or units. In general, a tenant-stockholder of a cooperative must make
a monthly payment to the cooperative representing the tenant-stockholder's pro
rata share of the cooperative's payments for its
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mortgage loans, real property taxes, maintenance expenses and other capital or
ordinary expenses. An ownership interest in a cooperative and accompanying
rights is financed through a cooperative share loan evidenced by a promissory
note and secured by a security interest in the occupancy agreement or
proprietary lease and in the related cooperative shares. The lender takes
possession of the share certificate and a counterpart of the proprietary lease
or occupancy agreement, and a financing statement covering the proprietary lease
or occupancy agreement and the cooperative shares is filed in the appropriate
state and local offices to perfect the lender's interest in its collateral.
Subject to the limitations discussed below, upon default of the
tenant-stockholder, the lender may sue for judgment on the promissory note,
dispose of the collateral at a public or private sale or otherwise proceed
against the collateral or tenant-stockholder as an individual as provided in the
security agreement covering the assignment of the proprietary lease or occupancy
agreement and the pledge of the cooperative shares.
Foreclosure
Single Family Loans, Multi-Family Loans, Conventional Home Improvement
Loans, Title I Loans and Home Equity Lines of Credit. Foreclosure of a mortgage
is generally accomplished by judicial action. A foreclosure action generally is
initiated by the service of legal pleadings upon the borrower and any party
having a subordinate interest in the real estate including any holder of a
junior encumbrance on the real estate. Delays in completion of the foreclosure
occasionally may result from difficulties in locating necessary parties
defendant. When the mortgagee's right to foreclosure is contested, the legal
proceedings necessary to resolve the issue can be time-consuming. After the
completion of a judicial foreclosure proceeding, the court may issue a judgment
of foreclosure and appoint a receiver or other officer to conduct the sale of
the mortgaged premises. 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 non-judicial power of sale.
Foreclosure of a deed of trust is generally accomplished by a
non-judicial trustee's sale under a specific provision in the deed of trust that
authorizes the trustee to sell the mortgaged premises to a third party upon any
default by the borrower under the terms of the note or deed of trust. In some
states, the 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 and to any person who
has recorded a request for a copy of a notice of default and notice of sale. In
addition, the trustee must provide notice in some states to any other party
having a subordinate interest in the real estate, including any holder of a
junior encumbrance on the real estate. If the deed of trust is not reinstated
within any applicable cure period, a notice of sale must be posted in a public
place and, in most states, published for a specified period of time in one or
more newspapers. In addition, some state laws require that a copy of the notice
of sale be posted on the property and sent to all parties having an interest of
record in the property. When the beneficiary's right to foreclosure is
contested, the legal proceedings necessary to resolve the issue can be
time-consuming.
In some states, the borrower, or any other person having a junior
encumbrance on the real estate, may, during a statutorily prescribed
reinstatement period, cure a monetary default by paying the entire amount in
arrears plus other designated costs and expenses incurred in enforcing the
obligation. In general, state law controls the amount of foreclosure expenses
and
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costs, including attorneys' fees, which may be recovered by a lender. After the
reinstatement period has expired without the default having been cured, the
borrower or junior lienholder no longer has the right to reinstate the loan and
must pay the loan in full to prevent the scheduled foreclosure sale. If the
mortgage or deed of trust is not reinstated, a notice of sale must be posted in
a public place and, in most states, published for a specific period of time in
one or more newspapers. In addition, some state laws require that a copy of the
notice of sale be posted on the property and sent to all parties having an
interest in the real property.
A sale conducted in accordance with the terms of the power of sale
contained in a mortgage or deed of trust is generally presumed to be conducted
regularly and fairly, and a conveyance of the real property by the referee
confers absolute legal title to the real property to the purchaser, free of all
junior mortgages and free of all other liens and claims subordinate to the
mortgage or deed of trust under which the sale is made, with the exception of
some governmental liens and any redemption rights that may be granted to
borrowers under applicable state law. The purchaser's title is, however, subject
to all senior liens, encumbrances and mortgages. Thus, if the mortgage or deed
of trust being foreclosed is a junior mortgage or deed of trust, the referee or
trustee will convey title to the property to the purchaser, subject to the
underlying first mortgage or deed of trust and any other prior liens or claims.
A foreclosure under a junior mortgage or deed of trust generally will have no
effect on any senior mortgage or deed of trust, except that it may trigger the
right of a senior mortgagee or beneficiary to accelerate its indebtedness under
a due-on-sale clause or due on further encumbrance clause contained in the
senior mortgage.
In case of foreclosure under either a mortgage or a deed of trust, the
sale by the receiver or other designated officer or by the trustee is a public
sale. Nevertheless, because of the difficulty a potential buyer at the sale
would have in determining the exact status of title and because the physical
condition of the mortgaged premises may have deteriorated during the foreclosure
proceedings, it is uncommon for a third party to purchase the mortgaged premises
at the foreclosure sale. Rather, it is common for the lender to purchase the
mortgaged premises from the receiver or trustee for an amount which may be as
great as the unpaid principal balance of the mortgage note, accrued and unpaid
interest thereon and the expenses of foreclosure. Subsequently, subject to the
right of the borrower in some states to remain in possession during the
redemption period, the lender will assume the burdens of ownership, including
obtaining hazard insurance and making such repairs at its own expense as are
necessary to render the mortgaged premises suitable for sale. The lender
commonly will obtain the services of a real estate broker and pay the broker a
commission in connection with the sale of the mortgaged premises. Depending upon
market conditions, the ultimate proceeds of the sale of the mortgaged premises
may not equal the lender's investment therein. Any loss may be reduced by the
receipt of insurance proceeds. Mortgaged premises that are acquired through
foreclosure must be sold by the trustee within two years of the date on which it
is acquired in order to satisfy certain federal income tax requirements
applicable to REMICs. Foreclosure of a deed of trust is generally accomplished
by a non-judicial sale under a specific provision in the deed of trust that
authorizes the trustee to sell the property at public auction upon any default
by the borrower under the terms of the note or deed of trust. In some states,
the trustee must record a notice of default and send a copy to the
borrower-trustor, to any person who has recorded a request for a copy of any
notice of default and notice of sale, to any successor in interest to the
borrower-trustor, to the beneficiary of any junior deed of trust and to certain
other persons. In some states,
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a notice of sale must be posted in a public place and published during a
specific period of time in one or more newspapers, posted on the property and
sent to parties having an interest of record in the property before the
non-judicial sale takes place.
Courts have imposed general equitable principles upon foreclosure,
which are generally designed to mitigate the legal consequences to the borrower
of the borrower's defaults under the loan documents. Some courts have been faced
with the issue of whether federal or state constitutional provisions reflecting
due process concerns for fair notice require that borrowers under deeds of trust
receive notice longer than that prescribed by statute. For the most part, these
cases have upheld the notice provisions as being reasonable or have found that
the sale by a trustee under a deed of trust does not involve sufficient state
action to afford constitutional protection to the borrower.
Cooperative Loans. The cooperative shares owned by the
tenant-stockholder and pledged to the lender are, in almost all cases, subject
to restrictions on transfer as set forth in the cooperative's charter documents,
as well as the proprietary lease or occupancy agreement, and may be canceled by
the cooperative for failure by the tenant-stockholder to pay rent or other
obligations or charges owed by such tenant-stockholder, including mechanics'
liens against the cooperative apartment building incurred by the
tenant-stockholder. The proprietary lease or occupancy agreement generally
permits the cooperative to terminate the lease or agreement in the event an
obligor fails to make payments or defaults in the performance of covenants
required thereunder. Typically, the lender and the cooperative enter into a
recognition agreement that establishes the rights and obligations of both
parties in the event of a default by the tenant-stockholder on its obligations
under the proprietary lease or occupancy agreement. A default by the
tenant-stockholder under the proprietary lease or occupancy agreement will
usually constitute a default under the security agreement between the lender and
the tenant-stockholder.
The recognition agreement generally provides that, in the event that
the tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the cooperative will take no action to terminate the lease or
agreement until the lender has been provided with an opportunity to cure the
default. The recognition agreement typically provides that if the proprietary
lease or occupancy agreement is terminated, the cooperative will recognize the
lender's lien against proceeds from the sale of the cooperative apartment,
subject, however, to the cooperative's right to sums due under such proprietary
lease or occupancy agreement. The total amount owed to the cooperative by the
tenant-stockholder, which the lender generally cannot restrict and does not
monitor, could reduce the value of the collateral below the outstanding
principal balance of the cooperative loan and accrued and unpaid interest
thereon.
Recognition agreements also provide that, in the event of a foreclosure
on a cooperative loan, the lender must obtain the approval or consent of the
cooperative as required by the proprietary lease before transferring the
cooperative shares or assigning the proprietary lease.
In some states, foreclosure on the cooperative shares is accomplished
by a sale in accordance with the provisions of Article 9 of the Uniform
Commercial Code and the security agreement relating to those shares. Article 9
of the Uniform Commercial Code requires that a sale be conducted in a
commercially reasonable manner. Whether a foreclosure sale has been conducted in
a commercially reasonable manner will depend on the facts in each case. In
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determining commercial reasonableness, a court will look to the notice given the
debtor and the method, manner, time, place and terms of the foreclosure.
Generally, a sale conducted according to the usual practice of banks selling
similar collateral will be considered reasonably conducted.
Article 9 of the Uniform Commercial Code provides that the proceeds of
the sale will be applied first to pay the costs and expenses of the sale and
then to satisfy the indebtedness secured by the lender's security interest. The
recognition agreement, however, generally provides that the lender's rights to
reimbursement is subject to the right of the cooperative to receive sums due
under the proprietary lease or occupancy agreement. If there are proceeds
remaining, the lender must account to the tenant-stockholder for the surplus.
Conversely, if a portion of the indebtedness remains unpaid, the
tenant-stockholder is generally responsible for the deficiency.
Junior Mortgage Loans; Rights of Senior Mortgagees
Some of the mortgage loans included in a trust may be secured by
mortgages or deeds of trust that are junior to other mortgages or deeds of
trust. The rights of the trustee, and therefore the certificateholders, as
mortgagee under a junior mortgage or beneficiary under a junior deed of trust
are subordinate to those of the mortgagee under the senior mortgage or
beneficiary under the senior deed of trust, including the prior rights of the
senior mortgagee to receive hazard insurance and condemnation proceeds and to
cause the property securing the mortgage loan to be sold upon default of the
mortgagor or trustor, thereby extinguishing the junior mortgagee's or junior
beneficiary's lien unless the junior mortgagee or junior beneficiary asserts its
subordinate interest in the property in foreclosure litigation and, possibly,
satisfies the defaulted senior mortgage or deed of trust. As discussed more
fully below, a junior mortgagee or junior beneficiary 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, no notice of default is required to be
given to a junior mortgagee or junior beneficiary, and junior mortgagees or
junior beneficiaries are seldom given notice of defaults on senior mortgages. In
order for a foreclosure action in some states to be effective against a junior
mortgagee or junior beneficiary, the junior mortgagee or junior beneficiary must
be named in any foreclosure action, thus giving notice to junior lienors.
The standard form of the mortgage or deed of trust used by most
institutional lenders confers on the mortgagee or beneficiary the right under
some circumstances both to receive all proceeds collected under any standard
hazard insurance policy and all awards made in connection with any condemnation
proceedings, and to apply the proceeds and awards to any indebtedness secured by
the mortgage or deed of trust in any order as the mortgagee or beneficiary may
determine. Thus, in the event improvements on the property are damaged or
destroyed by fire or other casualty, or in the event the property is taken by
condemnation, the mortgagee or beneficiary under any underlying senior mortgage
may have the right to collect any insurance proceeds payable under a standard
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 or deeds of trust. Proceeds in excess of the amount of senior mortgage
indebtedness, in most cases, will be applied to the indebtedness of a junior
mortgage or trust deed.
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A common form of mortgage or deed of trust used by institutional
lenders typically contains a future advance clause which provides, in essence,
that additional amounts advanced to or on behalf of the mortgagor or trustor by
the mortgagee or beneficiary are to be secured by the mortgage or deed of trust.
While a future advance clause is valid under the laws of most states, the
priority of any advance made under the clause depends, in some states, on
whether the advance was an obligatory or optional advance. If the mortgagee or
beneficiary is obligated to advance the additional amounts, the advance is
entitled to receive the same priority as amounts initially loaned under the
mortgage or deed of trust, notwithstanding that there may be intervening junior
mortgages or deeds of trust and other liens at the time of the advance. Where
the mortgagee or beneficiary is not obligated to advance the additional amounts,
and, in some jurisdictions, has actual knowledge of the intervening junior
mortgages or deeds of trust and other liens, the advance will be subordinate to
the intervening junior mortgages or deeds of trust and other liens. Priority of
advances under the clause rests, in many other states, on state statutes giving
priority to all advances made under the loan agreement at a credit limit amount
stated in the recorded mortgage.
Other provisions sometimes included in the form of the mortgage or deed
of trust used by institutional lenders obligate the mortgagor or trustor to pay,
before delinquency, all taxes and assessments on the property and, when due, all
encumbrances, charges and liens on the property which appear prior to the
mortgage or deed of trust, to provide and maintain fire insurance on the
property, to maintain and repair the property and not to commit or permit any
waste thereof, and to appear in and defend any action or proceeding purporting
to affect the property or the rights of the mortgagee or beneficiary under the
mortgage or deed of trust. Upon a failure of the mortgagor or trustor to perform
any of these obligations, the mortgagee or beneficiary is given the right under
some mortgages or deeds of trust to perform the obligation itself, at its
election, with the mortgagor or trustor agreeing to reimburse the mortgagee or
beneficiary for any sums expended by the mortgagee or beneficiary on behalf of
the mortgagor or trustor. All sums so expended by the mortgagee or beneficiary
become part of the indebtedness secured by the mortgage or deed of trust.
Right of Redemption
In some states, after foreclosure of a mortgage or sale pursuant to a
deed of trust, the borrower and certain foreclosed junior lienholders are given
a statutory period in which to redeem the mortgaged premises from the
foreclosure sale. Depending upon state law, the right of redemption may apply to
sale following judicial foreclosure or to sale pursuant to a non-judicial power
of sale. In some states, statutory redemption may occur only upon payment of the
foreclosure purchase price, accrued interest and taxes and certain of the costs
and expenses incurred in enforcing the obligation. In some states, the right to
redeem is a statutory right and in others it is a contractual right. The effect
of a right of redemption is to diminish the ability of the lender to sell the
foreclosed mortgaged premises while the right of redemption is outstanding. 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 judicial
foreclosure or sale under a deed of trust. The practical effect of the
redemption right is to force the lender to maintain the property and pay the
expenses of ownership until the redemption period has run.
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Anti-Deficiency Legislation and Other Limitations on Lenders
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, statutes limit the right of the beneficiary or mortgagee to obtain a
deficiency judgment against the borrower following foreclosure or sale under a
deed of trust. A deficiency judgment would be a personal judgment against the
former borrower equal in most cases to the difference between the amount due to
the lender and the fair market value of the real property sold at the
foreclosure sale. Currently, the general practice of the servicer or master
servicer is not to seek deficiency judgments against defaulting borrowers, even
where such legal prohibitions are not in force.
In addition to anti-deficiency and related legislation, numerous other
federal and state statutory provisions, including the federal bankruptcy laws
and state laws affording relief to debtors, may interfere with or affect the
ability of the secured mortgage lender to realize upon collateral and/or enforce
a deficiency judgment. For example, if a mortgagor is in a proceeding under the
federal Bankruptcy Code, a lender may not foreclose on the mortgaged premises
without the permission of the bankruptcy court. The rehabilitation plan proposed
by the debtor may provide, if the court determines that the value of the
mortgaged premises is less than the principal balance of the mortgage loan, for
the reduction of the secured indebtedness to the value of the mortgaged premises
as of the date of the commencement of the bankruptcy, rendering the lender a
general unsecured creditor for the difference, and also may reduce the monthly
payments due under the mortgage loan, change the rate of interest and alter the
mortgage loan repayment schedule. The effect of any of these proceedings under
the federal Bankruptcy Code, including, but not limited to, any automatic stay,
could result in delays in receiving payments on the mortgage loans underlying a
series of certificates and possible reductions in the aggregate amount of the
payments. Some states also have homestead exemption laws that would protect a
principal residence from a liquidation in bankruptcy.
Federal and local real estate tax laws provide priority to certain tax
liens over the lien of a mortgage or secured party. Numerous federal and state
consumer protection laws impose substantive requirements upon mortgage lenders
in connection with the origination, servicing and enforcement of single family
loans and cooperative loans. These laws include, in addition to state laws, the
federal Truth-in-Lending Act, Real Estate Settlement Procedures Act, Equal
Credit Opportunity Act, Fair Credit Billing Act, Fair Credit Reporting Act and
related statutes and regulations. These federal and state laws impose specific
statutory liabilities upon lenders who fail to comply with the provisions of the
law. In some cases, this liability may affect assignees of mortgage loans. In
some instances, any violations of these laws and regulations by the originator
of a loan could cause loans to be unenforceable, or give the borrower the right
to rescind or cancel the loan transaction. Any loan affected by violations of
law would have a significantly increased risk of default or prepayment.
Generally, Article 9 of the Uniform Commercial Code governs foreclosure
on cooperative shares and the related proprietary lease or occupancy agreement.
Some courts have interpreted section 9-504 of the Uniform Commercial Code to
prohibit a deficiency award unless the creditor establishes that the sale of the
collateral, which, in the case of a cooperative loan, would be the shares of the
cooperative and the related proprietary lease or occupancy agreement, was
conducted in a commercially reasonable manner.
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Soldiers' and Sailors' Civil Relief Act of 1940
Under the Soldiers' and Sailors' Civil Relief Act of 1940, members of
all branches of the military on active duty, including draftees and reservists
in military service,
o are entitled to have 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,
o may be entitled to a stay of proceedings on any kind of
foreclosure or repossession action in the case of defaults on
obligations incurred before the commencement of military service,
and
o may have the maturity of obligations incurred before the
commencement of military service extended, the payments lowered
and the payment schedule readjusted for a period of time after the
completion of military service.
If a borrower's obligation to repay amounts otherwise due on a mortgage loan
included in the trust for a series is relieved pursuant to the Soldiers' and
Sailors' Civil Relief Act of 1940, neither the servicer, the master servicer nor
the trustee will be required to advance the amounts, and any loss in respect of
those amounts may reduce the amounts available to be paid to the holders of the
certificates of the series. Unless otherwise specified in the prospectus
supplement for a series, any shortfalls in interest collections on mortgage
loans included in the trust for the series resulting from application of the
Soldiers' and Sailors' Civil Relief Act of 1940 will be allocated to each class
of certificates of the series that is entitled to receive interest in respect of
the mortgage loans in proportion to the interest that each class of certificates
would have otherwise been entitled to receive in respect of the mortgage loans
had the interest shortfall not occurred.
Environmental Considerations
Environmental conditions may diminish the value of the mortgage assets
and give rise to liability of various parties, including liability under
federal, state and local environmental laws, regulations and ordinances
concerning hazardous waste, hazardous substances, petroleum, underground and
aboveground storage tanks, solid waste, lead and copper in drinking water,
asbestos, lead-based paint and other materials under the federal Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended. A
secured party which participates in management of a facility, participates in
the management of the owner of a facility, takes a deed in lieu of foreclosure
or purchases a mortgaged premises at a foreclosure sale may become liable in
some circumstances for the costs of a remedial action if hazardous substances
have been released or disposed of on the property. These cleanup costs may be
substantial. The U.S. Environmental Protection Agency has established a Policy
Towards Owners of Residential Property at Superfund Sites (July 3, 1991), which
provides that the EPA will not proceed against owners of residential property
contaminated with hazardous substances under certain circumstances. Similarly,
the EPA and the Department of Justice have adopted a policy not to proceed
against lenders that are acting primarily to protect a security interest at the
inception of a loan, during a workout, in foreclosure or after foreclosure or
the taking of a deed in lieu of foreclosure. Policy on CERCLA Enforcement
Against Lenders and Government
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Entities that Acquire Property Involuntarily (September 22, 1995). These
policies are not binding on the EPA, a state or third parties who may have a
cause of action under CERCLA, however, and are subject to limitations and
conditions.
The Asset Conservation Act of 1996 was intended to clarify the scope of
the secured creditor exemption under both CERCLA and other legislation. The
Asset Conservation Act more explicitly defined the kinds of participation in
management that would trigger liability under CERCLA an specified the activities
that would not constitute participation in management or otherwise result in a
forfeiture of the secured creditor exemption before foreclosure or during a
workout period. The Asset Conservation Act also clarified the extent of
protection against liability under CERCLA in the event of foreclosure and
authorized certain regulatory clarifications of the scope of the secured
creditor exemption for purposes of other legislation, similar to the statutory
protections under CERCLA. However, since the courts have not yet had the
opportunity to interpret the new statutory provisions, the scope of the
additional protections offered by the Asset Conservation Act is not fully
defined. It also is important to note that the Asset Conservation Act does not
offer complete protection to lenders and that the risk of liability remains.
Many state or local laws, regulations or ordinances may also require
owners or operators of property, which may include a lender in certain
circumstances, to incur cleanup costs if hazardous substances, hazardous wastes,
petroleum or solid waste are released or otherwise exist on the property. It is
possible that cleanup costs under CERCLA or other federal, state or local laws,
regulations or ordinances could become a liability of a trust and reduce the
amounts otherwise distributable to the certificateholders if a mortgaged
premises securing a mortgage loan becomes the property of the trust in certain
circumstances and if the cleanup costs were incurred. Moreover, some states or
localities by statute or ordinance impose a lien for any cleanup costs incurred
by the state or locality on the property that is the subject of such cleanup
costs. Some liens take priority over all other prior recorded liens, and others
take the same priority as taxes in the jurisdiction. In both instances, the lien
of the states or localities would take priority over the security interest of
the trustee in a mortgaged premises in the jurisdiction in question.
It is possible that no environmental assessment or a very limited
environmental assessment of the mortgaged premises was conducted and no
representations or warranties are made by the depositor or the seller to the
trustee or certificateholders as to the absence or effect of adverse
environmental conditions on any of the mortgaged premises. In addition, the
servicers have not made any representations or warranties or assumed any
liability with respect to the absence or effect of adverse environmental
conditions on any mortgaged premises or any casualty resulting from the presence
or effect of adverse environmental conditions, and any loss or liability
resulting from the presence or effect of the adverse environmental conditions
will reduce the amounts otherwise available to pay to the holders of the
certificates.
Under the agreement, the servicer will not foreclose on any property
that it knows is materially contaminated with or affected by hazardous wastes or
hazardous substances. For purposes of environmental matters, the concept of
knowledge of the servicer or master servicer may be limited to the actual
knowledge of the servicer's managers directly responsible for servicing the
related mortgage loan. If a servicer does not foreclose on mortgaged premises,
the
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amounts otherwise available to pay the holders of the certificates may be
reduced. A servicer will not be liable to the holders of the certificates if it
fails to foreclose on mortgaged premises that it reasonably believes may be so
contaminated or affected, even if the mortgaged premises are, in fact, not so
contaminated or affected. In addition, a servicer will not be liable to the
holders of the certificates if, based on its reasonable belief that no
contamination or effect exists, the servicer forecloses on mortgaged premises
and takes title to the mortgaged premises and thereafter the mortgaged premises
are determined to be so contaminated or affected.
Due-on-Sale Clauses
The forms of mortgage note, mortgage and deed of trust relating to
conventional mortgage loans may contain a due-on-sale clause permitting
acceleration of the maturity of a loan if the borrower transfers its interest in
the mortgaged premises. The Garn-St Germain Depository Institutions Act of 1982
preempts state laws which prohibit the enforcement of due-on-sale clauses by
providing, among other matters, that due-on-sale clauses in some loans, which
loans include conventional mortgage loans, made after the effective date of the
Garn-St Germain Depository Institutions Act of 1982 are enforceable within
limitations as set forth in the Act and the regulations promulgated under the
Act.
By virtue of the Garn-St Germain Depository Institutions Act , a
mortgage lender generally may accelerate any conventional mortgage loan that
contains a due-on-sale clause upon transfer of an interest in the mortgaged
premises. With respect to any mortgage loan secured by a residence occupied or
to be occupied by the borrower, this ability to accelerate will not apply to
certain types of transfers, including:
o the granting of a leasehold interest which has a term of three
years or less and which does not contain an option to purchase,
o a transfer to a relative resulting from the death of a borrower,
or a transfer where the spouse or one or more children become
owners of the mortgaged premises, in each case where the
transferee(s) will occupy the mortgaged premises,
o a transfer resulting from a decree of dissolution of marriage,
legal separation agreement or an incidental property settlement
agreement by which the spouse becomes an owner of the mortgaged
premises,
o the creation of a lien or other encumbrance subordinate to the
lender's security instrument which does not relate to a transfer
of rights of occupancy in the mortgaged premises, provided that
the lien or encumbrance is not created under contract for deed,
o a transfer by devise, descent or operation of law on the death of
a joint tenant or tenant by the entirety, and
o other transfers as set forth in the Garn-St Germain Depository
Institutions Act and the regulations thereunder.
As a result, a lesser number of mortgage loans that contain due-on-sale clauses
may extend to full maturity than earlier experience would indicate with respect
to single-family mortgage loans.
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The extent of the effect of the Act on the average lives and delinquency rates
of the mortgage loans, however, cannot be predicted.
Enforceability of Late Fees and Prepayment Fees
The forms of mortgage note, mortgage and deed of trust used by the
servicers 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 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, to the extent
permitted by law and not waived by the servicers, unless otherwise specified in
a prospectus supplement, will generally be retained by the related servicer as
additional servicing compensation.
Courts have imposed general equitable principles upon foreclosure.
These equitable principles are generally designed to relieve the borrower from
the legal effect of defaults under the loan documents. Examples of judicial
remedies that may be fashioned include judicial requirements that the lender
undertake affirmative and expensive actions to determine the causes for the
borrower's default and the likelihood that the borrower will be able to
reinstate the loan. In some cases, courts have substituted their judgment for
the lender's judgment and have required lenders to reinstate loans or recast
payment schedules to accommodate borrowers who are suffering from temporary
financial disability. In some cases, courts have limited the right of lenders to
foreclose if the default under the security instrument is not monetary, such as
the borrower failing to adequately maintain the mortgaged premises or the
borrower executing a second mortgage or deed of trust affecting the mortgaged
premises. In other cases, courts have been faced with the issue whether federal
or state constitutional provisions reflecting due process concerns for adequate
notice require that borrowers under deeds of trust receive notices in addition
to the statutorily prescribed minimum requirements. For the most part, these
cases have upheld the notice provisions as being reasonable or have found that
the sale by a trustee under a deed of trust or under a mortgage having a power
of sale does not involve sufficient state action to afford constitutional
protections to the borrower.
Consumer Protection Laws
A number of federal and state laws and regulations related to
residential mortgage refinance transactions contain stringent limits on interest
rates and origination fees, and impose detailed disclosure requirements. In some
instances, any violations of these laws and regulations by the originator of the
loan could cause any affected loan to be unenforceable, or give the borrower the
right to rescind or cancel the loan transaction. Any affected loan would have a
significantly increased risk of default or prepayment.
THE DEPOSITOR
The depositor was incorporated in Virginia on May 6, 1996. It is a
wholly owned, limited-purpose direct or indirect financing subsidiary of Saxon
Capital, Inc., a Virginia
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corporation. None of Saxon Capital, Inc., Saxon Mortgage, Inc., their affiliates
or the depositor has guaranteed, or is otherwise obligated with respect to, the
certificates of any series. The principal executive offices of the depositor are
located at 4880 Cox Road, Glen Allen, Virginia 23060, and the telephone number
of the depositor is (804) 967-7400. The depositor was formed solely for the
purpose of facilitating the financing and sale of mortgage assets and other
related assets. It does not intend to engage in any business or investment
activities other than issuing and selling securities secured primarily by, or
evidencing interests in, mortgage assets and other related assets and taking
particular actions with respect to those assets. The depositor's Articles of
Incorporation limit the depositor's business to the foregoing and place certain
other restrictions on the depositor's activities.
USE OF PROCEEDS
Substantially all the net proceeds from the sale of the certificates of
each series will be applied by the depositor to purchase the mortgage assets
assigned to the trust underlying the series and to fund any pre-funding account.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following discussion is the opinion of McKee Nelson LLP concerning
the material federal income tax consequences of the purchase, ownership, and
disposition of certificates. This discussion is based on authorities that are
subject to change or differing interpretations. Any such change or differing
interpretation could be applied retroactively. No rulings have been or will be
sought from the IRS with respect to any of the matters discussed below and no
assurance can be given that the view of the IRS with respect to those matters
will not differ from that described below.
This discussion is directly solely to certificateholders that hold
certificates as capital assets within the meaning of section 1221 of the Code.
The discussion does not, however, purport to cover all federal income tax
consequences applicable to particular investors, some of which may be subject to
special rules, including insurance companies, tax-exempt organizations,
financial institutions or broker-dealers and holders that will hold the
certificates as other than capital assets.
The discussion does not address the state or local tax consequences of
the purchase, ownership and disposition of certificates. We recommend that you
consult your own tax adviser in determining the federal, state, local, or other
tax consequences to them of the purchase, ownership and disposition of the
certificates.
The discussion addresses certificates of three general types:
o REMIC certificates,
o FASIT certificates,
o trust certificates issued by trusts for which a REMIC or FASIT
election is not made.
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The prospectus supplement for each series of certificates will indicate
whether a REMIC or FASIT election or elections will be made for the 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 ownership interests in the FASIT. As used in this section and the
"ERISA Considerations" section of this prospectus, Code means the Internal
Revenue Code of 1986, as amended, and IRS means the Internal Revenue Service.
REMIC Certificates
With respect to each series of REMIC certificates representing
interests in all or a portion of a trust, McKee Nelson LLP, special counsel for
the depositor, will deliver its opinion concluding that, assuming there is
ongoing compliance by all parties with all provisions of the related trust
agreement, the trust will comprise one or more REMICs and the classes of
interests offered will be considered to be regular interests or residual
interests in a REMIC within the meaning of the Code.
A REMIC may issue one or more classes of regular interests and must
issue one and only one class of residual interest. A REMIC certificate
representing a regular interest in a REMIC will be referred to as a "REMIC
regular certificate" and a REMIC certificate representing a residual interest in
a REMIC will be referred to as a "REMIC residual certificate."
If an entity elects to be treated as a REMIC but fails to comply with
one or more of the ongoing requirements of the Code for REMIC status during any
taxable year, the entity will not qualify as a REMIC for such year and
thereafter. In this event, the entity may be subject to taxation as a separate
corporation, and the certificates issued by the entity may not be accorded the
status described below under "-- Status of REMIC Certificates." In the case of
an inadvertent termination of REMIC status, the Treasury Department has
authority to issue regulations providing relief; however, sanctions, such as the
imposition of a corporate tax on all or a portion of the entity's income for the
period during which the requirements for REMIC status are not satisfied, may
accompany any such relief.
Taxation of REMIC Regular Certificates. Except as otherwise stated in
this discussion, the REMIC regular certificates will be treated for federal
income tax purposes as debt instruments issued by the REMIC. You must include
interest accrued on a REMIC regular certificate in income under the accrual
method of accounting regardless of the method of accounting you otherwise use
for tax purposes.
Original Issue Discount. Certain REMIC regular certificates may be
issued with original issue discount within the meaning of section 1273(a) of the
Code. If you hold REMIC regular certificates issued with original issue discount
you will be required to include original issue discount in income as it accrues,
in accordance with a constant yield method that takes into account the
compounding of interest, in advance of the receipt of the cash attributable to
such income. You will receive reports annually, or more frequently if required,
with respect to the original issue discount accruing on the REMIC regular
certificates as may be required under section 6049 of the Code and the
regulations thereunder. See "-- Reporting and Other Administrative Matters of
REMICs."
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Rules governing original issue discount are set forth in sections 1271
through 1273 and 1275 of the Code and in the regulations thereunder (the "OID
Regulations"). Section 1272(a)(6) provides special original issue discount rules
applicable to REMIC regular certificates. The OID Regulations do not address all
issues presented by debt instruments subject to Code Section 1272(a)(6).
Section 1272(a)(6) requires that a mortgage prepayment assumption be
used in computing the accrual of original issue discount on REMIC regular
certificates and for certain other federal income tax purposes. The prepayment
assumption is to be determined in the manner prescribed in Treasury regulations.
To date, no such regulations have been promulgated. The Conference Committee
Report to the Tax Reform Act of 1986 (the "Committee Report") indicates that the
regulations should provide that the prepayment assumption, if any, used with
respect to a particular transaction must be the same as that used by the parties
in pricing the transaction. In reporting original issue discount, a prepayment
assumption consistent with this standard will be used. Nevertheless, the
depositor does not make any representation that prepayment will in fact be made
at the rate reflected in the prepayment assumption or at any other rate. You
must make your own decision as to the appropriate prepayment assumption to be
used in deciding to purchase any of the REMIC regular certificates. The
prospectus supplement with respect to a series of REMIC certificates will
disclose the prepayment assumption to be used in reporting original issue
discount, if any, and for certain other federal income tax purposes.
The total amount of original issue discount on a REMIC regular
certificate is the excess of the stated redemption price at maturity of the
REMIC regular certificate over its "issue price." Except as discussed in the
following two paragraphs, in general, the issue price of a particular class of
REMIC regular certificates will be the price at which a substantial amount
thereof are first sold to the public, excluding bond houses and brokers. The
stated redemption price at maturity of a REMIC regular certificate is equal to
the total of all payments to be made on such certificate other than qualified
stated interest.
If a REMIC regular certificate is sold with accrued interest that
relates to a period prior to the closing date of the REMIC regular certificate,
the amount paid for the accrued interest will be treated instead as increasing
the issue price of the REMIC regular certificate. In addition, that portion of
the first interest payment in excess of interest accrued from the closing date
to the first distribution date will be treated for federal income tax reporting
purposes as includible in the stated redemption price at maturity of the REMIC
regular certificates, and as excludable from income when received as a payment
of interest on the first distribution date, except to the extent of any accrued
market discount as of that date. The OID Regulations provide, however, that you
may treat pre-issuance accrued interest as a separate asset whose cost is
recovered entirely out of interest paid on the first distribution date.
Under the OID Regulations, qualified stated interest is interest that
is unconditionally payable at least annually during the entire term of the
certificate at either a fixed rate or a variable rate. Although not free from
doubt, unless the prospectus supplement for a series indicates otherwise, the
trustee for each series will treat all stated interest on the certificates as
qualified stated interest.
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Original issue discount on a REMIC regular certificate will be
considered to be zero if it is less than 0.25% of the stated redemption price at
maturity of the REMIC regular certificate multiplied by the number of complete
years to its weighted average maturity. Although not free from doubt, the
trustee for each series will take into account the prepayment assumption in
computing the weighted average maturity of a certificate for purposes of
determining whether any certificate has de minimis OID.
The OID Regulations generally treat de minimis original issue discount
as includible in income as each principal payment is made, based on the product
of the total amount of such de minimis original issue discount and a fraction,
the numerator of which is the amount of such principal payment and the
denominator of which is the outstanding principal balance of the REMIC regular
certificate. The OID Regulations also permit a certificateholder to elect to
accrue de minimis original issue discount, together with stated interest, market
discount and original issue discount, into income currently based on a constant
yield method. See "-- Market Discount" and "-- Premium."
Each holder of a REMIC regular certificate must include in gross income
the sum of the daily portions of original issue discount on its REMIC regular
certificate for each day during its taxable year on which it held such REMIC
regular certificate. For this purpose, in the case of an original holder of a
REMIC regular certificate, a calculation will first be made of the portion of
the original issue discount that accrued during each accrual period, generally
each period that ends on a date that corresponds to a distribution date on the
REMIC regular certificate and begins on the first day following the immediately
preceding accrual period, or in the case of the first such period, begins on the
closing date. For any accrual period, this portion will equal the excess of :
(1) the sum of (A) the present value of all the distributions
remaining to be made on the REMIC regular certificate, as of the
end of the accrual period, that are included in the stated
redemption price at maturity and (B) the sum of distributions
made on the REMIC regular certificate during the accrual period
of amounts included in the stated redemption price at maturity,
over
(2) the adjusted issue price of such REMIC regular certificate at the
beginning of the accrual period.
The present value of the remaining distributions referred to in clause (1)(A) of
the preceding sentence will be calculated based on (1) the yield to maturity of
the REMIC regular certificate, calculated as of the closing date, giving effect
to the prepayment assumption, (2) events, including actual prepayments, that
have occurred prior to the end of the accrual period and (3) the prepayment
assumption. The adjusted issue price of a REMIC regular certificate at the
beginning of any accrual period will equal the issue price of the certificate,
increased by the aggregate amount of original issue discount with respect to the
REMIC regular certificate that accrued in prior accrual periods, and reduced by
the amount of any distributions made on the REMIC regular certificate in prior
accrual periods of amounts included in the stated redemption price at maturity.
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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 for each day. With respect to an accrual
period between the closing date and the first distribution date that is shorter
than a full accrual period, the OID Regulations permit the daily portions of
original issue discount to be determined according to any reasonable method.
A subsequent purchaser of a REMIC regular certificate that purchases
such REMIC regular certificate at a cost, not including payment for accrued
qualified stated interest, less than its remaining stated redemption price at
maturity will also be required to include in gross income, for each day on which
it holds such REMIC regular certificate, the daily portions of original issue
discount with respect to such REMIC regular certificate If your cost exceeds the
adjusted issue price, then you have purchased the REMIC regular certificate at
an acquisition premium and you can reduce the amount of original issued discount
you accrue in any accrual period to reflect the acquisition premium. For any
accrual period, the amount of the reduction equals the product of the original
issue discount accrued in the period and a fraction, the numerator of which is
the acquisition premium you paid and the denominator of which is the amount of
original issue discount remaining to be accrued at the time you purchased the
REMIC regular certificate.
There is uncertainty concerning the application of section 1272(a)(6)
of the Code and the OID Regulations to REMIC regular certificates bearing
interest at one or more variable rates. In the absence of other authority, the
provisions of the OID Regulations governing variable rate debt instruments will
be used as a guide in adapting the provisions of section 1272(a)(6) to such
certificates for the purpose of preparing reports furnished to
certificateholders. Generally, under the OID regulations, the REMIC regular
certificate is assumed to bear interest at a fixed rate for purposes of
determining the yield to maturity of the REMIC regular certificate. regular
certificates. If the interest paid or accrued with respect to a Multiple
Variable Rate certificate during an accrual period differs from the assumed
fixed interest rate, such difference will be an adjustment, to interest or
original issue discount, as applicable, to the certificateholder's taxable
income for the taxable period or periods to which such difference relates.
Market Discount. The purchaser of a REMIC regular certificate at a
market discount -- that is, at a purchase price less than the stated redemption
price at maturity (or, in the case of a REMIC regular certificate issued with
original issue discount, the REMIC regular certificate's adjusted issue price
(as defined under "REMIC Certificates -- Original Issue Discount")) -- will
recognize market discount upon receipt of each payment of principal. In
particular, the holder will generally be required to allocate each payment of
principal on a REMIC regular certificate first to accrued market discount and to
recognize ordinary income to the extent the principal payment does not exceed
the aggregate amount of accrued market discount on the REMIC regular certificate
not previously included in income. The market discount must be included in
income in addition to any original issue discount includible in income.
A certificateholder may elect to include market discount in income
currently as it accrues rather than including it on a deferred basis in
accordance with the foregoing. The election, if made, will apply to all market
discount bonds acquired by the certificateholder on or after the first day of
the first taxable year to which the election applies. In addition, the OID
Regulations permit a certificateholder to elect to accrue all interest and
discount, including de minimis market
74
or original issue discount, reduced by any premium, in income as interest, based
on a constant yield method. If an election is made, the certificateholder is
deemed to have made an election to include on a current basis market discount in
income with respect to all other debt instruments having market discount that
such certificateholder acquires during the year of the election or thereafter.
Similarly, a certificateholder that makes this election for a certificate that
is acquired at a premium is deemed to have made an election to amortize bond
premium, as described below, with respect to all debt instruments having
amortizable bond premium that the certificateholder owns or acquires. A taxpayer
may not revoke an election to accrue interest, discount and premium on a
constant yield method without the consent of the IRS.
Under a statutory de minimis exception, market discount with respect to
a REMIC regular certificate will be considered to be zero for purposes of
sections 1276 through 1278 of the Code if it is less than 0.25% of the stated
redemption price at maturity of such REMIC regular certificate multiplied by the
number of complete years to maturity remaining after the date of its purchase.
In interpreting the de minimis rule with respect to original issue discount, the
OID Regulations refer to the weighted average maturity of obligations, and it is
likely that the same principle will be applied in determining whether market
discount is de minimis. It appears that de minimis market discount on a REMIC
regular certificate would be treated in a manner similar to de minimis original
issue discount. See "REMIC certificates -- Original Issue Discount." Such
treatment would result in de minimis market discount being included in income at
a slower rate than market discount would be required to be included using the
method described in the preceding paragraph.
The Treasury Department is authorized to issue regulations providing
for the method for accruing market discount of more than a de minimis amount on
debt instruments the principal of which is payable in more than one installment.
Nevertheless, no such regulations have been issued. Until regulations are
issued, certain rules described in the Committee Report might apply. Under those
rules, the holder of a REMIC regular certificate purchased with more than de
minimis market discount may elect to accrue such market discount either on the
basis of a constant yield method or on the basis of the appropriate
proportionate method described below. Under the proportionate method for
obligations issued with original issue discount, the amount of market discount
that accrues during a period is equal to the product of (i) the total remaining
market discount multiplied by (ii) a fraction the numerator of which is the
original issue discount accruing during the period and the denominator of which
is the total remaining original issue discount at the beginning of the period.
The prepayment assumption, if any, used in calculating the accrual of original
issue discount should be used in calculating the accrual of market discount.
Under the proportionate method for obligations issued without original issue
discount, the amount of market discount that accrues during a period is equal to
the product of (i) the total remaining market discount multiplied by (ii) a
fraction the numerator of which is the amount of stated interest paid during the
accrual period and the denominator of which is the total amount of stated
interest remaining to be paid at the beginning of the period. Because
regulations have not been issued, it is not possible to predict what effect such
regulations might have on the tax treatment of a REMIC regular certificate
purchased at a discount in the secondary market.
A certificateholder generally will be required to treat a portion of
any gain on sale or exchange of a REMIC regular certificate as ordinary income
to the extent of the market discount accrued to the date of disposition under
one of the foregoing methods less market discount
75
previously reported as ordinary income as distributions in reduction of the
stated redemption price at maturity were received. See "-- Sales of REMIC
Certificates" below. A certificateholder may be required to defer a portion of
its interest deductions for the taxable year attributable to any indebtedness
incurred or continued to purchase or carry such REMIC regular certificate. Any
such deferred interest expense, in general, is allowed as a deduction not later
than the year in which the related market discount income is recognized. If such
holder elects to include market discount in income currently as it accrues on
all market discount instruments acquired by such holder in that taxable year or
thereafter, the interest expense deferral rule described above will not apply.
Premium. A REMIC regular certificate purchased at a cost, not including
payment for accrued qualified stated interest, greater than its remaining stated
redemption price at maturity will be considered to be purchased at a premium.
The holder of such a REMIC regular certificate may elect to amortize such
premium under the constant yield method. The OID Regulations also permit
certificateholders to elect to include all interest, discount and premium in
income based on a constant yield method, further treating the certificateholder
as having made the election to amortize premium generally, as described above.
The Committee Report indicates a Congressional intent that the same rules that
apply to accrual of market discount on installment obligations also apply in
amortizing premium under Code Section 171 on installment obligations such as the
REMIC regular certificates.
Treasury regulations concerning amortization of premium ("the Premium
Regulations") describe the constant yield method under which premium is
amortized and provide that the resulting offset to interest income may be taken
into account only as a certificateholder takes the corresponding interest income
into account under the holder's regular accounting method. In the case of
instruments that may be called or repaid prior to maturity, the Premium
Regulations provide that the premium is calculated by assuming that the issuer
will exercise its redemption rights in the manner that maximizes the
certificateholder's yield and the certificateholder will exercise its option in
a manner that maximizes the certificateholder's yield. The Premium Regulations
do not apply to debt instruments subject to section 1272(a)(6) of the Code.
Nevertheless, if a certificateholder elects to amortize premium for the taxable
year containing the effective date of March 2, 1998, the Premium Regulations
will apply to all the certificateholder's debt instruments held on or after the
first day of that taxable year.
Treatment of Subordinated Certificates. REMIC regular certificates may
include one or more classes of subordinated certificates. Holders of
subordinated certificates will be required to report income with respect to such
certificates on the accrual method without giving effect to delays and
reductions in distributions attributable to defaults or delinquencies on any
mortgage loans, except possibly, in the case of income that constitutes
qualified stated interest, to the extent that it can be established that such
amounts are uncollectible. As a result, the amount of income reported by a
certificateholder of a subordinated certificate in any period could exceed the
amount of cash distributed to such certificateholder in that period.
Although not entirely clear, it appears that: (a) a holder who holds a
subordinated REMIC regular certificate in the course of a trade or business or a
corporate holder generally should be allowed to deduct as an ordinary loss any
loss sustained on account of its partial or complete worthlessness and (b) a
noncorporate holder who does not hold a subordinated REMIC
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regular certificate in the course of a trade or business generally should be
allowed to deduct as a short-term capital loss any loss sustained on account of
its complete worthlessness. Special rules are applicable to banks and thrift
institutions. Holders of subordinated certificates should consult their own tax
advisers regarding the appropriate timing, character and amount of any loss
sustained with respect to subordinated certificates.
Status of REMIC Certificates. Unless otherwise stated in the prospectus
supplement relating to a particular series of REMIC certificates, REMIC
certificates held by a domestic building and loan association will constitute a
"loans secured by interests in real property" within the meaning of section
7701(a)(19)(C)(xi) of the Code; REMIC certificates held by a real estate
investment trust will constitute "real estate assets" within the meaning of
section 856(c)(5)(B); any amount includible in gross income with respect to the
REMIC certificates will be considered "interest on obligations secured by
mortgages on real property" within the meaning of section 856(c)(3)(B); and
REMIC certificates held by certain financial institutions will constitute an
"evidence of indebtedness" within the meaning of section 582(c)(1).
Taxation of REMlC Residual Certificates. If you own a REMIC residual
certificate ("Residual Owner") you generally will be required to report the
daily portion of the taxable income or, subject to the limitation described
below in "Basis Rules and Distributions", the net loss of the REMIC for each day
during a calendar quarter that you owned the REMIC residual certificate. For
this purpose, the daily portion will be determined by allocating to each day in
the calendar quarter, using a 30 days per month/90 days per quarter/360 days per
year counting convention, a ratable portion of the taxable income or net loss of
the REMIC for the quarter. The daily portions will then be allocated among the
Residual Owners in accordance with their percentage of ownership. Any amount
included in the gross income of, or allowed as a loss to, any Residual Owner by
virtue of the rule referred to in this paragraph will be treated as ordinary
income or loss. Taxable income from Residual certificates may exceed cash
distributions with respect thereto in any taxable year.
The tax treatment of any payments made by a transferor of a REMIC
residual certificate to a transferee to induce the transferee to acquire the
REMIC residual certificate is unclear. Such payments may be taken into account
in determining the income of such holder. Alternatively, a holder may take
another position. Because of the uncertainty concerning the treatment of such
payments, Residual Owners should consult their tax advisers concerning the
treatment of such payments for income tax purposes.
Taxable Income or Net Loss of the REMIC Mortgage Pool. Generally, a
REMIC determines its taxable income or net loss for a given calendar quarter the
same manner as would an individual having the calendar year as his taxable year
and using the accrual method of accounting, with certain modifications. There
are, however, certain modifications. First, a deduction is allowed for accruals
of interest, including original issue discount, on the REMIC regular
certificates. Second, market discount equal to the excess of any qualified
mortgage's adjusted issue price (as determined under "-- REMIC Certificates --
Market Discount", and "--Premium") over its fair market value at the time of its
transfer to the REMIC mortgage pool generally will be included in income as it
accrues, based on a constant yield method and on the prepayment assumption. For
this purpose, the fair market value of the mortgage loans will be treated as
being equal to the aggregate issue prices of the REMIC regular certificates and
77
REMIC residual certificates. If one or more classes of REMIC regular
certificates or REMIC residual certificates are retained by the depositor, the
value of such retained interests will be estimated in order to determine the
fair market value of the qualified mortgages for this purpose. Third, no item of
income, gain, loss or deduction allocable to a prohibited transaction (see "--
Prohibited Transactions and Other Possible REMIC Taxes") is taken into account.
Fourth, the REMIC mortgage pool generally may deduct only items that would be
allowed in calculating the taxable income of a partnership by virtue of section
703(a)(2) of the Code. Fifth, the limitation on miscellaneous itemized
deductions imposed on individuals by section 67 does not apply at the REMIC
mortgage pool level to investment expenses such as trustee fees or the servicing
fees paid to the master servicer or sub-servicers, if any. See, however, "--
Pass through of Servicing Fees". If the deductions allowed to the REMIC mortgage
pool exceed its gross income for a calendar quarter, such excess will be the net
loss for the REMIC mortgage pool for that calendar quarter.
Basis Rules and Distributions. A Residual Owner will not include any
distribution by a REMIC mortgage pool in gross income to the extent it is less
than the adjusted basis of such Residual Owner's interest in a REMIC residual
certificate. The distribution will reduce the adjusted basis of such interest,
but not below zero. To the extent a distribution exceeds the adjusted basis of
the REMIC residual certificate, it will be treated as gain from the sale of the
REMIC residual certificate. See "-- Sales of REMIC Certificates." The adjusted
basis of a REMIC residual certificate is equal to the amount paid for the REMIC
residual certificate, increased by amounts included in the income of the
Residual Owner and decreased by distributions and by net losses taken into
account with respect to such interest.
A Residual Owner is not allowed to take into account any net loss for
any calendar quarter to the extent such net loss exceeds such Residual Owner's
adjusted basis in its REMIC residual certificate as of the close of such
calendar quarter, determined without regard to such 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 by
that Residual Owner to offset income from the REMIC residual certificate.
The effect of these basis and distribution rules is that a Residual
Owner may not amortize its basis in a REMIC residual certificate but may only
recover its basis through distributions, through the deduction of any net losses
of the REMIC mortgage pool or upon the sale of its REMIC residual certificate.
See "-- Sales of REMIC Certificates."
Excess Inclusions. Excess inclusions with respect to a REMIC residual
certificate are subject to special tax rules. With respect to a Residual Owner,
the excess inclusion for any calendar quarter is defined as the excess of the
daily portions of taxable income over the sum of the "daily accruals" for each
day during such quarter that the Residual Owner held such REMIC residual
certificate. 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 certificate at the beginning of the calendar quarter
and 120 percent of the long-term "applicable federal rate," generally, an
average of current yields on Treasury securities of comparable maturity, and
hereafter the "AFR," in effect at the time of issuance of the REMIC residual
certificate. For this purpose, the adjusted issue price of a REMIC residual
certificate as of the beginning of any calendar quarter is the issue price of
the REMIC residual certificate, increased
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by the amount of daily accruals for all prior quarters and decreased by any
distributions made with respect to such REMIC residual certificate before the
beginning of such quarter. The issue price of a REMIC residual certificate is
(a) if it is publicly offered, the initial offering price to the public,
excluding sales to bond houses and brokers, at which a substantial amount of the
REMIC residual certificates were sold, or (b) if it is not publicly offered, its
fair market value on the pricing date when the prices of the REMIC regular
certificates are fixed.
For Residual Owners, an excess inclusion may not be offset by
deductions, losses or loss carryovers. For Residual Owners that are subject to
tax on unrelated business taxable income (as defined in section 511 of the
Code), an excess inclusion is treated as unrelated business taxable income. For
Residual Owners that are nonresident alien individuals or foreign corporations
generally subject to United States withholding tax, even if interest paid to
such Residual Owners is generally eligible for exemptions from such tax, an
excess inclusion will be subject to such tax and no tax treaty rate reduction or
exemption may be claimed with respect thereto. See "--Foreign Investors in REMIC
Certificates."
Alternative minimum taxable income for a Residual Owner is determined
without regard to the special rule that taxable income may not be less than
excess inclusions and may not be less than the excess inclusions for the year.
Alternative minimum taxable income cannot, however, be less than the sum of a
Residual Owner's excess inclusions for the year. The amount of any alternative
minimum tax net operating loss deductions must be computed without regard to any
excess inclusions.
Noneconomic REMIC Residual Certificates. Transfers of "noneconomic"
REMIC residual certificates are disregarded for all federal income tax purposes
if a significant purpose of the transfer was to enable the transferor to impede
the assessment or collection of tax. If such transfer is disregarded, the
purported transferor will continue to remain liable for any taxes due with
respect to the income on such noneconomic REMIC residual certificate. A REMIC
residual certificate is noneconomic for this purpose unless, at the time of its
transfer and based on the prepayment assumption and any required or permitted
clean up calls or required liquidation provided for in the REMIC's
organizational documents: (1) the present value of the expected future
distributions (discounted using the AFR) on the REMIC residual certificate
equals at least the product of the present value of the anticipated excess
inclusions and the highest tax rate applicable to corporations for the year of
the transfer and (2) the transferor reasonably expects that the transferee will
receive distributions with respect to the REMIC residual certificate at or after
the time the taxes accrue on the anticipated excess inclusions in an amount
sufficient to satisfy the accrued taxes. Accordingly, all transfers of REMIC
residual certificates will be subject to certain restrictions under the terms of
the related trust agreement that are intended to reduce the possibility of any
such transfer being disregarded. Such restrictions will require each party to a
transfer to provide an affidavit that no purpose of such transfer is to impede
the assessment or collection of tax, including certain representations as to the
financial condition of the prospective transferee.
Prior to purchasing a REMIC residual certificate, prospective
purchasers should consider the possibility that a purported transfer of such
REMIC residual certificate by such a purchaser to another purchaser at some
future date may be disregarded in accordance with the above-described rules,
which would result in the retention of tax liability by such purchaser. The
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applicable prospectus supplement will disclose whether offered REMIC residual
certificates may be considered noneconomic residual interests; provided,
however, that any disclosure that a REMIC residual certificate will or will not
be considered noneconomic will be based upon certain assumptions, and the
depositor will make no representation that a REMIC residual certificate will not
be considered noneconomic for purposes of the above-described rules or that a
Residual Owner will receive distributions calculated pursuant to such
assumptions. See "-- Foreign Investors in REMIC Certificates" below for
additional restrictions applicable to transfers of certain REMIC residual
certificates to foreign persons.
Treasury regulations provide for a safe harbor for transfers of REMIC
Residual Certificates and if the safe harbor is satisfied, the transfer is
presumed to be a valid transfer that will be respected for federal income tax
purposes. To qualify under the safe harbor set out in the regulations, the
transferor must perform a reasonable investigation of the financial status of
the transferee and determine that the transferee has historically paid its debts
as they come due and find no evidence to indicate that the transferee will not
continue to pay its debts as they come due, and the transferor must obtain a
representation from the transferee to the effect that the transferee understands
that as the holder of the REMIC residual certificate the transferee will
recognize taxable income in excess of cash flow and that the transferee intends
to pay taxes on the income as those taxes become due.
The IRS, in Rev. Proc. 2001-12, 2001-3 IRB 335, adopted two additional
elements for qualification under the safe harbor that apply in the alternative.
Under the first alternative, in addition to the two elements described above,
the transferor must ensure that the inducement payment made to the transferee at
least equals (i) the sum of the present values of any distributions to be made
on the REMIC residual certificate and the tax savings associated with holding
the REMIC residual certificate as it generates losses, minus (2) the present
value of the tax liability associated with holding the REMIC residual
certificate as its generates taxable income. For purposes of the present value
calculations, the revenue procedure says to assume the transferee pays tax at
the highest corporate rate and to use as the AFR as the discount rate. A lower
rate is allowed, however, if the transferee can demonstrate that it regularly
borrows substantial funds in the course of its trade or business at lower rates.
Under the second alternative, in addition to the two elements described
above, the transferee must be a domestic "C" corporation having gross assets of
more than $100 million and net assets of more than $10 million and that domestic
"C" corporation must represent that it will only transfer the residual interest
to another domestic "C" corporation. To qualify under this alternative, the
facts and circumstances at the time of transfer cannot reasonably indicate that
the taxes associated with holding the REMIC residual certificate will not be
paid. Moreover, the transferee cannot by a foreign branch of a domestic "C"
corporation that would be subject to tax on a net basis in the foreign
jurisdiction on the income associated with the REMIC regular certificate.
If you hold a REMIC residual certificate, we recommend that you consult
your tax advisor concerning the above-described safe harbor rules before
undertaking a transfer of the REMIC residual certificate.
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Tax-Exempt Investors. Tax-exempt organizations, including employee
benefit plans, that are subject to tax on unrelated business taxable income, as
defined in section 511 of the Code, will be subject to tax on any excess
inclusions attributed to them as owners of Residual certificates. Excess
inclusion income associated with a Residual certificate may significantly exceed
cash distributions with respect thereto. See "-- Excess Inclusions."
Generally, tax-exempt organizations that are not subject to federal
income taxation on unrelated business taxable income pursuant to section 511 of
the Code are treated as disqualified organizations. Under provisions of the
agreement, such organizations generally are prohibited from owning Residual
certificates. See "-- Sales of REMIC Certificates."
Mark-to-Market Rules. Section 475 of the Code generally requires that
securities dealers include securities in inventory at their fair market value,
recognizing gain or loss as if the securities were sold at the end of each tax
year. The Treasury regulations provide that a REMIC residual certificate is not
treated as a security and thus may not be marked to market.
Sales of REMIC Certificates. If a REMIC certificate is sold, the seller
will recognize gain or loss equal to the difference between the amount realized
on the sale and its adjusted basis in the REMIC certificate. The adjusted basis
of a REMIC regular certificate generally will equal the cost of such REMIC
regular certificate to the seller, increased by any original issue discount or
market discount included in the seller's gross income with respect to such REMIC
regular certificate and reduced by premium amortization deductions and
distributions previously received by the seller of amounts included in the
stated redemption price at maturity of such REMIC regular certificate. The
adjusted basis of a REMIC residual certificate will be determined as described
under "-- Basis Rules and Distributions." Gain from the disposition of a REMIC
regular certificate that might otherwise be treated as a capital gain will be
treated as ordinary income to the extent that such gain does not exceed the
excess of (1) the amount that would have been includible in such holder's income
had income accrued at a rate equal to 110% of the AFR as of the date of purchase
over (2) the amount actually includible in such holder's income. Except as
otherwise provided under "-- Market Discount" and "-- Premium" and under section
582(c) of the Code, any additional gain or any loss on the sale or exchange of a
REMIC certificate will be capital gain or loss, provided such REMIC certificate
is held as a capital asset (generally, property held for investment) within the
meaning of section 1221.
All or a portion of any gain from the sale of a REMIC certificate that
might otherwise be capital gain may be treated as ordinary income (1) if such
certificate is held as part of a "conversion transaction" as defined in section
1258(c) of the Code, up to the amount of interest that would have accrued on the
holder's net investment in the conversion transaction at 120% of the appropriate
AFR in effect at the time the taxpayer entered into the transaction reduced by
any amount treated as ordinary income with respect to any prior disposition or
other termination of a position that was held as part of such transaction or (2)
in the case of a noncorporate taxpayer that has made an election under section
163(d)(4) to have net capital gains taxed as investment income at ordinary
income rates.
If a Residual Owner sells a REMIC residual certificate at a loss, the
loss will not be recognized if, within six months before or after the sale of
the REMIC residual certificate, the Residual Owner purchases another residual
interest in any REMIC or any interest in a taxable
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mortgage pool (as defined in section 7701(i) of the Code) comparable to a
residual interest in a REMIC. Such disallowed loss will 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 the Committee
Report states that this rule may be modified by Treasury regulations, the REMIC
Regulations do not address this issue and it is not clear whether any such
modification will in fact be implemented or, if implemented, what its precise
nature or effective date would be.
Transfers of a REMIC residual certificate to certain disqualified
organizations are subject to an additional tax on the transferor in an amount
equal to the maximum corporate tax rate applied to the present value (using a
discount rate equal to the AFR) of the total anticipated excess inclusions with
respect to such residual interest for the periods after the transfer. For this
purpose, disqualified organizations include the United States, any state or
political subdivision of a state, any foreign government or international
organization or any agency or instrumentality of any of the foregoing; any
tax-exempt entity (other than a section 521 cooperative) which is not subject to
the tax on unrelated business income; and any rural electrical or telephone
cooperative. The anticipated excess inclusions must be determined as of the date
that the REMIC residual certificate is transferred and must be based on events
that have occurred up to the time of such transfer, the prepayment assumption,
and any required or permitted clean up calls or required liquidation provided
for in the REMIC's organizational documents. The tax generally is imposed on the
transferor of the REMIC residual certificate, except that it is imposed on an
agent for a disqualified organization if the transfer occurs through such agent.
The agreement requires, as a prerequisite to any transfer of a residual
certificate, the delivery to the trustee of an affidavit of the transferee to
the effect that it is not a disqualified organization and contains other
provisions designed to render any attempted transfer of a residual certificate
to a disqualified organization void.
In addition, if a pass through entity includes in income excess
inclusions with respect to a REMIC residual certificate, and a disqualified
organization is the record holder of an interest in such entity at any time
during any taxable year of such entity, then a tax will be imposed on the entity
equal to the product of (1) the amount of excess inclusions on the REMIC
residual certificate for such taxable year that are allocable to the interest in
the pass through entity held by such disqualified organization and (2) the
highest marginal federal income tax rate imposed on corporations. A pass through
entity will not be subject to this tax for any period, however, if the record
holder of an interest in such entity furnishes to such entity (1) such holder's
social security number and a statement under penalties of perjury that such
social security number is that of the record holder or (2) a statement under
penalties of perjury that such record holder is not a disqualified organization.
For these purposes, a pass through entity means any regulated investment
company, real estate investment trust, trust, partnership or certain other
entities described in section 860E(e)(6) of the Code. In addition, a person
holding an interest in a pass through entity as a nominee for another person
shall, with respect to such interest, be treated as a pass through entity.
Moreover, in the case of any electing large partnership, within the meaning of
section 775 of the Code, all record holders are considered to be disqualified
organizations so that the partnership itself will be subject to tax on the
excess inclusions and such excess inclusions are excluded in determining
partnership income.
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Pass through of Servicing Fees. In general, Residual Owners take into
account taxable income or net loss of the related REMIC. Consequently, expenses
of the REMIC mortgage pool to service providers, such as servicing compensation
of the master servicer and the servicers, will be allocated to the holders of
the REMIC residual certificates, and therefore will not affect the income or
deductions of holders of REMIC regular certificates. In the case of a
single-class REMIC (as described below), however, such expenses and an
equivalent amount of additional gross income will be allocated among all holders
of REMIC regular certificates and REMIC residual certificates for purposes of
the limitations on the deductibility of certain miscellaneous itemized
deductions by individuals contained in sections 56(b)(1) and 67 of the Code.
Generally, any holder of a REMIC residual certificate and any holder of a REMIC
regular certificate issued by a "single-class REMIC" who is an individual,
estate or trust (including such a person that holds an interest in a pass
through entity holding such a REMIC certificate) are permitted to deduct such
expenses in determining regular taxable income only to the extent that such
expenses together with certain other miscellaneous itemized deductions of such
individual, estate or trust exceed 2% of adjusted gross income; such a holder
may not deduct such expenses to any extent in determining liability for
alternative minimum tax. Accordingly, REMIC residual certificates, and REMIC
regular certificates receiving an allocation of servicing compensation, may not
be appropriate investments for individuals, estates or trusts.
A single-class REMIC is a REMIC that either (i) would be treated as an
investment trust under the provisions of Treasury Regulation section
301.7701-4(c) in the absence of a REMIC election or (ii) is substantially
similar to such an investment trust and is structured with the principal purpose
of avoiding the allocation of investment expenses to holders of REMIC regular
certificates. The master servicer intends (subject to certain exceptions which,
if applicable, will be stated in the applicable prospectus supplement) to treat
each REMIC mortgage pool as other than a single-class REMIC, consequently
allocating servicing compensation expenses and related income amounts entirely
to REMIC residual certificates.
Prohibited Transactions and Other Possible REMIC Taxes. A REMIC is
subject to tax at a rate of 100% on the net income the REMIC derives from
prohibited transactions. In general, a prohibited transaction means the
disposition of a qualified mortgage other than pursuant to certain specified
exceptions, the receipt of income from a source other than a qualified mortgage
or certain other permitted investments, the receipt of compensation for
services, or gain from the disposition of an asset purchased with the payments
on the qualified mortgages for temporary investment pending distribution on the
REMIC certificates. The Code also imposes a 100% tax on the value of any
contribution of assets to the REMIC after the closing date other than pursuant
to specified exceptions, and subjects net income from foreclosure property to
tax at the highest corporate rate. We do not anticipate that any REMIC in which
we will offer certificates will engage in any such transactions or receive any
such income.
Termination of a REMIC Mortgage Pool. In general, no special tax
consequences will apply to a holder of a REMIC regular certificate upon the
termination of the REMIC mortgage pool by virtue of the final payment or
liquidation of the last mortgage asset remaining in the REMIC mortgage pool. If
a Residual Owner's adjusted basis in its REMIC residual certificate at the time
such termination occurs exceeds the amount of cash distributed to such Residual
Owner in liquidation of its interest, then, although the matter is not entirely
free from doubt, it appears
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that the Residual Owner would be entitled to a loss (which could be a capital
loss) equal to the amount of such excess.
Reporting and Other Administrative Matters of REMICs. Reporting of
interest income, including any original issue discount, with respect to REMIC
regular certificates is required annually, and may be required more frequently
under Treasury regulations. Certain holders of REMIC regular certificates that
are generally exempt from information reporting on debt instruments, such as
corporations, banks, registered securities or commodities brokers, real estate
investment trusts, registered investment companies, common trust funds,
charitable remainder annuity trusts and unitrusts, will be provided interest and
original issue discount income information and the information set forth in the
following paragraph upon request in accordance with the requirements of the
Treasury regulations. The information must be provided by the later of 30 days
after the end of the quarter for which the information was requested, or two
weeks after the receipt of the request.
The REMIC regular certificate information reports must include a
statement of the adjusted issue price of the REMIC regular certificate at the
beginning of each accrual period. In addition, the reports must include
information necessary to compute the accrual of any market discount that may
arise upon secondary trading of REMIC regular certificates. Because exact
computation of the accrual of market discount on a constant yield method would
require information relating to the holder's purchase price which the REMIC
mortgage pool may not have, it appears that this provision will only require
information pertaining to the appropriate proportionate method of accruing
market discount.
Backup Withholding with Respect to REMIC Certificates. Distribution of
interest and principal on REMIC regular certificates, as well as payment of
proceeds from the sale of REMIC certificates, may be subject to the backup
withholding tax under section 3406 of the Code if recipients fail to furnish
certain information, including their taxpayer identification numbers, or
otherwise fail to establish an exemption from such tax. Any amounts deducted and
withheld from a recipient would be allowed as a credit against such recipient's
federal income tax. Furthermore, certain penalties may be imposed by the IRS on
a recipient that is required to supply information but that does not do so in
the manner required.
Foreign Investors in REMIC Certificates. Except as qualified below,
payments made on a REMIC regular certificate to a REMIC regular
certificateholder that is not a U.S. Person, as hereinafter defined (a "Non-U.S.
Person"), or to a person acting on behalf of such a certificateholder, generally
will be exempt from U.S. federal income and withholding taxes, provided that (1)
the holder of the certificate is not subject to U.S. tax as a result of a
connection to the United States other than ownership of such certificate, (2)
the holder of such certificate signs a statement under penalties of perjury that
certifies that such holder is a Non-U.S. Person, and provides the name and
address of such holder and (3) the last U.S. Person in the chain of payment to
the holder receives such statement from such holder or a financial institution
holding on its behalf and does not have actual knowledge that such statement is
false. If the holder does not qualify for exemption, distributions of interest,
including distributions in respect of accrued original issue discount, to such
holder may be subject to a withholding tax rate of 30 percent, subject to
reduction under an applicable tax treaty.
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"U.S. Person" means (i) a citizen or resident of the United States;
(ii) a corporation (or entity treated as a corporation for tax purposes) created
or organized in the United States or under the laws of the United States or of
any state thereof, including, for this purpose, the District of Columbia; (iii)
a partnership (or entity treated as a partnership for tax purposes) organized in
the United States or under the laws of the United States or of any state
thereof, including, for this purpose, the District of Columbia (unless provided
otherwise by future Treasury regulations); (iv) an estate whose income is
includible in gross income for United States income tax purposes regardless of
its source; or (v) a trust, if a court within the United States is able to
exercise primary supervision over the administration of the trust and one or
more U.S. Persons having authority to control all substantial decisions of the
trust. Notwithstanding the last clause of the preceding sentence, to the extent
provided in Treasury regulations, certain trusts in existence on August 20,
1996, and treated as U.S. Persons prior to such date, may elect to continue to
be U.S. Persons.
Holders of REMIC regular certificates should be aware that the IRS may
take the position that exemption from U.S. withholding taxes does not apply to
such a holder that also directly or indirectly owns 10 percent or more of the
REMIC residual certificates. Further, the foregoing rules will not apply to
exempt a United States shareholder (as such term is defined in section 951 of
the Code) of a controlled foreign corporation from taxation on such United
States shareholder's allocable portion of the interest or original issue
discount income earned by such controlled foreign corporation.
Amounts paid to a Residual Owner that is a Non-U.S. Person generally
will be treated as interest for purposes of applying the withholding tax on
Non-U.S. Persons with respect to income on its REMIC residual certificate. It is
unclear, however, whether distributions on REMIC residual certificates will be
eligible for the general exemption from withholding tax that applies to REMIC
regular certificates as described above. Treasury regulations provide that, for
purposes of the portfolio interest exception, payments to the foreign owner of a
REMIC residual certificate are to be considered paid on the obligations held by
the REMIC, rather than on the certificate itself. Such payments will thus only
qualify for the portfolio interest exception if the underlying obligations held
by the REMIC mortgage pool would so qualify. Such withholding tax generally is
imposed at a rate of 30 percent but is subject to reduction under any tax treaty
applicable to the Residual Owner. Nevertheless, there is no exemption from
withholding tax nor may the rate of such tax be reduced, under a tax treaty or
otherwise, with respect to any distribution of income that is an excess
inclusion. Although no regulations have been proposed or adopted addressing
withholding on residual interests held by Non-U.S. Persons, the provisions of
the REMIC Regulations, relating to the transfer of residual interests to
Non-U.S. Persons may be read to imply that withholding with respect to excess
inclusion income is to be determined by reference to the amount of the excess
inclusion income rather than to the amount of cash distributions. If the IRS
were successfully to assert such a position, cash distributions on Residual
certificates held by Non-U.S. Persons could be subject to withholding at rates
as high as 100%, depending on the relationship of accrued excess inclusion
income to cash distributions with respect to such Residual certificates. See
"REMIC Certificates -- Excess Inclusions."
Certain restrictions relating to transfers of REMIC residual
certificates to and by investors who are Non-U.S. Persons are also imposed by
the REMIC Regulations. First, transfers of REMIC residual certificates to a
Non-U.S. Person that have tax avoidance potential are
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disregarded for all federal income tax purposes. If such transfer is
disregarded, the purported transferor of such a REMIC residual certificate to a
Non-U.S. Person continues to remain liable for any taxes due with respect to the
income on such REMIC residual certificate. A transfer of a REMIC residual
certificate has tax avoidance potential unless, at the time of the transfer, the
transferor reasonably expects (1) that the REMIC will distribute to the
transferee Residual certificateholder amounts that will equal at least 30
percent of each excess inclusion and (2) that such amounts will be distributed
at or after the time at which the excess inclusion accrues and not later than
the close of the calendar year following the calendar year of accrual. This rule
does not apply to transfers if the income from the REMIC residual certificate is
taxed in the hands of the transferee as income effectively connected with the
conduct of a U.S. trade or business. Second, if a Non-U.S. Person transfers a
REMIC residual certificate to a U.S. Person (or to a Non-U.S. Person in whose
hands income from the REMIC residual certificate would be effectively connected)
and the transfer has the effect of allowing the transferor to avoid tax on
accrued excess inclusions, that transfer is disregarded for all federal income
tax purposes and the purported Non-U.S. Person transferor continues to be
treated as the owner of the REMIC residual certificate. Thus, the REMIC's
liability to withhold 30% of the excess inclusions is not terminated even though
the REMIC residual certificate is no longer held by a Non-U.S. Person.
Treasury regulations may affect the United States taxation of foreign
investors in REMIC certificates. The withholding regulations are generally
effective for payments after December 31, 2000, regardless of the issue date of
the REMIC certificate with respect to which such payments are made, subject to
certain transition rules. The withholding regulations provide certain
presumptions with respect to withholding for holders not providing the required
certifications to qualify for the withholding exemption described above and have
replaced a number of current tax certification forms with a single, restated
form and standardize the period of time for which withholding agents could rely
on such certifications. The withholding regulations also provide rules to
determine whether, for purposes of United States federal withholding tax,
interest paid to a Non-U.S. Person that is an entity should be treated as paid
to the entity or those holding an interest in that entity.
FASIT Certificates
General. With respect to a particular series of certificates, an
election may be made to treat the trust or one or more trusts or segregated
pools of assets therein as one or more FASITs within the meaning of section 860L
of the Code. A trust or a portion or portions thereof as to which one or more
FASIT elections will be made will be referred to as a "FASIT Pool." For purposes
of this discussion, certificates of a series as to which one or more FASIT
elections are made are referred to as "FASIT certificates" and will consist of
one or more classes of "FASIT regular certificates" and one "Ownership
Certificate" in the case of each FASIT Pool. Although the FASIT provisions of
the Code became effective on September 1, 1997, no final Treasury regulations or
other administrative guidance has been issued with respect to those provisions.
Accordingly, definitive guidance cannot be provided with respect to many aspects
of the tax treatment of holders of FASIT certificates.
Qualification as a FASIT requires ongoing compliance with certain
conditions. With respect to each series of FASIT certificates, McKee Nelson LLP,
special counsel for the depositor, will deliver its opinion concluding, assuming
compliance with all provisions of the
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related trust agreement, each FASIT Pool will qualify as a FASIT. In such case,
the FASIT regular certificates will be considered to be "regular interests" in
the FASIT Pool and generally will be treated for federal income tax purposes as
if they were newly originated debt instruments, and the Ownership Certificate
will be considered to be the "ownership interest" in the FASIT Pool, which
generally is not treated as debt for tax purposes, but rather as representing
ownership of the assets held in the FASIT pool subject to the debt represented
by the FASIT regular certificates. The prospectus supplement for each series of
certificates will indicate whether one or more FASIT elections with respect to
the related trust will be made and will also address any material federal income
tax consequences applicable to the holders of FASIT certificates.
Status of FASIT Regular Certificates. Unless provided other wise in the
applicable prospectus supplement, FASIT regular certificates held by a REIT will
qualify as "real estate assets" within the meaning of section 856(c)(4)(A) of
the Code, and interest on such certificates will be considered interest on
mortgages on real property and FASIT regular certificates held by a domestic
building and loan association will represent qualifying assets for purposes of
the qualification requirements set forth in section 7701(a)(19) to the same
extent that REMIC certificates would be so considered. See "-- REMIC
Certificates -- Status as REMIC Certificates." In addition, FASIT Regular
certificates held by a financial institution to which section 585 applies will
be treated as evidences of indebtedness for purposes of Code Section
Consequences of Disqualification. If a FASIT Pool fails to comply with
one or more of the Code's ongoing requirements for FASIT status during any
taxable year, the Code provides that its FASIT status may be lost for that year
and thereafter. If FASIT status is lost, the treatment of the former FASIT and
the interests therein for federal income tax purposes is uncertain. The former
FASIT might be treated as a grantor trust, as a separate association taxable as
a corporation, or as a partnership. The FASIT Regular certificates could be
treated as debt instruments for federal income tax purposes or as equity
interests in the former FASIT. Although the Code authorizes the Treasury to
issue regulations that address situations where a failure to meet the
requirements for FASIT status occurs inadvertently and in good faith, such
regulations have not yet been issued. It is possible that disqualification
relief might be accompanied by sanctions, such as the imposition of a corporate
tax on all or a portion of the FASIT's income for a period of time in which the
requirements for FASIT status are not satisfied.
Tax Treatment of FASIT Regular Certificates. As in the case of holders
of REMIC regular certificates, holders of FASIT Regular certificates must report
income from such certificates under an accrual method of accounting, even if
they otherwise would have used another method. Moreover, the rules that pertain
to the treatment of original issue discount, market discount, and premium on
REMIC regular certificates also apply to the treatment of those items with
respect to FASIT regular certificates. See""-- REMIC Certificates --Taxation of
Regular Certificates -- Market Discount," and "--Premium."
If a FASIT regular certificate is sold or exchanged, the holder
generally will recognize gain or loss upon the sale in the same manner as that
described for REMIC regular certificates. See "-- REMIC Certificates -- Taxation
of Regular Certificates -- Sale or Exchange of Regular Certificates."
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Treatment of High-Yield Interests. Certain FASIT regular interests,
referred to as "High-Yield Interests" are subject to special rules. The
applicable prospectus supplement will identify those FASIT regular certificates,
if any, that are High-Yield Interests. Generally, High-Yield Interests may be
held only by domestic "C" corporations, other FASITs, and dealers in securities
who hold such interests in inventory. If a securities dealer (other than a
domestic "C" corporation) initially acquires a High-Yield Interest as inventory,
but later begins to hold it for investment or ceases to be a dealer, the dealer
will become subject to an excise tax equal to the income from the High-Yield
Interest multiplied by the highest corporate income tax rate. In addition, the
transfer of a High-Yield Interest to disqualified holder will be disregarded for
federal income tax purposes, and the transferor will continue to be taxed as the
holder of the High-Yield Interest.
The holder of a High-Yield Interest may not use non-FASIT current
losses or net operating loss carryforwards or carrybacks to offset any income
derived from the High-Yield Interest, for either regular income tax purposes or
for alternative minimum tax purposes. In addition, the FASIT provisions contain
an anti-abuse rule under which corporate income tax could be imposed on income
derived from a FASIT Regular certificate that is held by a pass through entity
(other than another FASIT) that issues debt or equity securities backed by the
FASIT Regular certificate and that have the same features as High-Yield
Interests.
Tax Treatment of Ownership Certificate. A FASIT is not subject to
taxation. An Ownership Certificate represents the residual equity interest in a
FASIT. As such, the holder of an Ownership Certificate determines its taxable
income by taking into account all assets, liabilities and items of income, gain,
deduction, loss and credit of a FASIT (other than those allocable to prohibited
transactions as described below). In general, the character of the income to the
holder of an Ownership Certificate will be the same as the character of such
income of the FASIT, except that any tax-exempt interest income taken into
account by the holder of an Ownership Certificate is treated as ordinary income.
In determining that taxable income, the holder of an Ownership Certificate must
determine the amount of interest, original issue discount, market discount and
premium recognized with respect to the FASIT's assets and the FASIT Regular
certificates issued by the FASIT according to a constant yield methodology and
under an accrual method of accounting. In addition, the holder of the Ownership
Certificate is subject to the same limitations on its ability to use losses to
offset income from the FASIT as are the Holders of High-Yield Interests. See "--
FASIT Certificates -- Treatment of High-Yield Interests."
The holder of an Ownership Certificate will recognize gain, but not
loss, upon the contribution of assets to a FASIT to support one or more FASIT
regular certificates to the extent the value of the assets exceeds the Ownership
Certificateholder's basis in those assets. Moreover, upon the transfer of
mortgage loans to a FASIT Pool, value for purposes of the gain computation will
be determined by reference to a formula set out in section 860I(c) that will
likely overstate the true value of those mortgage loans. Any gain recognized
will increase the Ownership Certificateholder's basis in the assets held in the
FASIT Pool. The FASIT Ownership Certificateholder will not be allowed to use
non-FASIT losses to offset the gain recognized.
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Rules similar to the wash sale rules applicable to REMIC residual
certificates also will apply to Ownership Certificate. Accordingly, losses on
dispositions of an Ownership Certificate generally will be disallowed where,
within six months before or after the disposition, the seller of such Security
acquires any other Ownership Certificate or, in the case of a FASIT holding
mortgage assets, any interest in a taxable mortgage pool that is economically
comparable to an Ownership Certificate.
The Holder of an Ownership Certificate will be subject to a tax equal
to 100% of the net income derived by the FASIT from any "prohibited
transactions." Prohibited transactions include:
o the receipt of income derived from assets that are not permitted
assets,
o certain dispositions of permitted assets,
o the receipt of any income derived from any loan originated by a
FASIT, and
o in certain cases, the receipt of income representing a servicing
fee or other compensation. Any FASIT Pool for which a FASIT
election is made generally will be structured in order to avoid
application of the prohibited transaction tax.
Backup Withholding, Reporting and Tax Administration. Holders of FASIT
certificates will be subject to backup withholding to the same extent as Holders
of REMIC certificates. See "-- REMIC Certificates -- Backup Withholding." For
purposes of reporting and tax administration, Holders of FASIT certificates
generally will be treated in the same manner as Holders of REMIC certificates.
Trust Certificates
Classification of Trust Certificates. With respect to each series of
trust certificates for which no REMIC or FASIT election is made and which are
not subject to partnership treatment or debt treatment (without reference to the
REMIC Provisions and the FASIT Provisions), McKee Nelson LLP, special counsel to
the depositor, will deliver its opinion (unless otherwise limited by the related
prospectus supplement) concluding that the arrangements pursuant to which the
related trust will be administered and such trust certificates will be issued
will be classified as a trust under applicable Treasury regulations and will not
be taxable as a corporation and that each certificateholder will be an owner of
the trust under the provisions of subpart E, Part I, of subchapter J of the
Code.
A trust certificate representing an undivided equitable ownership
interest in the principal of the mortgage loans constituting the related trust,
together with interest thereon at a remittance rate (which may be less than,
greater than, or equal to the net rate on the related mortgage assets) is
referred to as a "trust fractional certificate" and a trust certificate
representing an equitable ownership of all or a portion of the interest paid on
each mortgage loan constituting the related trust (net of normal servicing fees)
is referred to as a "trust interest certificate."
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Characterization of Investments in Trust Certificates.
Trust Fractional Certificates. Trust fractional certificates held by a
thrift institution taxed as a "domestic building and loan association" will
represent "loans . . . secured by an interest in real property" within the
meaning of section 7701(a)(19)(C)(v) of the Code; trust fractional certificates
held by a real estate investment trust will represent "real estate assets"
within the meaning of section 856(c)(5)(B) and interest on trust fractional
certificates 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)(5)(B) of the Code; and trust fractional certificates acquired by a REMIC
in accordance with the requirements of section 860G (a)(3)(A)(i) and (ii) or
section 860G(a)(4)(B) will be treated as qualified mortgages within the meaning
of section 860D(a)(4).
Trust Interest Certificates. Although there appears to be no policy
reason not to accord to Trust Interest certificates the treatment described
above for trust fractional certificates, there is no authority addressing such
characterization for instruments similar to trust Interest certificates.
Consequently, it is unclear to what extent, if any, (1) a trust Interest
certificate owned by a domestic building and loan association within the meaning
of section 7701 (a) (19) of the Code will be considered to represent "loans . .
.. secured by an interest in real property" within the meaning of section
7701(a)(19)(C)(v); and (2) a real estate investment trust which owns a trust
Interest certificate will be considered to own real estate assets within the
meaning of section 856(c)(5)(B), and interest income thereon will be considered
"interest on obligations secured by mortgages on real property" within the
meaning of section 856(c)(3)(B). Prospective purchasers to which such
characterization of an investment in trust Interest certificates is material
should consult their own tax advisers regarding whether the trust Interest
certificates, and the income therefrom, will be so characterized.
Taxation of Trust Fractional Certificates. Each holder of a trust
fractional certificate (a "trust fractional certificateholder") will be treated
as the owner of an undivided percentage interest in the principal of, and
possibly a different undivided percentage interest in the interest portion of,
each of the assets in a trust. Accordingly, each trust fractional
certificateholder must report on its federal income tax return its allocable
share of income from its interests, as described below, at the same time and in
the same manner as if it had held directly interests in the mortgage assets and
received directly its share of the payments on such mortgage assets. Because
those interests may represent interests in "stripped bonds" or "stripped
coupons" within the meaning of section 1286 of the Code, such interests would be
considered to be newly issued debt instruments, and thus to have no market
discount or premium, and the amount of original issue discount may differ from
the amount of original issue discount on the mortgage assets and the amount
includible in income on account of a trust fractional certificate may differ
significantly from the amount payable thereon from payments of interest on the
mortgage assets. Each trust fractional certificateholder may report and deduct
its allocable share of the servicing and related fees and expenses at the same
time, to the same extent, and in the same manner as such items would have been
reported and deducted had it held directly interests in the mortgage assets and
paid directly its share of the servicing and related fees and expenses. A holder
of a trust fractional certificate who is an individual, estate or trust will be
allowed a deduction for servicing fees in determining its regular tax liability
only to the extent that the aggregate of such holder's miscellaneous itemized
deductions exceeds 2 percent of such holder's adjusted gross income and will be
allowed no deduction for such fees in determining its liability for alternative
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minimum tax. Amounts received by trust fractional certificateholders in lieu of
amounts due with respect to any mortgage assets but not received from the
mortgagor will be treated for federal income tax purposes as having the same
character as the payments that they replace.
Purchasers of trust fractional certificates identified in the
applicable prospectus supplement as representing interests in Stripped mortgage
assets should read the material under "-- Application of Stripped Bond Rules,"
"-- Market Discount and Premium" and "-- Allocation of Purchase Price" for a
discussion of particular rules applicable to their certificates. A "stripped
mortgage asset" means a mortgage asset having a Retained Yield (as that term is
defined below) or a mortgage asset included in a trust having either trust
interest certificates or more than one class of trust fractional certificates or
identified in the prospectus supplement as related to a class of trust
certificates identified as representing interests in stripped mortgage assets.
Purchasers of trust fractional certificates identified in the
applicable prospectus supplement as representing interests in unstripped
mortgage assets should read the material under "-- Treatment of Unstripped
Certificate," "-- Market Discount and Premium," and "-- Allocation of Purchase
Price" for a discussion of particular rules applicable to their certificates.
Nevertheless, the IRS has indicated that under some circumstances it will view a
portion of servicing and related fees and expenses paid to or retained by the
master servicer or sub-servicers as an interest in the mortgage assets,
essentially equivalent to that portion of interest payable with respect to each
mortgage asset that is retained ("Retained Yield"). If such a view were
sustained with respect to a particular trust, such purchasers would be subject
to the rules set forth under "-- Application of Stripped Bond Rules" rather than
those under "-- Treatment of Unstripped Certificates." Saxon Asset Securities
Company does not expect any servicing fee or master servicing fee to constitute
a retained interest in the mortgage assets; nevertheless, prospective purchasers
are advised to consult their own tax advisers with respect to the existence of a
retained interest and any effects on investment in trust fractional
certificates.
Application of Stripped Bond Rules. Each trust will consist of an
interest in each of the mortgage assets relating thereto, exclusive of the
Retained Yield, if any. With respect to each series of certificates McKee Nelson
LLP, special counsel to the depositor, will deliver its opinion (unless
otherwise limited by the related prospectus supplement) concluding that any
Retained Yield will be treated for federal income tax purposes as an ownership
interest retained by the owner thereof in a portion of each interest payment on
the underlying mortgage assets. The sale of the trust certificates associated
with any trust for which there is a class of trust interest certificates or two
or more classes of trust fractional certificates bearing different interest
rates or of trust certificates identified in the prospectus supplement as
representing interests in stripped mortgage assets (subject to certain
exceptions which, if applicable, will be stated in the applicable prospectus
supplement) will be treated for federal income tax purposes as having effected a
separation in ownership between the principal of each mortgage asset and some of
or all the interest payable thereon. As a consequence, each stripped mortgage
asset will become subject to the "stripped bond" rules of the Code (the
"Stripped Bond Rules"). The effect of applying those rules will generally be to
require each trust fractional certificateholder to accrue and report income
attributable to its share of the principal and interest on each of the stripped
mortgage assets as original issue discount on the basis of the yield to maturity
of such stripped mortgage assets, as determined in accordance with the
provisions of the Code dealing with original issue discount. For a description
of the general method of calculating original issue
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discount, see "REMIC Certificates -- Original Issue Discount." The yield to
maturity of a trust fractional certificateholder's interest in the stripped
mortgage loans will be calculated taking account of the price at which the
holder purchased the certificate and the holder's share of the payments of
principal and interest to be made thereon. Although the provisions of the Code
and the OID Regulations do not directly address the treatment of instruments
similar to trust fractional certificates, in reporting to trust fractional
certificateholders such certificates will be treated as a single obligation with
payments corresponding to the aggregate of the payments allocable thereto from
each of the mortgage assets and the amount of original issue discount on such
certificates will be determined accordingly. See "-- Aggregate Reporting."
Under Treasury regulations, original issue discount determined with
respect to a particular stripped mortgage loan may be considered to be zero
under the de minimis rule described above, in which case it is treated as market
discount. See "-- REMIC Certificates -- Original Issue Discount." Those
regulations also provide that original issue discount so determined with respect
to a particular stripped mortgage asset will be treated as market discount if
the rate of interest on the stripped mortgage asset, including a reasonable
servicing fee, is no more than one percentage point less than the unstripped
rate of interest. See "-- Market Discount and Premium." The foregoing de minimis
and market discount rules will be applied on an aggregate poolwide basis,
although it is possible that investors may be required to apply them on a
loan-by-loan basis. The loan-by-loan information required for such application
of those rules may not be available. See "-- Aggregate Reporting."
Subsequent purchasers of the certificates may be required to include
"original issue discount" in an amount computed using the price at which such
subsequent purchaser purchased the certificates. Further, such purchasers may be
required to determine if the above described de minimis and market discount
rules apply at the time a trust fractional certificate is acquired, based on the
characteristics of the mortgage assets at that time.
Variable Rate Certificates. There is considerable uncertainty
concerning the application of the OID Regulations to mortgage assets bearing a
variable rate of interest. Although such regulations are subject to a different
interpretation, as discussed below, in the absence of other contrary authority
in preparing reports furnished to certificateholders, stripped mortgage assets
bearing a variable rate of interest (other than those treated as having market
discount pursuant to the regulations described above) will be treated as subject
to the provisions of the OID Regulations governing variable rate debt
instruments. The effect of the application of such provisions generally will be
to cause certificateholders holding trust fractional certificates bearing
interest at a Single Variable Rate or at a Multiple Variable Rate (as defined
above under "-- REMIC Certificates -- Original Issue Discount") to accrue
original issue discount and interest as though the value of each variable rate
were a fixed rate, which is (a) for each qualified floating rate, such rate as
of the closing date (with appropriate adjustment for any differences in
intervals between interest adjustment dates), (b) for a qualified inverse
floating rate, such rate as of the closing date and (c) for any other objective
rate, the fixed rate that reflects the yield that is reasonably expected for the
trust fractional certificate. If the interest paid or accrued with respect to a
variable rate trust fractional certificate during an accrual period differs from
the assumed fixed interest rate, such difference will be an adjustment (to
interest or original issue discount, as applicable) to the certificateholder's
taxable income for the taxable period or periods to which such difference
relates.
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The provisions in the OID Regulations applicable to variable rate debt
instruments may not apply to certain adjustable and variable rate mortgage
loans, possibly including the mortgage assets, or to stripped certificates
representing interests in such mortgage assets. If variable rate trust
fractional certificates are not governed by the provisions of the OID
Regulations applicable to variable rate debt instruments, such certificates may
be subject to the provisions of the Contingent Debt Regulations. The application
of those provisions to instruments such as the trust fractional certificates is
subject to differing interpretations. Prospective purchasers of variable rate
trust fractional certificates are advised to consult their tax advisers
concerning the tax treatment of such certificates.
Aggregate Reporting. The trustee intends in reporting information
relating to original issue discount to certificateholders to provide such
information on an aggregate poolwide basis. Applicable law is unclear, however,
and it is possible that investors may be required to compute original issue
discount on a loan-by-loan basis (or on the basis of the rights to individual
payments) taking account of an allocation of the investor's basis in the
certificates among the interests in the various mortgage assets represented by
such certificates according to their respective fair market values. Investors
should be aware that after the fact it may not be possible to reconstruct fact
sufficient loan-by-loan information should the IRS require a computation on that
basis.
Because the treatment of the certificates under the OID Regulations is
both complicated and uncertain, certificateholders should consult their tax
advisers to determine the proper method of reporting amounts received or accrued
on certificates.
Treatment of Unstripped Certificates. Mortgage assets in a fund for
which there is neither any class of trust interest certificates, nor more than
one class of trust fractional certificates, nor any Retained Yield otherwise
identified in the prospectus supplement as being unstripped mortgage assets
("unstripped mortgage assets") will be treated as wholly owned by the trust
fractional certificateholders of the stated trust. Trust fractional
certificateholders using the cash method of accounting must take into account
their pro rata shares of original issue discount as it accrues and qualified
stated interest (as described in "-- REMIC Certificates -- Original Issue
Discount") from unstripped mortgage assets as and when collected by the trustee.
Trust fractional certificateholders using an accrual method of accounting must
take into account their pro rata shares of qualified stated interest from
unstripped mortgage assets as it accrues or is received by the trustee,
whichever is earlier.
Sections 1272 through 1275 of the Code provide generally for the
inclusion of original issue discount in income on the basis of a constant yield
to maturity. Nevertheless, the application of the OID Regulations to mortgage
loans is unclear in certain respects. The OID Regulations provide a de minimis
rule for determining whether certain self-amortizing installment obligations are
to be treated as having original issue discount. Such obligations have original
issue discount if the points charged at origination (or other loan discount)
exceed the greater of one-sixth of one percent times the number of full years to
final maturity or one-fourth of one percent times weighted average maturity. The
OID Regulations treat certain variable rate mortgage loans as having original
issue discount because of an initial rate of interest that differs from that
determined by the mechanism for setting the interest rate during the remainder
of the term of the mortgage loan, or because of the use of an index that does
not vary in a manner
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approved in the OID Regulations. For a description of the general method of
calculating the amount of original issue discount see "-- REMIC Certificates --
Original Issue Discount" and "-- Application of Stripped Bond Rules" and "--
Variable Rate Certificates."
A subsequent purchaser of a trust fractional certificate that purchases
such certificate at a cost (not including payment for accrued qualified stated
interest) less than its allocable portion of the aggregate of the remaining
stated redemption prices at maturity of the unstripped mortgage assets will also
be required to include in gross income, for each day on which it holds such
trust fractional certificate, its allocable share of the daily portion of
original issue discount with respect to each unstripped mortgage asset. That
allocable share is reduced, if the cost of such subsequent purchaser's interest
in such unstripped mortgage asset 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 such excess and the denominator of which is the sum of the
daily portions of original issue discount allocable to such subsequent
purchaser's interest for all days on or after the day of purchase. The adjusted
issue price of an unstripped mortgage asset on any given day is equal to the sum
of the adjusted issue price (or, in the case of the first accrual period, the
issue price) of such unstripped mortgage asset at the beginning of the accrual
period during which such day occurs and the daily portions of original issue
discount for all days during such accrual period prior to such day reduced by
the aggregate amount of payments made (other than payments of qualified stated
interest) during such accrual period prior to such day.
Market Discount and Premium. In general, if the Stripped Bond Rules do
not apply to a trust fractional certificate, a purchaser of a trust fractional
certificate will be treated as acquiring market discount bonds to the extent
that the share of such purchaser's purchase price allocable to any unstripped
mortgage asset is less than its allocable share of the "adjusted issue price" of
such mortgage asset. See "-- Treatment of Unstripped Certificates" and "--
Application of Stripped Bond Rules." Thus, with respect to such mortgage assets,
a holder will be required, under section 1276 of the Code, to include as
ordinary income the previously unrecognized accrued market discount in an amount
not exceeding each principal payment on any such mortgage assets at the time
each principal payment is received or due, in accordance with the purchaser's
method of accounting, or upon a sale or other disposition of the certificate. In
general, the amount of market discount that has accrued is determined on a
ratable basis. A trust fractional certificateholder may, however, elect to
determine the amount of accrued market discount on a constant-yield-to-maturity
basis. This election is made on a loan-by-loan basis and is irrevocable. In
addition, the description of the market discount rules under "REMIC Certificates
- -- Market Discount" and "-- Premium" with respect to (1) conversion to ordinary
income of a portion of any gain recognized on sale or exchange of a market
discount bond, (2) deferral of interest expense deductions, (3) the de minimis
exception from the market discount rules and (4) the elections to include in
income either market discount or all interest, discount and premium as they
accrue, is also generally applicable to trust fractional certificates. Treasury
regulations implementing the market discount rules have not yet been issued and
investors therefore should consult their own tax advisers regarding the
application of these rules.
If a trust fractional certificate is purchased at a premium, under
existing law such premium must be allocated to each of the mortgage assets (on
the basis of its relative fair market value). In general, the portion of any
premium allocated to unstripped mortgage assets can be amortized and deducted
under the provisions of the Code relating to amortizable bond premium.
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The application of the Stripped Bond Rules to stripped mortgage assets
will generally cause any premium allocable to stripped mortgage assets to be
amortized automatically by adjusting the rate of accrual of interest and
discount to take account of the allocable portion of the actual purchase price
of the certificate. In that event, no additional deduction for the amortization
of premium would be allowed. See "REMIC Certificates -- Market Discount" and "--
Premium" for a discussion of the application of the Premium Regulations.
Allocation of Purchase Price. As noted above, a purchaser of a trust
fractional certificate relating to unstripped mortgage assets will be required
to allocate the purchase price therefor to the undivided interest it acquires in
each of the mortgage assets, in proportion to the respective fair market values
of the portions of such mortgage assets included in the trust at the time the
certificate is purchased. The depositor believes that it may be reasonable to
make such allocation in proportion to the respective principal balances of the
mortgage assets, where the interests in the mortgage assets represented by a
trust fractional certificate have a common remittance rate and other common
characteristics, and otherwise so as to produce a common yield for each interest
in a mortgage asset, provided the mortgage assets are not so diverse as to evoke
differing prepayment expectations. Nevertheless, if there is any significant
variation in interest rates among the mortgage assets, a disproportionate
allocation of the purchase price taking account of prepayment expectations may
be required.
Taxation of Trust Interest Certificates. With respect to each series of
certificates McKee Nelson LLP, special counsel to the depositor, will deliver
its opinion (unless otherwise limited by the related prospectus supplement)
concluding that each holder of a trust interest certificate (a "trust interest
certificateholder") will be treated as the owner of an undivided interest in the
interest portion ("Interest Portion") of each of the mortgage assets in the
related trust. Accordingly, and subject to the discussion below, each trust
interest certificateholder is treated as owning its allocable share of the
Interest Portion from the mortgage assets, will report income as described
below, and may deduct its allocable share of the servicing and related fees and
expenses paid to or retained by the related trust at the same time and in the
same manner as such items would have been reported under the trust interest
certificateholder's tax accounting method had it held directly an interest in
the Interest Portion from the mortgage assets, received directly its share of
the amounts received with respect to the mortgage assets and paid directly its
share of the servicing and related fees and expenses. An individual, estate or
trust holder of a trust interest certificate will be allowed a deduction for
servicing fees in determining its regular tax liability only to the extent that
the aggregate of such holder's miscellaneous itemized deductions exceeds 2
percent of such holder's adjusted gross income, and will be allowed no deduction
for such fees in determining its liability for alternative minimum tax. Amounts,
if any, received by trust interest certificateholders in lieu of amounts due
with respect to any mortgage asset but not received from the mortgagor will be
treated for federal income tax purposes as having the same character as the
payment that they replace.
A trust interest certificate will consist of an undivided interest in
the Interest Portion of each of the mortgage assets in the related trust. With
respect to each series of certificates, a trust interest certificate will be
treated for federal income tax purposes as comprised of an ownership interest in
a portion of the Interest Portion of each of the mortgage assets (a "Stripped
Interest") separated from the right to receive principal payments and the
remainder, if any, of each interest payment on the underlying mortgage asset. As
a consequence, the trust interest certificates will
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become subject to the Stripped Bond Rules. Each trust interest certificateholder
will be required to apply the Stripped Bond Rules to its interest in the
Interest Portion under the method prescribed by the Code, taking account of the
price at which the holder purchased the trust interest certificate. The Stripped
Bond Rules generally require a holder of stripped bonds or coupon portions to
accrue and report income therefrom daily on the basis of the yield to maturity
of such stripped bonds or coupons, as determined in accordance with the
provisions of the Code dealing with original issue discount. For a discussion of
the general method of calculating original issue discount, see "-- REMIC
Certificates -- Original Issue Discount." The provisions of the Code and the OID
Regulations do not directly address the treatment of instruments similar to
trust interest certificates. In reporting to trust interest certificateholders
such certificates will be treated as a single obligation with payment
corresponding to the aggregate of the payment allocable thereto from each of the
mortgage assets.
Alternatively, the IRS may require trust interest certificateholders to
treat each scheduled payment on each Stripped Interest (or their interests in
all scheduled payments from each of the Stripped Interests) as a separate
obligation for purposes of allocating purchase price and computing original
issue discount.
The tax treatment of the trust interest certificates with respect to
the application of the original issue discount provisions of the Code is
currently unclear. Each trust interest certificate will be treated as a single
debt instrument issued on the day it is purchased for purposes of calculating
any original issue discount. Original issue discount with respect to a trust
interest certificate must be included in ordinary gross income for federal
income tax purposes as it accrues in accordance with a constant yield method
that takes into account the compounding of interest and such accrual of income
may be in advance of the receipt of any cash attributable to such income. In
general, the rules for accruing original issue discount set forth above under
"REMIC Certificates -- Original Issue Discount" apply; however, there is no
authority permitting trust interest certificateholders to take into account the
prepayment assumption in computing original issue discount accruals. See "--
Prepayments" below. For purposes of applying the original issue discount
provisions of the Code, the issue price used in reporting original issue
discount with respect to a trust interest certificate will be the purchase price
paid by each holder thereof and the stated redemption price at maturity may
include the aggregate amount of all payments to be made with respect to the
trust interest certificate whether or not denominated as interest. The amount of
original issue discount with respect to a trust interest certificate may be
treated as zero under the original issue discount de minimis rules described
above.
The trustee intends in reporting information relating to original issue
discount to certificateholders to provide such information on an aggregate
poolwide basis. Applicable law is, however, unclear, and it is possible that
certificateholders may be required to compute original issue discount either on
a loan-by-loan basis or on a payment-by-payment basis taking account of an
allocation of their basis in the certificates among the interests in the various
mortgage loans represented by such certificates according to their respective
fair market values. The effect of an aggregate computation for the inclusion of
original issue discount in income may be to defer the recognition of losses due
to early prepayments relative to a computation on a loan-by-loan basis. It may
not be possible to reconstruct after the fact sufficient loan-by-loan
information should the IRS require a computation on that basis.
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Prepayments. The proper treatment of interests, such as the trust
fractional certificates and the trust interest certificates, in debt instruments
that are subject to prepayment is unclear. The rules of section 1272(a)(6) of
the Code described above require original issue discount to be taken into
account on the basis of a constant yield to assumed maturity and actual
prepayments to any pool of debt instruments the payments on which may be
accelerated by reason of prepayments. The manner of determining the prepayment
assumption is to be determined under Treasury regulations, but no regulations
have been issued. Trust fractional certificateholders and trust interest
certificateholders should consult their tax advisers as to the proper reporting
of income from trust fractional certificates and trust interest certificates, as
the case may be, in the light of the possibility of prepayment and, with respect
to the trust interest certificates, as to the possible application of the
Contingent Debt Regulations.
Sales of Trust Certificates. If a certificate is sold, gain or loss
will be recognized by the holder thereof in an amount equal to the difference
between the amount realized on the sale and the certificateholder's adjusted tax
basis in the certificate. Such tax basis will equal the certificateholder's cost
for the certificate, increased by any original issue or market discount
previously included in income and decreased by any deduction previously allowed
for premium and by the amount of payments, other than payments of qualified
stated interest, previously received with respect to such certificate. The
portion of any such gain attributable to accrued market discount not previously
included in income will be ordinary income, as will gain attributable to a
certificate which is part of a conversion transaction or which the holder elects
to treat as ordinary. See "REMIC Certificates -- Sales of REMIC Certificates"
above. Any remaining gain or any loss will be capital gain or loss if the
certificate was held as a capital asset except to the extent that section 582(c)
of the Code applies to such gain or loss.
Trust Reporting. Each holder of a trust fractional certificate will be
furnished with each distribution a statement setting forth the allocation of
such distribution to principal and interest. In addition, within a reasonable
time after the end of each calendar year each holder of a trust certificate who
was such a holder at any time during such year will be furnished with
information regarding the amount of servicing compensation and such other
customary factual information necessary or desirable to enable holders of trust
certificates to prepare their tax returns.
Back-up Withholding. In general, the rules described in "REMIC
Certificates-- Back-up Withholding" will also apply to trust certificates.
Foreign Certificateholders. Payments in respect of interest or original
issue discount (including amounts attributable to servicing fees) to a
certificateholder who is not a U.S. Person, will not generally be subject to
United States withholding tax, provided that the certificateholder (1) does not
own, directly or indirectly, 10% or more of, and is not a controlled foreign
corporation (within the meaning of section 957 of the Code) related to, each of
the issuers of the mortgage assets and (2) provides required certification as to
its non-United States status under penalty of perjury. Any withholding tax that
does apply may be reduced or eliminated by an applicable tax treaty.
Notwithstanding the foregoing, if any such payments are effectively connected
with a United States trade or business conducted by the certificateholder, they
will be subject to regular United States income tax and, in the case of a
corporation, to a possible branch profits tax, but will ordinarily be exempt
from United States withholding tax provided that applicable documentation
requirements are met.
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See further the discussion of the Withholding Regulations, under "REMIC
Certificates--Foreign Investors in REMIC Certificates."
Certificates Classified as Partnership Interests
Certain arrangements may be treated as partnerships for federal income
tax purposes. In such event, the related certificates will characterized, for
federal income tax purposes, as Partnership Interests as discussed in the
related prospectus supplement. With respect to certificates classified as
partnership interests, McKee Nelson LLP, special counsel to the depositor, will
deliver its opinion (unless otherwise limited in the related prospectus
supplement) concluding that the effect that the arrangement pursuant to which
such certificates are issued will be characterized as a partnership and not as
an association taxable as a corporation or taxable mortgage pool for federal
income tax purposes. The related prospectus supplement will also address any
material federal income tax consequences applicable to the holder.
STATE AND LOCAL TAX CONSIDERATIONS
In addition to the federal income tax consequences described above,
potential investors should consider the state and local income tax consequences
of the acquisition, ownership and disposition of the certificates. 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.
For example, a REMIC or FASIT mortgage pool or Non-REMIC or Non-FASIT
trust may be characterized as a corporation, a partnership or some other entity
for purposes of state income tax law. Such characterization could result in
entity level income or franchise taxation of the REMIC mortgage pool or trust
fund formed in, owning mortgages or property in, or having servicing activity
performed in a state. Further, REMIC regular certificateholders resident in
non-conforming states may have their ownership of REMIC regular certificates
characterized as an interest other than debt of the REMIC, such as stock or a
partnership interest. Therefore, potential investors should consult their own
tax advisers with respect to the various state and local tax consequences of an
investment in the certificates.
ERISA CONSIDERATIONS
General
The Employee Retirement Income Security Act of 1974, as amended
("ERISA"), and the Code impose certain requirements in connection with the
investment of plan assets on employee benefit plans and on certain other
retirement plans and arrangements, including individual retirement accounts and
annuities, Keogh plans and collective investment funds and separate accounts in
which these plans, accounts or arrangements are invested, that are subject to
Title I of ERISA or to Section 4975 of the Code ("Plans") and on persons who are
fiduciaries for those Plans. Some employee benefit plans, such as governmental
plans (as defined in ERISA Section 3(32)) and, if no election has been made
under Section 410(d) of the Code, church plans (as defined in Section 3(33) of
ERISA), are not subject to ERISA requirements. Therefore, assets of these plans
may be invested in certificates without regard to the ERISA considerations
described
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below, subject to the provisions of other applicable federal, state and local
law. Any of these plans that is qualified and exempt from taxation under
Sections 401(a) and 501(a) of the Code, however, is subject to the prohibited
transaction rules set forth in Section 503 of the Code.
ERISA generally imposes on Plan fiduciaries certain general fiduciary
requirements, including those of investment prudence and diversification and the
requirement that a Plan's investments be made in accordance with the documents
governing the Plan. In addition, ERISA and the Code prohibit a broad range of
transactions involving assets of a Plan and persons ("Parties in Interest") who
have certain specified relationships to the Plan unless a statutory, regulatory
or administrative exemption is available. Certain Parties in Interest that
participate in a prohibited transaction may be subject to an excise tax imposed
pursuant to Section 4975 of the Code, unless a statutory, regulatory or
administrative exemption is available. These prohibited transactions generally
are set forth in Sections 406 and 407 of ERISA and Section 4975 of the Code.
A Plan's investment in certificates may cause the assets included in a
related trust fund to be deemed Plan assets. Section 2510.3-101 of the
regulations of the United States Department of Labor ("DOL") provides that when
a Plan acquires an equity interest in an entity, the Plan's assets include both
the equity interest and an undivided interest in each of the underlying assets
of the entity, unless certain exceptions not applicable here apply, or unless
the equity participation in the entity by "benefit plan investors" (i.e., Plans,
employee benefit plans not subject to ERISA, and entities whose underlying
assets include plan assets by reason of a Plan's investment in the entity) is
not "significant," both as defined therein. For this purpose, in general, equity
participation by benefit plan investors will be "significant" on any date if 25%
or more of the value of any class of equity interests in the entity is held by
benefit plan investors. To the extent the certificates are treated as equity
interests for purposes of DOL regulations Section 2510.3-101, equity
participation in a trust fund will be significant on any date if immediately
after the most recent acquisition of any certificate, 25% or more of any class
of certificates is held by benefit plan investors.
Any person who has discretionary authority or control respecting the
management or disposition of assets of a Plan, and any person who provides
investment advice for those assets for a fee, is a fiduciary of the Plan. If the
assets included in a trust fund constitute plan assets of an investing Plan,
then any party exercising management or discretionary control regarding those
assets, such as the servicer or master servicer, may be deemed to be a
"fiduciary" of the Plan and thus subject to the fiduciary responsibility
provisions and prohibited transaction provisions of ERISA and the Code with
respect to the investing Plan. In addition, if the assets included in a trust
fund constitute plan assets, the purchase of certificates by a Party in Interest
of the Plan, as well as the operation of the trust fund, may constitute or
involve a prohibited transaction under ERISA and the Code.
The DOL has issued individual exemptions to various underwriters as
indicated in the related prospectus supplement (the "Exemption") that generally
exempt from the application of the prohibited transaction provisions of Sections
406(a) and 407(a) of ERISA, and the excise taxes imposed on those prohibited
transactions pursuant to Section 4975(a) and (b) of the Code, certain
transactions relating to the servicing and operation of mortgage pools and the
purchase, sale and holding of certificates underwritten by an underwriter, as
defined below, that (1)
99
represent a beneficial ownership interest in the assets of an issuer which is a
trust and entitle the holder to pass-through payments of principal, interest
and/or other payments made with respect to the assets of the trust fund or (2)
are denominated as a debt instrument and represent an interest in the issuer,
provided that certain conditions set forth in the Exemption are satisfied.
For purposes of this Section "ERISA Considerations," the term
"underwriter" will include (a) the underwriter specified in the related
prospectus supplement, (b) any person directly or indirectly, through one or
more intermediaries, controlling, controlled by or under common control with
that underwriter, and (c) any member of the underwriting syndicate or selling
group of which a person described in (a) or (b) is a manager or co-manager for a
class of certificates.
The Exemption sets forth several general conditions that must be
satisfied for a transaction involving the purchase, sale and holding of
certificates to be eligible for exemptive relief thereunder:
o The acquisition of certificates by a Plan must be 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 Unless the investment pool contains only certain types of assets, such as
mortgage loans fully secured by real property (a "Designated Transaction"),
the Exemption only applies to certificates evidencing rights and interests
not subordinated to the rights and interests evidenced by the other
certificates of the trust fund;
o The certificates at the time of acquisition by the Plan must be rated in
one of the three highest generic rating categories (four, in a Designated
Transaction) by Standard & Poor's Rating Services, a division of The
McGraw-Hill Companies, Inc. ("S&P"), Moody's Investors Service, Inc.
("Moody's") or Fitch, Inc. ("Fitch") (each, a "Rating Agency");
o The trustee may not be 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 underwriter(s) must
represent not more than reasonable compensation for underwriting the
certificates; the sum of all payments made to and retained by the depositor
pursuant to the assignment of the assets to the issuer must represent not
more than the fair market value of those obligations; and the sum of all
payments made to and retained by the master servicer and any other servicer
must represent not more than reasonable compensation for that person's
services under the related agreement and reimbursement of that person's
reasonable expenses in connection therewith;
o The Plan investing in the certificates must be an accredited investor as
defined in Rule 501(a)(1) of Regulation D of the Commission under the
Securities Act of 1933, as amended;
o For certain types of issuers, the documents establishing the issuer and
governing the transaction must contain provisions intended to protect the
assets of the issuer from creditors of the seller.
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Moreover, the Exemption provides relief from certain
self-dealing/conflict of interest prohibited transactions that may arise under
Sections 406(b)(1) and 406(b)(2) of ERISA (as well as from the excise taxes
imposed by Sections 4975(a) and 4975(b) of the Code, by reason of Section
4975(c)(1)(E) of the Code) when a fiduciary causes a Plan to invest in an issuer
that holds obligations on which the fiduciary (or its affiliate) is an obligor
only if, among other requirements: (1) the fiduciary (or its affiliate) is an
obligor with respect to no more than five percent of the fair market value of
the obligations contained in the trust fund; (2) the Plan's investment in each
class of certificates does not exceed twenty-five percent of all of the
certificates of that class outstanding at the time of the acquisition and (3)
immediately after the acquisition, no more than twenty-five percent of the
assets of any Plan for which the fiduciary serves as a fiduciary are invested in
securities representing an interest in one or more trusts containing assets sold
or serviced by the same entity; (4) in the case of an acquisition of
certificates in connection with their initial issuance, at least 50% of each
class of certificates in which Plans have invested and at least 50% of the
aggregate interest in the issuer is acquired by persons independent of the
Restricted Group; and (5) the Plan is not an Excluded Plan. An "Excluded Plan"
is one that is sponsored by a member of the Restricted Group, which consists of
the trustee, each underwriter, any insurer of the issuer, the sponsor, each
servicer, any obligor with respect to obligations included in the issuer
constituting more than 5 percent of the aggregate unamortized principal balance
of the assets of the issuer on the date of the initial issuance of certificates,
each counterparty in any eligible swap transactions and any affiliate of any
such persons.
A fiduciary of a Plan contemplating purchasing a certificate must make
its own determination that the general conditions set forth above will be
satisfied for that certificate.
The rating of a certificate may change. If the rating of a certificate
declines below the lowest permitted rating, the certificate will no longer be
eligible for relief under the Exemption, and consequently may not be purchased
by or sold to a Plan (although a Plan that had purchased the certificate when
the certificate had a permitted rating would not be required by the Exemption to
dispose of it).
If the general conditions of the Exemption are satisfied, the Exemption
may provide an exemption from the restrictions imposed by Sections 406(a) and
407(a) of ERISA (as well as the excise taxes imposed by Sections 4975(a) and (b)
of the Code by reason of Sections 4975(c) (1)(A) through (D) of the Code) in
connection with the direct or indirect sale, exchange, transfer, holding or the
direct or indirect acquisition or disposition in the secondary market of
certificates by Plans. However, no exemption is provided from the restrictions
of Sections 406(a)(1)(E), 406(a)(2) and 407 of ERISA for the acquisition or
holding of a certificate on behalf of an Excluded Plan by any person who has
discretionary authority or renders investment advice with respect to the assets
of that Excluded Plan.
Further, if certain specific conditions of the Exemption are satisfied,
the Exemption may provide an exemption from the restrictions imposed by Sections
406(a), 406(b) and 407(a) of ERISA, and the taxes imposed by Sections 4975(a)
and (b) of the Code by reason of Section 4975(c) of the Code for transactions in
connection with the servicing, management and operation of the trust fund. The
depositor expects that the specific conditions of the Exemption required for
this purpose will be satisfied for the certificates so that the Exemption would
provide an
101
exemption from the restrictions imposed by Sections 406(a), 406(b) and 407(a) of
ERISA (as well as the excise taxes imposed by Sections 4975(a) and (b) of the
Code by reason of Section 4975(c) of the Code) for transactions in connection
with the servicing, management and operation of the mortgage pools, provided
that the general conditions of the Exemption are satisfied.
The Exemption also may provide an exemption from the restrictions
imposed by Sections 406(a) and 407(a) of ERISA, and the taxes imposed by Section
4975(a) and (b) of the Code by reason of Sections 4975(c)(1)(A) through (D) of
the Code if those restrictions are deemed to otherwise apply merely because a
person is deemed to be a "party in interest" (within the meaning of Section
3(14) of ERISA) or a "disqualified person" (within the meaning of Section
4975(e)(2) of the Code) with respect to an investing Plan by virtue of providing
services to the Plan (or by virtue of having certain specified relationships to
that person) solely as a result of the Plan's ownership of certificates.
The Exemption extends exemptive relief to certain mortgage-backed and
asset-backed securities transactions that use pre-funding accounts and that
otherwise meet the requirements of the exemption. Obligations in an investment
pool supporting payments to securityholders, and having a value equal to no more
than 25% of the total initial principal balance of the related certificates, may
be transferred to the trust fund within the pre-funding period, instead of being
required to be either identified or transferred on or before the closing date.
The relief is available if the following conditions are met:
(1) The ratio of the amount allocated to the pre-funding account
to purchase mortgage loans that have not yet been identified to the
total principal amount of the certificates being offered (the
"Pre-Funding Limit") must not exceed 25%.
(2) All assets transferred after the closing date (the
"Subsequent Assets") must meet the same terms and conditions for
eligibility as the original assets used to create the issuer, which
terms and conditions have been approved by at least one rating agency.
(3) The transfer of the Subsequent Assets to the issuer during
the pre-funding period must not result in the certificates that are to
be covered by the Exemption receiving a lower credit rating from a
rating agency upon termination of the pre-funding period than the
rating that was obtained at the time of the initial issuance of the
certificates by the issuer.
(4) The weighted average annual percentage interest rate for all
of the assets in the issuer at the end of the pre-funding period must
not be more than 100 basis points lower than the average interest rate
for the assets transferred to the issuer on the closing date.
(5) In order to ensure that the characteristics of the Subsequent
Assets are substantially similar to the original assets that were
transferred to the issuer:
o the characteristics of the Subsequent Assets must be monitored by an
insurer or other credit support provider that is independent of the
depositor; or
102
o an independent accountant retained by the depositor must provide the
depositor with a letter (with copies provided to each rating agency rating
the certificates, the underwriter and the trustee) stating whether or not
the characteristics of the Subsequent Assets conform to the characteristics
described in the related prospectus supplement and/or the related
agreement. In preparing this letter, the independent accountant must use
the same type of procedures as were applicable to the assets transferred to
the issuer as of the closing date.
(6) The pre-funding period must end no later than the later of
three months or 90 days after the closing date (or earlier if the
pre-funding account falls below the minimum level specified in the
related agreement or an event of default occurs).
(7) Amounts transferred to the pre-funding account and/or the
capitalized interest account used in connection with the pre-funding
may be invested only in certain permitted investments.
(8) The prospectus or prospectus supplement must describe:
o the pre-funding account and/or capitalized interest account used in
connection with the pre-funding account;
o the duration of the pre-funding period;
o the percentage and/or dollar amount of the pre-funding limit for the
issuer; and
o that the amounts remaining in the pre-funding account at the end of the
pre-funding period will be remitted to securityholders as repayments of
principal.
(9) The related agreement must describe the permitted investments
for the pre-funding account and/or capitalized interest account and, if
not disclosed in the prospectus supplement, the terms and conditions
for eligibility of Subsequent Assets.
With respect to each transaction specified in a related prospectus
supplement, there will be sufficient obligations identified prior to the closing
date so that these obligations, if transferred to the trust after the closing
date, in exchange for amounts credited to the pre-funding account, would result
in a ratio that is within the pre-funding limit. In addition, these obligations
would meet the same terms and conditions for eligibility as the original
obligations used to create the trust and other conditions required under the
Exemption.
The certificates may have features, such as put option rights or
mandatory purchase features, that are not eligible for exemptive relief under
the Exemption. In this case, the prospectus supplement related to a series of
certificates will identify any additional considerations and conditions for a
fiduciary investing assets of a Plan in a class of certificates that includes
such features.
To the extent the certificates are not treated as equity interests for
purposes of DOL regulations Section 2510.3-101, a Plan's investment in those
certificates ("Non-Equity Certificates") would not cause the assets included in
a related trust fund to be deemed Plan assets. However, the depositor, the
master servicer, the servicer, the trustee, or underwriter may
103
be the sponsor of or investment advisor with respect to one or more Plans.
Because these parties may receive certain benefits in connection with the sale
of Non-Equity Certificates, the purchase of Non-Equity Certificates using Plan
assets over which any of these parties has investment authority might be deemed
to be a violation of the prohibited transaction rules of ERISA and the Code for
which no exemption may be available. Accordingly, Non-Equity Certificates may
not be purchased using the assets of any Plan if any of the depositor, the
servicer, the trustee or underwriter has investment authority for those assets,
or is an employee maintaining or contributing to the Plan.
In addition, certain affiliates of the depositor might be considered or
might become Parties in Interest with respect to a Plan. Also, any holder of
certificates, because of its activities or the activities of its respective
affiliates, may be deemed to be a Party in Interest with respect to certain
Plans, including but not limited to Plans sponsored by that holder. In either
case, the acquisition or holding of Non-Equity Certificates by or on behalf of
that Plan could be considered to give rise to an indirect prohibited transaction
within the meaning of ERISA and the Code, unless it is subject to one or more
statutory, regulatory or administrative exemptions such as Prohibited
Transaction Class Exemption ("PTCE") 84-14, which exempts certain transactions
effected on behalf of a Plan by a "qualified professional asset manager," PTCE
90-1, which exempts certain transactions involving insurance company pooled
separate accounts, PTCE 91-38, which exempts certain transactions involving bank
collective investment funds, PTCE 95-60, which exempts certain transactions
involving insurance company general accounts, or PTCE 96-23, which exempts
certain transactions effected on behalf of a Plan by certain "in-house" asset
managers. It should be noted, however, that even if the conditions specified in
one or more of these exemptions are met, the scope of relief provided by these
exemptions may not necessarily cover all acts that might be construed as
prohibited transactions.
Any Plan fiduciary that proposes to cause a Plan to purchase
certificates should consult with its counsel with respect to the potential
applicability of ERISA and the Code to that investment, the availability of the
exemptive relief provided in the Exemption and the potential applicability of
any other prohibited transaction exemption in connection therewith. In
particular, a Plan fiduciary that proposes to cause a Plan to purchase
certificates representing a beneficial ownership interest in a pool of
single-family residential first mortgage loans should consider the applicability
of PTCE 83-1, which provides exemptive relief for certain transactions involving
mortgage pool investment trusts. The prospectus supplement for a series of
certificates may contain additional information regarding the application of the
Exemption, PTCE 83-1 or any other exemption, with respect to the certificates
offered thereby. In addition, any Plan fiduciary that proposes to cause a Plan
to purchase certin types of certificates should consider the federal income tax
consequences of that investment.
Any Plan fiduciary considering whether to purchase a certificate on
behalf of a Plan should consult with its counsel regarding the application of
the DOL regulations Section 2510.3-101 and the fiduciary responsibility and
prohibited transaction provisions of ERISA and the Code to that investment.
The sale of certificates to a Plan is in no respect a representation by
the depositor or the underwriter that the investment meets all relevant legal
requirements for investments by Plans
104
generally or any particular Plan, or that the investment is appropriate for
Plans generally or any particular Plan.
LEGAL INVESTMENT MATTERS
If so specified in the prospectus supplement for a series, the
certificates of such series will constitute "mortgage related securities" for
purposes of the Secondary Mortgage Market Enhancement Act of 1984, so long as
they are rated in one of the two highest rating categories by one or more
nationally recognized statistical rating organizations, and, as such, will be
legal investments for persons, trusts, corporations, partnerships, associations,
business trusts and business entities, including, but not limited to,
state-chartered savings banks, commercial banks, savings and loan associations,
and insurance companies, as well as trustees and state government employee
retirement systems, created pursuant to or existing under the laws of the United
States or any state, territory or possession of the United States, including the
District of Columbia or Puerto Rico, whose authorized investments are subject to
state regulation to the same extent that, under applicable law, obligations
issued by or guaranteed as to principal and interest by the United States or any
agency or instrumentality thereof constitute legal investments for such
entities. Pursuant to SMMEA, a number of states enacted legislation, on or
before the October 3, 1991 cut off for such enactments, limiting to varying
extents the ability of certain entities, in particular, insurance companies, to
invest in "mortgage related securities," in most cases by requiring the affected
investors to rely solely upon existing state law and not SMMEA. Accordingly, the
investors affected by such legislation will be authorized to invest in the
certificates only to the extent provided in such legislation. Institutions whose
investment activities are subject to legal investment laws and regulations or to
review by certain regulatory authorities may be subject to restrictions on
investment in certain classes of the certificates of a series.
SMMEA also amended the legal investment authority of federally
chartered depository institutions as follows: federal savings and loan
associations and federal savings banks may invest in, sell or otherwise deal
with mortgage related securities without limitation as to the percentage of
their assets represented thereby; federal credit unions may invest in mortgage
related securities; and national banks may purchase mortgage related securities
for their own account without regard to the limitations generally applicable to
investment securities set forth in 12 U.S.C. ss. 24 (Seventh), subject in each
case to such regulations as the applicable federal regulatory authority may
prescribe. Federal credit unions should review National Credit Union
Administration (the "NCUA") Letter to Credit Unions No. 96, as modified by
Letter to Credit Unions No. 108, which includes guidelines to assist federal
credit unions in making investment decisions for mortgage related securities.
The NCUA has adopted rules, effective December 2, 1991, which prohibit federal
credit unions from investing in some types of mortgage related securities,
possibly including specified series or classes of certificates, except under
limited circumstances. The OTS has issued Thrift Bulletin 13a (December 1,
1998), "Management of Interest Rate Risk, Investment Securities and Derivative
Activities," which thrift institutions subject to the jurisdiction of the OTS
should consider before investing in any certificates.
If specified in the prospectus supplement for a series, one or more
classes of certificates of the series will not constitute "mortgage related
securities" for purposes of SMMEA. In this
105
event, persons whose investments are subject to state or federal regulation may
not be legally authorized to invest in such classes of certificates.
All depository institutions considering an investment in the
certificates should review the "Supervisory Policy Statement on Investment
Securities and End-User Derivatives Activities" (the "Policy Statement") of the
Federal Financial Institution Examination Council. The Policy Statement, which
has been adopted by the Board of Governors of the Federal Reserve System, the
FDIC, the Office of the Comptroller of the Currency and the Office of Thrift
Supervision, effective May 26, 1998, and by the NCUA effective October 1, 1998,
among other things, sets forth general guidelines which depository institutions
must follow in managing risks, including market, credit, liquidity, operational,
and legal risks, applicable to all securities used for investment purposes. In
addition, depository institutions and other financial institutions should
consult their regulators concerning the risk-based capital treatment of any
certificates. Any financial institution that is subject to the jurisdiction of
the Comptroller of the Currency, the Board of Governors of the Federal Reserve
System, the Federal Deposit Insurance Corporation, the Office of Thrift
Supervision, the National Credit Union Administration or other federal or state
agencies with similar authority should review any applicable rules, guidelines
and regulations prior to purchasing the certificates of a series.
Institutions whose investment activities are subject to regulation by
federal or state authorities should review the rules, policies and guidelines
adopted from time to time by these authorities before purchasing certificates,
since some certificates may be deemed unsuitable investments, or may otherwise
be restricted, under these rules, policies or guidelines, in some instances
irrespective of SMMEA.
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines or agreements generally
governing investments made by a particular investor, including, but not limited
to, "prudent investor" provisions, percentage-of-assets limits, provisions which
may restrict or prohibit investments in securities which are not
"interest-bearing" or "income-paying," and, with regard to any book-entry
certificates, provisions which may restrict or prohibit investments in
securities which are issued in book-entry form.
Prospective investors should consult their own legal advisors in
determining whether and to what extent the certificates constitute legal
investments for such investors.
PLAN OF DISTRIBUTION
The depositor may sell the certificates offered by this prospectus and
by the related prospectus supplement either directly or through one or more
underwriters or underwriting syndicates. The prospectus supplement for each
series will set forth the terms of the offering of the series and of each class
of the series, including the name or names of the underwriters, and either the
initial public offering price, the discounts and commissions to the underwriters
and any discounts or concessions allowed or reallowed to certain dealers or the
method by which the price at which the underwriters will sell the certificates
will be determined.
106
The certificates of a series may be acquired by the underwriters for
their own account and may be resold from time to time in one or more
transactions, including negotiated transactions, at a fixed public offering
price or at varying prices determined at the time of sale. The obligations of
the underwriters will be subject to certain conditions precedent, and the
underwriters will be severally obligated to purchase all the certificates of a
series described in the related prospectus supplement if any are purchased. If
certificates of a series are offered other than through underwriters, the
related prospectus supplement will contain information regarding the nature of
the offering and any agreements to be entered into between the depositor and the
purchasers of the certificates of the series.
The place and time of delivery for the certificates of a series in
respect of which this prospectus is delivered will be set forth in the related
prospectus supplement.
AVAILABLE INFORMATION
The depositor has filed a registration statement with the Securities
and Exchange Commission with respect to the certificates. The registration
statement and amendments thereto and the exhibits thereto as well as reports
filed with the Commission on behalf of each trust may be inspected and copied at
the public reference facilities maintained by the Commission at Room 1024, 450
Fifth Street, N.W., Washington, D.C. 20549, and at the following Regional
Offices: Chicago Regional Office, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511; and New York Regional Office, 233 Broadway, New York, New
York 10279. Copies of these materials can also be obtained from the Public
Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates and electronically through the Electronic Data
Gathering, Analysis and Retrieval system at the Commission's web site
(http:\\www.sec.gov). The Commission maintains computer terminals providing
access to the EDGAR system at each of the offices referred to above.
This prospectus does not contain all the information set forth in the
registration statement of which this prospectus is a part, or in the exhibits
relating thereto, which the depositor has filed with the Commission in
Washington, D.C. Copies of the information and the exhibits are on file at the
offices of the Commission and may be obtained upon payment of the fee prescribed
by the Commission or may be examined without charge at the offices of the
Commission. Copies of the agreement for a particular series will be provided to
each person to whom a prospectus is delivered upon written or oral request,
provided that the request is made to Saxon Asset Securities Company, 4880 Cox
Road, Glen Allen, Virginia 23060 ((804) 967-7400).
107
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents filed with respect to each trust pursuant to Sections
13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as amended,
after the date of this prospectus and prior to the termination of the offering
of the certificates of the trust under this prospectus shall be deemed to be
incorporated into and made a part of this prospectus from the date of filing of
those documents. Any statement contained in a document incorporated or deemed to
be incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this prospectus to the extent that a statement contained herein
or in any other subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes that statement. Any
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this prospectus. The depositor will
provide a copy of any and all information that has been incorporated by
reference into this prospectus, not including exhibits to the information so
incorporated by reference unless such exhibits are specifically incorporated by
reference into the information that this prospectus incorporates, upon written
or oral request of any person, without charge to such person, provided that the
request is made to the depositor, 4880 Cox Road, Glen Allen, Virginia 23060
((804) 967-7400).
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SAXON
$1,000,000,000
Saxon Asset Securities Trust 2002-3
Saxon Asset Securities Company,
as Depositor
Mortgage Loan Asset Backed Certificates
Series 2002-3
JPMORGAN
CREDIT SUISSE FIRST BOSTON
RBS GREENWICH CAPITAL
WACHOVIA SECURITIES
----------------
PROSPECTUS SUPPLEMENT
----------------
October 30, 2002