As filed with the Securities and Exchange Commission on September 30,October 31,
2003 ===========
Registration No. 333- 109298
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------------------------------------
Amendment No. 1
to FORM S-3
REGISTRATION STATEMENT
under
THE SECURITIES ACT OF 1933
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WACHOVIA ASSET SECURITIZATION ISSUANCE, INC.LLC
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(Exact name of registrant as specified in its charter)
North Carolina
(State or other jurisdiction of incorporation or organization)
56-1967773
(I.R.S. employer identification number)
One Wachovia Center
301 South College Street, Suite D
Charlotte, North Carolina 28288
(704) 383-5374
(Address, including zip code, and telephone number, including area code, of
registrant's principle executive offices)
Robert J. Perret
Vice President
One Wachovia Center
301 South College Street
Charlotte, North Carolina 28288
(704) 374-4868
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copies to:
David K. Tinkler, Esq. Jordan M. Schwartz, Esq. Katharine I. Crost, Esq.
Wachovia Corporation Cadwalader, Wickersham & Taft LLP Orrick, Herrington & Sutcliffe LLP
301 South College Street 100 Maiden Lane 666 Fifth Avenue
Charlotte, North Carolina 28288 New York, New York 10038 New York, New York 10103
Approximate date of commencement of proposed sale to the public: From
time to time after this Registration Statement becomes effective as determined
by market conditions.
If any of the securities being registered on this Form are to be
offered pursuant to dividend or interest reinvestment plans, please check the
following box. |_|
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, other than securities offered only in connection with
dividend or interest reinvestment plans, check the following box. |X|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act Registration Statement number of the earlier
effective Registration Statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act Registration Statement number of the earlier effective Registration
Statement for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. |_|
CALCULATION OF REGISTRATION FEE
===================================== ===================== ======================= ======================== =====================
Title of Securities to be Registered Amount to be Proposed Maximum Proposed Maximum Amount of
Registered(1)(2)(3) Aggregate Price Per Aggregate Offering Registration Fee(5)
====== ===
Unit(24) Price(24)
- -------------------------------------- -------------------- ------------------------ ------------------------ ---------------------
Mortgage Asset-Backed Pass-Through
Certificates and Asset-Backed Notes $1,000,00015,300,000,000 100% $1,000,00015,300,000,000] $80.901,237,770
============== =============== =========
(Issuable in Series)
===================================== ===================== ======================= ======================== =====================
(1) This Registration Statement registers an indeterminate amount of Mortgage
Asset-Backed Pass-Through Certificates and Asset-Backed Notes that are to be
offered and sold in market-making activities by Wachovia Capital Markets, LLC,
an affiliate of the Registrant.
(2) With respect to any Asset Backed Securities issued with original issue
discount, the amount to be registered is calculated based on the initial public
offering price thereof. (3) With respect to any Asset Back Securities
denominated by foreign currency, the amount to be registered shall be the U.S
dollar
equivalent thereof based on the prevailing exchange rate at the time such
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Asset Backed Securities is first offered.
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(4) Estimated solely for the purpose of calculating the registration fee..
===== =
(5) $80.90 of which was paid in connection with the initial filing of this
================================================================================
Registration Statement. In addition, a filing fee of
==========================================================
$1,234,363.94 was paid with Registration Statement No. 333-97457 in
connection with $13,416,999,439 of unissued Asset Backed Securities
registered by Wachovia Asset Securitization, Inc., as
predecessor-in-interest to the Registrant, under Registration Statement
333-97457, initially filed on July 31, 2002, and is being offset against
the total filing fee due for this Registration Statement pursuant to Rule
457(p) of the General Rules and Regulation under the Securities Act of
1933, as amended.
-------------------
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
Explanatory Note
This Registration Statement includes (i) the basic prospectus relating
to Mortgage Asset-Backed Pass-Through Certificates and Asset-Backed Notes, (ii)
an illustrative form of prospectus supplement for use in an offering of Mortgage
Asset-Backed Pass-Through Certificates representing beneficial ownership
interests in a trust fund consisting primarily of mortgage loans and (iii) an
illustrative form of prospectus supplement for use in an offering of
Asset-Backed Notes representing beneficial ownership interests in a trust fund
consisting primarily of home equity revolving lines of credit.
SUBJECT TO COMPLETION DATED AUGUST 27, 2002NOVEMBER [__], 2003
===================
PROSPECTUS
WACHOVIA ASSET SECURITIZATION ISSUANCE, INC.LLC
======== ===
Depositor
Mortgage Pass-Through Certificates
Mortgage-Backed Notes
(Issuable in Series)
--------------------------
You should carefully consider the risk factors beginning on page 11 of this
prospectus.
The securities of any series will not be insured or guaranteed by any
governmental agency or instrumentality other than as expressly described in the
prospectus supplement for that series.
The securities of each series will represent interests in, or will represent
debt obligations of, the related trust only and will not represent interests in
or obligations of any other entity.
This prospectus may be used to offer and sell any series of securities only if
accompanied by the prospectus supplement for that series.
The securities of each series are not deposits or other obligations of a bank
and are not insured by the FDIC.
Each Trust--
o will issue a series of asset-backed certificates or asset-backed notes that
will consist of one or more classes; and
o may own--
o a pool or pools of single family and/or multifamily mortgage loans,
which may include sub-prime mortgage loans, and are secured by either
first or junior liens on one- to four-family residential properties or
primarily residential properties consisting of five or more
residential dwelling units and which may include limited retail,
office or other commercial space;
o a pool or pools of home improvement installment sales contracts or
installment loans that are unsecured;
o a pool or pools of manufactured housing installment sales contracts
and installment loan agreements secured by a security interest in a
new or used manufactured home, and if indicated in the accompanying
prospectus supplement, by real property; and
o other assets described in this prospectus and the accompanying
prospectus supplement.
Each Series of Securities--
o will represent ownership interest in the related trust or will represent
debt obligations of the related trust;
o may be entitled to one or more of the other types of credit support
described in this prospectus; and
o will be paid only from the assets of the related trust.
Neither the SEC nor any state securities commission has approved the securities
or determined that this prospectus is accurate or complete. Any representation
to the contrary is a criminal offense.
,200
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The information in this prospectus is not complete and may be changed. The
Depositor may not sell these securities until the registration statement filed
with the Securities and Exchange Commission is effective. This prospectus is not
an offer to sell these securities and is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
- --------------------------------------------------------------------------------
, 2002
, 2003
TABLE OF CONTENTS
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED
IN THIS PROSPECTUS AND THE ACCOMPANYING
PROSPECTUS SUPPLEMENT..............................6
SUMMARY OF PROSPECTUS...............................7
RISK FACTORS.......................................12
Risks Associated with the Securities............12
Risks Associated with the Assets................15
Violations of Federal Laws or State
Laws May Adversely Affect Ability to
Collect on Loans or Result in Losses...........19
Market Values of Manufactured Homes
May Increase the Risk of Loss................20
Risk of Loss May Be Greater on
Unsecured Home Improvement Loans.............20
Risks of Loss May Increase Due to
Defective Security Interest and Effects
of Certain Other Legal Aspects of the
Contracts......................................20
DESCRIPTION OF THE TRUST FUNDS.....................21
Assets..........................................21
Mortgage Loans..................................23
General........................................23
Loan-to-Value Ratio............................24
Mortgage Loan Information in Prospectus
Supplements...................................24
Payment Provisions of the Mortgage Loans.......25
Revolving Credit Line Loans....................26
Unsecured Home Improvement Loans..............2627
==
Unsecured Home Improvement Loan
Information in Prospectus Supplements........2627
==
Contracts.......................................28
General........................................28
Contract Information in Prospectus Supplements.28
Payment Provisions of the Contracts............29
Pre-Funding Account.............................29
Accounts........................................30
Credit Support..................................30
Cash Flow Agreements............................30
USE OF PROCEEDS....................................31
YIELD CONSIDERATIONS...............................31
General.........................................31
Pass-Through Rate and Interest Rate.............31
Timing of Payment of Interest.................3132
==
Payments of Principal; Prepayments..............32
Prepayments--Maturity and Weighted Average Life.33
Other Factors Affecting Weighted Average Life.3435
==
Type of Asset.............................3435
==
Termination.................................36
Defaults..................................3637
==
Foreclosures................................37
Refinancing.................................37
Due-on-Sale Clauses.........................37
THE DEPOSITOR......................................38
DESCRIPTION OF THE SECURITIES......................39
General.........................................39
Distributions...................................40
Available Distribution Amount...................40
Distributions of Interest on the Securities...4142
==
Distributions of Principal of the Securities..4243
==
Categories of Classes of Securities.............43
Components......................................49
Distributions on the Securities of
Prepayment Premiums............................49
Allocation of Losses and Shortfalls.............49
Advances in Respect of Delinquencies............49
Reports to Securityholders......................50
Termination; Optional Purchase of Mortgage Loans52
Optional Purchases..............................53
Definitive Form.................................53
Book-Entry Registration and Form................54
DESCRIPTION OF THE AGREEMENTS......................59
Agreements Applicable to a Series...............59
REMIC Securities, FASIT Securities,
Grantor Trust Securities...................59
Securities That Are Partnership Interests
for Tax Purposes and Notes.................59
3
Material Terms of the Pooling and Servicing
Agreements and Underlying Servicing Agreements.59
General.....................................59
Assignment of Assets; Repurchases...........60
Representations and Warranties; Repurchases.62
Collection Account and Related Accounts.....64
Realization Upon Defaulted Assets...........69
Hazard Insurance Policies...................71
Contracts...................................72
Fidelity Bonds and Errors and
Omissions Insurance........................73
Due-on-Sale Provisions......................73
Retained Interest; Servicing Compensation
and Payment of Expenses....................73
Evidence as to Compliance...................74
Certain Matters Regarding Servicers, the
Master Servicer and the Depositor..........75
Special Servicers...........................76
Events of Default under the Agreements......76
Rights Upon Event of Default under
the Agreements.............................77
Amendment...................................78
The Trustee.................................79
Duties of the Trustee.......................79
Certain Matters Regarding the Trustee.......79
Resignation and Removal of the Trustee......80
Material Terms of the Indenture.................80
General.....................................80
Events of Default...........................81
Discharge of Indenture......................83
Indenture Trustee's Annual Report...........83
The Indenture Trustee.....................8384
==
DESCRIPTION OF CREDIT SUPPORT......................84
General.........................................84
Subordinate Securities..........................85
Cross-Support Provisions........................85
Limited Guarantee...............................85
Financial Guaranty Insurance Policy or
Surety Bond..................................8586
==
Letter of Credit..............................8586
==
Pool Insurance Policies.......................8586
==
Special Hazard Insurance Policies...............86
Mortgagor Bankruptcy Bond.......................86
Reserve Funds...................................86
Overcollateralization...........................87
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS..........8788
==
General.......................................8788
==
Types of Mortgage Instruments...................88
Interest in Real Property.....................8889
==
Cooperative Loans...............................89
Land Sale Contracts.............................90
Foreclosure.....................................91
General.....................................91
Judicial Foreclosure........................91
Equitable Limitations on Enforceability
of Certain Provisions....................9192
==
Non-Judicial Foreclosure/Power of Sale......92
Public Sale...............................9293
==
Rights of Redemption......................9394
==
Cooperative Loans...........................94
Junior Mortgages..............................9596
==
Rights of Redemption............................96
Anti-Deficiency Legislation, the Bankruptcy
Code and Other Limitations on Lenders........9697
==
Enforceability of Certain Provisions..........9998
==
Environmental Considerations.................10099
==
Due-on-Sale Clauses.........................102101
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Prepayment Charges..........................103102
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Subordinate Financing..........................103
Applicability of Usury Laws....................103
Alternative Mortgage Instruments...............104
Homeowners Protection Act of 1998..............105
Texas Home Equity Loans........................105
Soldiers' and Sailors' Civil Relief Act of
1940 and Similar Laws......................105106
===
Forfeitures in Drug, RICO and Money
Laundering Violations.........................106
CERTAIN LEGAL ASPECTS OF THE CONTRACTS.........106107
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General.....................................106107
===
4
Security Interests in the Manufactured Homes...107
Enforcement of Security Interests in
Manufactured Homes............................109
Soldiers' and Sailors' Civil Relief Act of 1940
and Similar Laws..............................110
Consumer Protection Laws.......................110
Transfers of Manufactured Homes; Enforceability
of Due-on-Sale Clauses........................110
Applicability of Usury Laws.................110111
===
FEDERAL INCOME TAX CONSEQUENCES...................112
General........................................112
Taxable Mortgage Pools.....................113
REMICS.........................................113
Classification of REMICs...................113
Characterization of Investments in REMIC
Securities................................116
Tiered REMIC Structures....................117
Taxation of Owners of Regular Securities...117
Election to Treat All Interest Under the
Constant Yield Method.....................124
Taxation of Owners of Residual Securities..126
Taxes That May Be Imposed on the REMIC
Pool...................................135136
===
Taxation of Certain Foreign Investors......138
Grantor Trust Funds............................141
Classification of Grantor Trust Funds......141
Standard Securities............................141
General....................................141
Tax Status.................................142
Premium and Discount.......................143
Recharacterization of Servicing Fees.......144
Stripped Securities............................145
General....................................145
Status of Stripped Securities...........146147
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Taxation of Stripped Securities............147
Reporting Requirements and Backup
Withholding...............................149
Taxation of Certain Foreign Investors...149150
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Partnership Trust Funds.....................149150
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Classification of Partnership Trust
Funds..................................149150
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Characterization of Investments in
Partnership Securities and Debt
Securities...............................150
Taxation of Debt Securityholders...........150
Taxation of Owners of Partnership
Securities.............................150151
===
Recent Tax Law Changes156Error! Bookmark not defined.
============================
STATE AND OTHER TAX CONSEQUENCES..................157
ERISA CONSIDERATIONS..............................157
LEGAL INVESTMENT..................................163
METHODS OF DISTRIBUTION...........................164
LEGAL MATTERS.....................................166
FINANCIAL INFORMATION.............................166
RATINGS...........................................166
WHERE YOU CAN FIND MORE INFORMATION...............166
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE.167
INDEX OF SIGNIFICANT DEFINITIONS..................168
5
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS
PROSPECTUS AND THE ACCOMPANYING PROSPECTUS SUPPLEMENT
Information is provided to you about the securities in two separate
documents that progressively provide more detail: (a) this prospectus, which
provides general information, some of which may not apply to a particular series
of securities, including your series, and (b) the accompanying prospectus
supplement, which will describe the specific terms of your series of securities,
including:
o the principal balances and/or interest rates of each class;
o the timing and priority of interest and principal payments;
o statistical and other information about the mortgage loans;
o information about credit enhancement, if any, for each class;
o the ratings for each class; and
o the method for selling the securities.
If the terms of a particular series of securities vary between this
prospectus and the accompanying prospectus supplement, you should rely on the
information in the accompanying prospectus supplement.
You should rely only on the information provided in this prospectus and the
accompanying prospectus supplement including the information incorporated by
reference. No one has been authorized to provide you with different information.
The securities are not being offered in any state where the offer is not
permitted. The depositor does not claim the accuracy of the information in this
prospectus or the accompanying prospectus supplement as of any date other than
the dates stated on their respective covers.
Cross-references are included in this prospectus and in the accompanying
prospectus supplement to captions in these materials where you can find further
related discussions. The followingforegoing Table of Contents and the Table of
=========
Contents included in the accompanying prospectus supplement provide the pages on
which these captions are located.
You can find a listing of the pages where capitalized terms used in this
prospectus are defined under the caption "Index of Significant Definitions"
beginning on page 167168 in this prospectus.
The depositor's principal executive office is located at One Wachovia
Center, 301 South College Street, Charlotte, NC 28288 and the depositor's
telephone number is (704) 374-2702.383-4634.
=========
6
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SUMMARY OF PROSPECTUS
This summary highlights selected information from this document and does
not contain all of the information that you need to consider in making an
investment decision. Please read this entire prospectus and the accompanying
prospectus supplement carefully to understand all of the terms of a series of
certificates.
This summary provides an overview of certain calculations, cash flows and
other information to aid your understanding of the terms of the certificates or
==
notes and is qualified by the full description of these calculations, cash flows
=====
and otherthis information in the prospectus and the prospectus supplement.
====
RELEVANT PARTIES FOR EACH SERIES OF SECURITIES
Title of Securities
Mortgage pass-through certificates and mortgage-backed notes issuable isin
series. ==
Depositor
Wachovia Asset Securitization Issuance, Inc.LLC, an wholly-owned indirect
======== ===
subsidiary of Wachovia Corporation. The depositor is an affiliate of Wachovia
Securities, IncCapital Markets, LLC.
====================
Issuer
With respect to each series of certificates and/or notes, the trust fund to be
formed pursuant to either a pooling and servicing agreement or a deposit trust
agreement.
Servicer
The entity or entities named as servicer in the related prospectus supplement. A
servicer may be an affiliate of the depositor.
Master Servicer
The entity, if any, named as master servicer in the related prospectus
supplement that will perform certain administration, calculation and reporting
functions with respect to the trust fund and will supervise the servicers. The
master servicer may be an affiliate of the depositor.
Trustee / Indenture Trustee
The entity named as trustee or indenture trustee in the related prospectus
supplement.
RELEVANT DATES
Cut-off Date
The date specified in the related prospectus supplement.
Closing Date
The date when the certificates and/or notes of any series are initially issued
as specified in the related prospectus supplement.
Distribution Date
The monthly, quarterly or other periodic date specified in the related
prospectus supplement on which distributions will be made to holders of the
certificates and/or notes.
Statistical Calculation Date
The calendar day, if applicable, specified in the related prospectus supplement.
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7
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DESCRIPTION OF SECURITIES
Each series of certificates will be issued pursuant to a pooling and
servicing agreement and will include one or more classes representing an
ownership interest in a segregated pool of mortgage loans, unsecured home
improvement loans and/or manufactured housing installment sales contracts and
other assets of the trust fund. If a series of securities includes notes, such
notes will represent debt obligations of the related trust fund formed pursuant
to a deposit trust agreement and will be secured by the assets of the trust fund
pursuant to an indenture. A class of securities will be entitled, to the extent
of funds available, to one of the following:
o principal and interest distributions;
o principal distributions, with no interest distributions;
o interest distributions, with no principal distributions; or
o such other distributions as are described in the applicable prospectus
supplement.
See "Description of the Securities" in this prospectus.
Interest Distributions
With respect to each series of securities, interest on each class of
securities (other than a class of securities entitled to receive only principal)
will accrue during each period specified in the prospectus supplement and will
be distributed to the holders of the related classes of securities on each
distribution date in accordance with the particular terms of each such class of
securities. The terms of each such class of securities will be described in the
related prospectus supplement.
See "Description of the Securities--Distributions of Interest on the
Securities" in this prospectus.
Principal Distributions
With respect to each series of securities, principal payments (including
prepayments) on the related mortgage loans, unsecured home improvement loans
and/or manufactured housing installment sales contracts will be distributed to
holders of the related securities or otherwise applied as described in the
related prospectus supplement on each distribution date. Distributions in
reduction of principal balance will be allocated among the classes of securities
of a series in the manner specified in the applicable prospectus supplement.
See "Description of the Securities--Distribution of Principal on the
Securities" in this prospectus.
Denominations
Each class of securities of a series will be issued in the minimum
denominations set forth in the related prospectus supplement.
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8
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Registration of the Securities
The securities will be issued either:
o in book-entry form initially held through DTC in the United States, or
Clearstream Banking or the Euroclear System, in Europe; or
o in fully registered, certificated form.
See "Description of the Securities--General" and "--Book-Entry Registration
and Definitive Securities" in this prospectus.
ASSETS OF THE TRUST
The trust related to each series will consist primarily of any of the
following assets:
o a segregated pool of single family and/or multifamily mortgage loans, which
may include sub-prime mortgage loans; o home improvement installment sales
contracts or installment loans that are unsecured; o manufactured housing
installment sales contracts and installment loan agreements; and o certain other
property.
You should refer to the applicable prospectus supplement for the precise
characteristics or expected characteristics of the assets and a description of
the other property, if any, included in a particular trust.
See "Description of the Trust Funds" in this prospectus.
OPTIONAL TERMINATION OF THE TRUST
The related prospectus supplement may provide that the party specified in
the related prospectus supplement may
o repurchase all of the assets in the trust fund and thereby cause early
retirement of the securities under the circumstances and in the manner
specified in the related prospectus supplement and
o repurchase a portion of such assets to retire specified class or
classes of securities under the circumstances and in the manner specified
in the related prospectus supplement.
See "Description of the Securities--Termination" in this prospectus.
The yield on each class of securities of a series will be affected by,
among other things, the rate of payment of principal (including prepayments) on
the assets in the related trust and the timing of receipt of such payments.
See "Yield Considerations" in this prospectus.
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9
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PREFUNDING ACCOUNT
The related prospectus supplement may provide that the depositor deposit a
specified amount in a pre-funding account on the date the securities are issued.
In this case, the deposited funds may only be used to acquire the additional
assets for the trust during a set period after the initial issuance of the
securities. Any amounts remaining in the account at the end of the period will
be distributed as a prepayment of principal to the holders of the related
securities.
See "Description of the Trust Funds--Prefunding Account" in this prospectus.
CREDIT ENHANCEMENT
If so specified in the applicable prospectus supplement, the securities of
any series, or any one or more classes of a series, may be entitled to the
benefits of other types of credit enhancement, including but not limited to:
o letter of credit o financial guaranty insurance policy
o special hazard insurance policy o mortgage pool insurance policy
o reserve fund o spread account
o cash collateral account o overcollateralization
Credit support may also be provided by subordination. Any credit support
will be described in detail in the applicable prospectus supplement.
See "Description of Credit Support" in this prospectus.
RATINGS OF SECURITIES
The securities of any series will not be offered pursuant to this
prospectus and a prospectus supplement unless each offered security is rated in
one of the four highest rating categories by at least one nationally recognized
statistical rating agency.
o A security rating is not a recommendation to buy, sell or hold the
securities on any series and is subject to revision or withdrawal at
any time by the assigning rating agency.
o Ratings do not address credit risk and do not represent any assessment
of the likelihood or rate of principal prepayments.
See "Risk Factors--Risks Associated with the Securities--Ratings Assigned
to the Securities Will Have Limitations" and "Ratings" in this prospectus.
TAX STATUS OF THE SECURITIES
The securities of each series offered will be either:
o regular interests and residual interests in a trust fund treated as a
REMIC; o interests in a trust fund treated as a grantor trust;
o interests in a trust fund treated as a partnership;
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10
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o debt obligations secured by assets of a trust fund; or
o regular interest or ownership interests in a trust fund treated as a
FASIT.
For additional information see "Federal Income Tax Consequences" in this
prospectus and "Certain Material Federal Income Tax Consequences" in the
prospectus supplement.
ERISA CONSIDERATIONS
If you are a fiduciary of any employee benefit plan or arrangement,
including an individual retirement account, subject to fiduciary responsibility
or prohibited transaction provisions of ERISA, you should carefully review with
your legal advisors whether the purchase or holding of securities could give
rise to a transaction that is prohibited or not otherwise permissible under
ERISA or other comparable rules or regulations.
For additional information see "ERISA Considerations" in this prospectus
and in the prospectus supplement.
LEGAL INVESTMENT
The applicable prospectus supplement will specify whether the class or
classes of securities offered will constitute "mortgage related securities" for
purposes of the Secondary Mortgage Market Enhancement Act of 1984, as amended.
If your investment authority is subject to legal restrictions you should consult
your own legal advisors to determine whether and to what extent such securities
constitute a legal investment for you.
For additional information see "Legal Investment" in this prospectus and in
the prospectus supplement.
MATERIAL RISKS
You are urged to read "Risk Factors" in this prospectus and in the
prospectus supplement for a discussion of the material risks associated with an
investment in the securities.
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11
RISK FACTORS
You should consider, among other things, the following factors in
connection with the purchase of securities.
Risks Associated with the Securities
Securities May Not be Liquid. The liquidity of your securities may be
limited. You should consider that:
o a secondary market for the securities of any series may not develop,
or if it does, it may not provide you with liquidity of investment, or
it may not continue for the life of the securities of any series;
o issuance of any of the securities of any series in book-entry form may
reduce the liquidity of such securities in the secondary trading
market because investors may not be willing to purchase securities for
which they cannot obtain physical certificates or notes; and
o unless specified in the applicable prospectus supplement, the
securities will not be listed on any securities exchange.
The Depositor, the Master Servicer, the Servicer, the Trustee and, if
applicable, the Certificate Administrator Will Have Limited Obligations. No
class of securities of any series will be an interest in or obligation of the
depositor, the master servicer, the servicer, the trustee, the certificate
administrator (if applicable) or any of their affiliates. Unless otherwise
provided in the related prospectus supplement, the only obligations with respect
to any of the securities or the related assets will be:
o the servicer's and master servicer's servicing obligations under the
applicable agreement; and
o the obligation of the party making representations and warranties
regarding the assets of a trust, the seller of the assets of a trust,
either directly or indirectly, to the depositor or other entity
specified in the related prospectus supplement to purchase, or
substitute a substantially similar asset for any asset as to which
there is defective documentation or a breach of certain
representations and warranties made with respect to such asset.
Unless otherwise provided in the prospectus supplement, the securities and
the underlying assets will not be guaranteed or insured by any governmental
agency or instrumentality, or by the depositor, the master servicer, the
servicer, the trustee or any of their affiliates.
Credit Enhancement is Limited in Amount and Coverage. With respect to each
series of securities, credit enhancement may be provided in limited amounts to
cover certain types of losses on the underlying assets. Credit enhancement will
be provided in one or more of the forms referred to in this prospectus,
including, but not limited to: subordination of other classes of securities of
the same series; a letter of credit; a financial guaranty insurance policy; a
mortgage pool insurance policy; a special hazard insurance policy; a reserve
fund; a spread
12
account; a cash collateral account; or other type of credit enhancement. See
"Description of Credit Support" in this prospectus.
Regardless of the form of credit enhancement provided:
o the amount of coverage will be limited in amount and in most cases
will be subject to periodic reduction in accordance with a schedule or
formula;
o may provide only very limited coverage as to certain types of losses,
and may provide no coverage as to certain types of losses; and
o all or a portion of the credit enhancement for any series of
securities may be permitted to be reduced, terminated or substituted
for, if each applicable rating agency indicates that the then-current
ratings will not be adversely affected.
Rate of Prepayment on Assets May Adversely Affect Average Lives and Yields
on the Securities. The yield on the securities of each series will depend in
part on the rate of principal payment on the assets (including prepayments,
liquidations due to defaults and asset repurchases). Such yield may be adversely
affected, depending upon whether a particular security is purchased at a premium
or a discount, by a higher or lower than anticipated rate of prepayments on the
related assets. In particular:
o the yield on principal-only or interest-only securities will be
extremely sensitive to the rate of prepayments on the related assets;
and
o the yield on certain classes of securities may be relatively more
sensitive to the rate of prepayments of specified assets than other
classes of securities.
The rate of prepayments on assets is influenced by a number of factors,
including: o the prevailing mortgage market interest rates; o local and national
economic conditions; o homeowner mobility; and o the ability of the borrower to
obtain financing.
In addition, your yield may be adversely affected by interest shortfalls
which may result from the timing of the receipt of prepayments or liquidations
to the extent that such interest shortfalls are not covered by aggregate
servicing fees or other mechanisms specified in the applicable prospectus
supplement. Your yield also will be adversely affected if losses on the assets
in the related trust are allocated to your securities and may be adversely
affected to the extent of unadvanced delinquencies on the assets in the related
trust. Classes of securities identified in the applicable prospectus supplement
as subordinated certificates or notes are more likely to be affected by
delinquencies and losses than other classes of securities.
See "Yield Considerations" in this prospectus.
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Ratings Assigned to the Securities Will Have Limitations. The ratings
assigned to your securities will not:
o assess the likelihood that principal prepayments (including those
caused by defaults) on the related assets will be made, the degree to
which the rate of such prepayments might differ from that originally
anticipated or the likelihood of early optional termination or
redemption of the series of securities; and
o address the possibility that prepayments at higher or lower rates than
anticipated by an investor may cause such investor to experience a
lower than anticipated yield or that an investor purchasing a security
at a significant premium might fail to recoup its initial investment
under certain prepayment scenarios.
In addition, the ratings of any series of securities by any applicable
rating agency may be lowered following the initial issuance of the securities.
The lowering of a rating on a series or class of securities may adversely affect
the market value of such securities and the liquidity of such securities. The
depositor or any of its affiliates will not have any obligation to maintain any
rating of any series of securities.
Book-Entry Securities May Experience Certain Problems. Since transactions
in the classes of securities of a Series issued in book-entry form can be
effected only through DTC, Clearstream Banking, the Euroclear System,
participating organizations, indirect participants and certain banks:
o you may experience delays in your receipts of payments of interest and
principal; and
o your ability to pledge such securities to persons or entities that do
not participate in the DTC, Clearstream Banking or the Euroclear
System may be limited due to the lack of a physical certificate.
See "Description of the Securities--Book-Entry Registration and Definitive
Securities" in this prospectus.
Risk of Loss May Be Greater on Subordinated Securities. The rights of
holders of subordinated securities will be subordinate:
o to the rights of the servicer and any master servicer (to the extent
of their servicing fees, including any unpaid servicing fees with
respect to one or more prior due periods, and its reimbursement for
certain unreimbursed advances and unreimbursed liquidation expenses);
and
o the holders of senior securities to the extent described in the
related prospectus supplement.
As a result of the foregoing, investors must be prepared to bear the risk
that they may be subject to delays in payment and may not recover their initial
investments in the subordinated securities. See "Description of Credit Support"
in this prospectus.
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The yields on the subordinated securities may be extremely sensitive to the
loss experience of the related assets and the timing of any such losses. If the
actual rate and amount of losses experienced by the assets exceed the rate and
amount of such losses assumed by an investor, the yield to maturity on the
subordinated securities may be lower than anticipated.
Risks Associated with the Assets
Mortgage Loans Secured by Multifamily Properties May Experience Greater
Rates of Delinquency and Foreclosure. The ability of a borrower to repay a loan
secured by an income-producing property typically is dependent primarily upon
the successful operation of such property rather than upon the existence of
independent income or assets of the borrower; thus, the value of an
income-producing property typically is directly related to the net operating
income derived from such property. If the net operating income of the property
is reduced (for example, if rental or occupancy rates decline or real estate tax
rates or other operating expenses increase), the borrower's ability to repay the
loan may be impaired. In addition, the concentration of default, foreclosure and
loss risk for a pool of mortgage loans secured by multifamily properties may be
greater than for a pool of mortgage loans secured by single family properties of
comparable aggregate unpaid principal balance because the pool of mortgage loans
secured by multifamily properties is likely to consist of a smaller number of
higher balance loans.
General Economic Conditions Affect Mortgage Loan Performance. General
economic conditions have an impact on the ability of borrowers to repay mortgage
loans. Loss of earnings, illness and other similar factors may lead to an
increase in delinquencies and bankruptcy filings by borrowers. In the event of
personal bankruptcy of a borrower under a mortgage loan, it is possible that the
holders of the related securities could experience a loss with respect to such
mortgagor's mortgage loan. In conjunction with a mortgagor's bankruptcy, a
bankruptcy court may suspend or reduce the payments of principal and interest to
be paid with respect to such mortgage loan, thus delaying the amount received by
the holders of the related securities with respect to such mortgage loan.
Moreover, if a bankruptcy court prevents the transfer of the related mortgaged
property to the related trust, any remaining balance on such mortgage loan may
not be recoverable.
Real Estate Market Conditions Affect Mortgage Loan Performance. An
investment in the securities which are secured by or represent interests in
mortgage loans may be affected by, among other things, a decline in real estate
values. There is no assurance that the values of the mortgaged properties will
remain at the levels existing on the dates of origination of the related
mortgage loans.
If the residential real estate market should experience an overall decline
in property values such that the outstanding balances of the mortgage loans
contained in a particular trust and any secondary financing on the mortgaged
properties, become equal to or greater than the value of the mortgaged
properties, delinquencies, foreclosures and losses could be higher than those
now generally experienced in the mortgage lending industry.
Geographic Concentration May Increase Rates of Loss and Delinquency.
Certain geographic regions of the United States from time to time will
experience weaker regional economic conditions and housing markets, and,
consequently, will experience higher rates of
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loss and delinquency on assets generally. Any concentration of the assets
relating to any series of securities in such a region may present risk
considerations in addition to those generally present for similar asset-backed
securities without such concentration.
See "The Mortgage Pool" in the related prospectus supplement for further
information regarding the geographic concentration of the assets underlying the
securities of any series.
Risk of Loss May Be Greater on Junior Mortgage Loans. Certain of the
mortgage loans underlying the securities of a series may be secured by mortgages
junior or subordinate to one or more other mortgages, and the related more
senior mortgages may not be included in the trust fund. Although little data is
available, the rate of default of second or more junior mortgage loans may be
greater than that of mortgage loans secured by senior liens on comparable
properties. A primary risk to holders of mortgage loans secured by junior
mortgages is the possibility that adequate funds will not be received in
connection with a foreclosure of the related senior mortgage to satisfy fully
both the senior mortgage and the mortgage that is junior or subordinate. In such
case, holders of the securities would bear:
o the risk of delay in distributions while a deficiency judgement
against the borrower is obtained; and
o the risk of loss if the deficiency judgment is not realized upon.
Moreover, deficiency judgments may not be available in certain
jurisdictions. In addition, a junior mortgagee may not foreclose on the property
securing a junior mortgage unless it forecloses subject to the more senior
mortgage.
In servicing junior mortgages, it is generally the servicer's and master
servicer's practice to advance funds to keep the senior mortgage current if the
mortgagor is in default thereunder. The servicer and master servicer intend to
advance such amounts in accordance with their normal servicing procedures, but
only to the extent that it determines such advances will be recoverable from
future payments and collections on that mortgage loan or otherwise. Such
practice may not be followed in servicing loans more junior than second
mortgages or may be modified at any time. The related trust will have no source
of funds to satisfy any senior mortgage or make payments due to any senior
mortgagee. The junior mortgages securing the mortgage loans are subject and
subordinate to any senior mortgage affecting the related mortgaged property,
including limitations and prohibitions which may be contained in such senior
mortgage upon subordinate financing.
Special Risks of Certain Assets. Certain assets that may be included in the
Trust may involve additional uncertainties not present in other types of assets.
Certain of the assets may provide for escalating or variable payments that may
be larger than the initial payment amount; however, the borrowers under such
assets are generally approved on the basis of the initial payment amount and the
borrower's income may not be sufficient to enable them to pay the increased
payment amounts. Therefore, in such cases the likelihood of default may
increase.
Certain of the assets underlying a series of securities may be delinquent
in respect of the payment of principal and interest. In addition, certain of the
mortgagors under the mortgage loans underlying a series of securities may be
subject to personal bankruptcy proceedings. Credit enhancement provided with
respect to a particular series of securities may not cover all
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losses related to such mortgage loans. Prospective investors should consider the
risk that the inclusion in a trust of delinquent assets and mortgage loans with
respect to which the mortgagor is the subject of bankruptcy proceedings may
cause the rate of the defaults and prepayments on such assets to increase and,
in turn, may cause losses to exceed the available credit enhancement for such
series and affect the yield on the securities of such series. See "The Mortgage
Pool" in the related prospectus supplement.
Defaulted Mortgage Loans May Experience Delays in Liquidation. Even
assuming the mortgaged properties provide adequate security for the mortgage
loans underlying a series of securities, substantial delays could result in
connection with the liquidation of defaulted mortgage loans. This could result
in corresponding delays in the receipt of the related proceeds by the related
trust. See "Certain Legal Aspects of the Mortgage Loans--Foreclosure," "--Rights
of Redemption" and "--Anti-Deficiency Legislation, the Bankruptcy Code and Other
Limitations on Lenders" in this prospectus.
Liquidation Expenses May be Disproportionate. Liquidation expenses with
respect to defaulted assets do not vary directly with the outstanding principal
balance of the assets at the time of default. Therefore, assuming that the
servicer and master servicer took the same steps in realizing upon a defaulted
asset having a small remaining principal balance as they would in the case of a
defaulted asset having a large remaining principal balance, the amount realized
after expenses of liquidation would be smaller as a percentage of the
outstanding principal balance of the small asset than would be the case with the
defaulted asset having a large remaining principal balance. Because the average
outstanding principal balance of the assets is small relative to the size of the
average outstanding principal balance of the loans in a typical pool consisting
only of conventional purchase-money mortgage loans, net liquidation proceeds on
liquidated assets may also be smaller as a percentage of the principal balance
of the assets than would be the case in a typical pool consisting only of
conventional purchase-money mortgage loans.
Defaults May Be More Likely on Newer Assets. Certain of the assets
underlying a series of securities may be recently originated as of the date of
the inclusion in the related trust fund. Although little data is available,
defaults on assets are generally expected to occur with greater frequency in
their early years.
Balloon Payment Assets May Have a Greater Default Risk at Maturity. Certain
of the underlying a series of securities may provide for a lump-sum payment of
the unamortized principal balance of the mortgage loan at the maturity of the
asset. See "The Mortgage Pool" in the related prospectus supplement.
Because borrowers under this type of asset are required to make a
relatively large single payment upon maturity, it is possible that the default
risk associated with such assets is greater than that associated with
fully-amortizing mortgage loans. The ability of a mortgagor on this type of
asset to repay the mortgage loan upon maturity frequently depends upon the
mortgagor's ability:
o to refinance the asset, which will be affected by a number of factors,
including, without limitation, the level of mortgage rates available
in the primary mortgage market at the time, the mortgagor's equity in
the related mortgaged property, the financial condition of the
mortgagor, the condition of the mortgaged property, tax law, general
economic conditions
17
and the general willingness of financial
institutions and primary mortgage bankers to extend credit; or
o to sell the related mortgaged property at a price sufficient to permit
the mortgagor to make the lump-sum payment.
Texas Home Equity Loans Have Significant Limitations. Certain of the
mortgage loans may be home equity loans secured by mortgaged properties located
in Texas. The Texas Constitution permits this type of loan, but significant
limitations were imposed on permitted terms, conditions and practices incident
to their creation. For example, these loans must be made without recourse for
personal liability against the homestead owner(s) or their spouse(s) (except in
the case of actual fraud on their part in obtaining the loan) and may be
foreclosed upon only by court order. Further, holders of these types of loans
face unique legal risks and uncertainties that they do not customarily confront
with equity take-out mortgages in other states. For example, if any of the
requirements that are addressed in the amendment to the Texas Constitution (such
as limitations on fees charged to the borrower, disclosures to the borrower or
matters to be provided for in the closing documents) are not met, the lien may
be invalid. There are also similar risks involved in servicing these types of
loans, such as the failure to comply with an obligation to the borrower within a
reasonable time after receiving notification from the borrower, that can result
in the forfeiture of all principal and interest due on the mortgage loan.
Increased Risk of Loss if Assets are Delinquent. A portion of the assets
may be delinquent upon the issuance of the related securities. Credit
enhancement provided with respect to a particular series of securities may not
cover all losses related thereto. You should consider the risk that the
inclusion of such assets in the trust fund for a series may cause the rate of
defaults and prepayments on the assets to increase and, in turn, may cause
losses to exceed the available credit enhancement for such series and affect the
yield on the securities of such series.
Cash Flow Agreements are Subject to Counterparty Risk. The assets of a
trust fund may, if specified in the related prospectus supplement, include
agreements such as interest rate exchange agreements, interest rate cap or floor
agreements, currency exchange agreements or other similar agreements, which will
require the provider of such instrument or counterparty to make payments to the
trust fund under the circumstances described in the prospectus supplement. To
the extent that payments on the securities of the related series depend in part
on payments to be received under this type of agreement, the ability of the
trust fund to make payments on the securities will be subject to the credit risk
of the counterparty. The prospectus supplement for a series of securities will
describe any mechanism, such as the payment of any "breakage fee," which may
exist to facilitate the replacement of this type of agreement upon the default
of credit impairment of the related counterparty. However, there can be no
assurance that any such mechanism will result in the ability of the servicer to
obtain a replacement.
Sub-Prime Mortgage Loans May Experience Greater Rates of Delinquency and
Foreclosure. If specified in the related prospectus supplement, all or a portion
of the mortgage loans may consist of sub-prime mortgage loans. A sub-prime
mortgage loan is a mortgage loan that is ineligible for purchase by Fannie Mae
or the Freddie Mac due to borrower credit characteristics, property
characteristics, loan documentation guidelines or other credit characteristics
that do not meet Fannie Mae or Freddie Mac underwriting guidelines. As a
consequence:
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o delinquencies and foreclosures may be expected to be more likely with
respect to sub-prime mortgage loans than with respect to mortgage
loans originated in accordance with Fannie Mae or Freddie Mac
underwriting guidelines; and
o changes in the values of the mortgaged properties may have a greater
effect on the loss experience of sub-prime mortgage loans than on
mortgage loans originated in accordance with Fannie Mae or Freddie Mac
underwriting guidelines.
Violations of Federal Laws or State Laws May Adversely Affect Ability to Collect
on Loans or Result in Losses
There are various federal and state laws, public policies and principles of
equity that protect consumers. Among other things, these laws, policies and
principles:
o regulate interest rate and other charges;
o require certain disclosures;
o require licensing of mortgage loan originators;
o require the lender to provide credit counseling and/or make certain
affirmative determinations regarding the borrower's ability to replay
the mortgage loan;
o prohibit discriminatory lending practices;
o limit or prohibit certain mortgage loan features, such as prepayment
penalties or balloon payments;
o regulate the use of consumer credit information; and o regulate debt
collection practices.
Violation of certain provisions of these laws, policies and principles:
o may limit a servicer's ability to collect all or part of the principal
of or interest on the mortgage loans;
o may entitle the borrower to a refund of amounts previously paid; and
o could subject a servicer or the trust to damages and administrative
sanctions.
The seller of the assets, either directly or indirectly, to the depositor will
generally be required to repurchase any mortgage loan which, at the time of
origination, did not comply with such federal and state laws or regulations,
however that remedy may not be adequate to fully compensate the related trust
fund.
See "Certain Legal Aspects of the Mortgage Loans" in this prospectus.
In addition, certain of the mortgage loans secured by mortgaged properties
located in Texas may be subject to the provisions of Texas laws which regulate
loans other than purchase money
19
loans. These laws provide for certain disclosure requirements, caps on allowable
fees, required loan closing procedures and other restrictions. Failure to comply
with any requirement may render the mortgage loan unenforceable and/or the lien
on the mortgaged property invalid. There are also similar risks involved in
servicing such mortgage loans (such as the failure to comply with an obligation
to the borrower within a reasonable time after receiving notification from the
borrower) that can result in the forfeiture of all principal and interest due on
the mortgage loan.
See "Certain Legal Aspects of the Mortgage Loans-Anti-Deficiency
Legislation, the Bankruptcy Code and Other Limitations on Lenders," "-Texas Home
Equity Loans" and "-Homeowners Protection Act of 1998."
Market Values of Manufactured Homes May Increase the Risk of Loss
Manufactured homes generally depreciate in value. Thus investors should
expect that, as a general matter, the market value of any manufactured home will
be lower than the outstanding principal balance of the related installment
contract. As a result, investors must be prepared to bear the risk of loss
resulting from any delinquency or liquidation loss on the contracts in a trust
fund. See "Description of Credit Support" in this prospectus.
Risk of Loss May Be Greater on Unsecured Home Improvement Loans
The obligations of the borrower under any unsecured home improvement loan
included in a trust fund will not be secured by an interest in the related real
estate or any other property. In the event of a default, the trust fund will
have recourse only against the borrower's assets generally, along with all other
general unsecured creditors of the borrower. In a bankruptcy or insolvency
proceeding, the obligations of the borrower under an unsecured home improvement
loan may be discharged in their entirety. As a result, the trust fund may suffer
losses. In addition, a borrower on an unsecured home improvement loan may not
demonstrate the same degree of concern over performance of the borrower's
obligations as if such obligations were secured by the real estate or other
assets owned by such borrower.
Risks of Loss May Increase Due to Defective Security Interest and Effects of
Certain Other Legal Aspects of the Contracts
The seller of the assets, either directly or indirectly, to the depositor
will represent that a contract is secured by a security interest in a
manufactured home. Perfection of such security interests and the right to
realize upon the value of the manufactured homes as collateral for the contracts
are subject to a number of federal and state laws, including the Uniform
Commercial Code. The steps necessary to perfect the security interest in a
manufactured home will vary from state to state. Because of the expense and
administrative inconvenience involved, the servicer or the master servicer will
not amend any certificates of title to change the lienholder specified therein
from the asset seller to the trustee and will not deliver any certificate of
title to the trustee or note thereon the trustee's interest. Consequently, in
some states, in the absence of such an amendment, the assignment to the trustee
of the security interest in the manufactured home may not be effective or such
security interest may not be perfected and, may not be effective against
creditors of the asset seller or a trustee in bankruptcy of the asset seller.
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In addition, numerous federal and state consumer protection laws impose
requirements on lending under installment sales contracts and installment loan
agreements and the failure by the lender or seller of goods to comply with such
requirements could give rise to liabilities of assignees for amounts due under
such agreements and claims by such assignees may be subject to set-off as a
result of such lender's or seller's noncompliance. These laws would apply to the
trustee as assignee of the contracts. The asset seller of the contracts will
warrant that each contract complies with all requirements of law and will make
certain warranties relating to the validity, subsistence, perfection and
priority of the security interest in each manufactured home securing a contract.
A breach of any such warranty that materially adversely affects any contract
would create an obligation of the asset seller to repurchase, or if permitted by
the applicable agreement, substitute for, such contract unless such breach is
cured. If the credit support is exhausted and recovery of amounts due on the
contracts is dependent on repossession and resale of manufactured homes securing
contracts that are in default, certain other factors may limit the ability to
realize upon the manufactured home or may limit the amount realized by
securityholders to less than the amount due. See "Certain Legal Aspects of the
Contracts."
DESCRIPTION OF THE TRUST FUNDS
Assets
The primary assets of each Trust Fund (the "Assets") will include (i)
single family and/or multifamily mortgage loans, which may include sub-prime
mortgage loans (or certain balances thereof) (collectively, the "Mortgage
Loans"), including without limitation, First Lien Mortgage Loans, Home Equity
Loans, Home Improvement Contracts and Land Sale Contracts, (ii) unsecured home
improvement loans ("Unsecured Home Improvement Loans"), (iii) manufactured
housing installment sale contracts or installment loan agreements (the
"Contracts"), or (iv) a combination of Mortgage Loans, Unsecured Home
Improvement Loans and/or Contracts. The Mortgage Loans will not be guaranteed or
insured by the Depositor or any of its affiliates. The Mortgage Loans will be
guaranteed or insured by a governmental agency or instrumentality or other
person only if and to the extent expressly provided in the related prospectus
supplement. Each Asset will be selected by the Depositor for inclusion in a
Trust Fund from among those purchased, either directly or indirectly, from a
prior holder thereof (an "Asset Seller"), which may be an affiliate of the
Depositor and which prior holder may or may not be the originator of such
Mortgage Loan, Unsecured Home Improvement Loan or Contract.
The Assets included in the Trust Fund for a Series may be subject to
various types of payment provisions. Such Assets may consist of:
o "Level Payment Assets," which may provide for the payment of interest
and full repayment of principal in level monthly payments with a fixed
rate of interest computed on their declining principal balances;
o "Adjustable Rate Assets," which may provide for periodic adjustments
to their rates of interest to equal the sum (which may be rounded) of
a fixed margin and an index;
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o "Buy Down Assets," which are Assets for which funds have been provided
by someone other than the related obligors to reduce the obligors'
monthly payments during the early period after origination of such
Assets;
o "Increasing Payment Assets," as described below;
o "Interest Reduction Assets," which provide for the one-time reduction
of the interest rate payable thereon;
o "GEM Assets," which provide for (a) monthly payments during the first
year after origination that are at least sufficient to pay interest
due thereon, and (b) an increase in such monthly payments in
subsequent years at a predetermined rate resulting in full repayment
over a shorter term than the initial amortization terms of such
Assets;
o "GPM Assets," which allow for payments during a portion of their terms
which are or may be less than the amount of interest due on the unpaid
principal balances thereof, and which unpaid interest will be added to
the principal balances of such Assets and will be paid, together with
interest thereon, in later years;
o "Step-up Rate Assets" which provide for interest rates that increase
over time;
o "Balloon Payment Assets" which are mortgage loans that are not fully
amortizing over their terms and, thus, will require a lump-sum payment
at their stated maturity;
o "Interest-Only Assets" which provide for the payment of interest at
the related interest rate, but no payment of principal, for a certain
period of time following the origination of the asset;
o "Additional Collateral Assets" which are assets that are either (i)
secured by a security interest in additional collateral (normally
securities) owned by the borrower or (ii) supported by a third party
guarantee (usually a parent of the borrower) which is in turn secured
by a security interest in collateral (usually securities) owned by
such guarantor;
o "Convertible Assets" which are Adjustable Rate Assets subject to
provisions pursuant to which, subject to certain limitations, the
related obligors may exercise an option to convert the adjustable
interest rate to a fixed interest rate; and
o "Bi-weekly Assets," which provide for obligor payments to be made on a
bi-weekly basis.
An "Increasing Payment Asset" is an Asset that provides for monthly
payments that are fixed for an initial period to be specified in the related
prospectus supplement and which increase thereafter (at a predetermined rate
expressed as a percentage of the monthly payment during the preceding payment
period, subject to any caps on the amount of any single monthly payment
increase) for a period to be specified in the related prospectus supplement from
the date of origination, after which the monthly payment is fixed at a
level-payment amount so as to fully amortize the Asset over its remaining term
to maturity. The scheduled monthly payment with respect to an Increasing Payment
Asset is the total amount required to be paid each month in accordance with its
terms and equals the sum of (1) the obligor's monthly payments referred to
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in the preceding sentence and (2) in the case of certain Increasing Payment
Assets, payments made by the respective Servicers pursuant to buy-down or
subsidy agreements. The obligor's initial monthly payments for each Increasing
Payment Asset are set at the level-payment amount that would apply to an
otherwise identical Level Payment Asset having an interest rate a certain number
of percentage points below the Asset Rate of such Increasing Payment Asset. The
obligor's monthly payments on each Increasing Payment Asset, together with any
payments made thereon by the related Servicers pursuant to buy-down or subsidy
agreements, will in all cases be sufficient to allow payment of accrued interest
on such Increasing Payment Asset at the related interest rate, without negative
amortization. An obligor's monthly payments on such an Asset may, however, not
be sufficient to result in any reduction of the principal balance of such Asset
until after the period when such payments may be increased.
The Securities will be entitled to payment only from the assets of the
related Trust Fund and will not be entitled to payments in respect of the assets
of any other trust fund established by the Depositor. If specified in the
related prospectus supplement, the assets of a Trust Fund will consist of
certificates representing beneficial ownership interests in, or indebtedness of,
another trust fund that contains the Assets.
Mortgage Loans
General
Each Mortgage Loan will generally be secured by a lien on (i) a one-to
four-family residential property or a security interest in shares issued by a
cooperative housing corporation (a "Single Family Property" and the related
Mortgage Loan a "Single Family Mortgage Loan") or (ii) a primarily residential
property which consists of five or more residential dwelling units, and which
may include limited retail, office or other commercial space (a "Multifamily
Property" and the related Mortgage Loan a "Multifamily Mortgage Loan"). Single
Family Properties and Multifamily Properties are sometimes referred to herein
collectively as "Mortgaged Properties." To the extent specified in the related
prospectus supplement, the Mortgage Loans will be secured by first and/or junior
mortgages or deeds of trust or other similar security instruments creating a
first or junior lien on Mortgaged Property. The Mortgaged Properties may include
apartments owned by cooperative housing corporations ("Cooperatives"). The
Mortgaged Properties may include leasehold interests in properties, the title to
which is held by third party lessors. The term of any such leasehold shall
exceed the term of the related mortgage note by at least five years or such
other time period specified in the related prospectus supplement. The Mortgage
Loans may include (i) fixed or adjustable rate conventional mortgage loans which
are secured by a first lien on one- to four-family residential property ("First
Lien Mortgage Loans"), (ii) closed-end and/or revolving home equity loans or
certain balances thereof secured by first liens or junior liens on one- to four-
family residential property ("Home Equity Loans") and/or (iii) secured home
improvement installment sales contracts and secured installment loan agreements
("Home Improvement Contracts"). In addition, the Mortgage Loans may include
certain Mortgage Loans evidenced by contracts ("Land Sale Contracts") for the
sale of properties pursuant to which the mortgagor promises to pay the amount
due thereon to the holder thereof with fee title to the related property held by
such holder until the mortgagor has made all of the payments required pursuant
to such Land Sale Contract, at which time fee title is conveyed to the
mortgagor. The Originator of each
23
Mortgage Loan will have been a person other than the Depositor. The related
prospectus supplement will indicate if any person who originated the Mortgage
Loans (each an "Originator") is an affiliate of the Depositor. The Mortgage
Loans will be evidenced by promissory notes (the "Mortgage Notes") secured by
mortgages, deeds of trust or other security instruments (the "Mortgages")
creating a lien on the Mortgaged Properties.
Loan-to-Value Ratio
The "Loan-to-Value Ratio" of a Mortgage Loan at any given time is the ratio
(expressed as a percentage) of the then outstanding principal balance of the
Mortgage Loan to the Value of the related Mortgaged Property. The "Value" of a
Mortgaged Property, other than with respect to Refinance Loans, is generally the
lesser of (a) the appraised value determined in an appraisal obtained by the
originator at origination of such loan and (b) the sales price for such
property. "Refinance Loans" are loans made to refinance existing loans. Unless
otherwise set forth in the related prospectus supplement, the Value of the
Mortgaged Property securing a Refinance Loan is the appraised value thereof
determined in an appraisal obtained at the time of origination of the Refinance
Loan. The value of a Mortgaged Property as of the date of initial issuance of
the related Series of Securities may be less than the Value at origination and
will fluctuate from time to time based upon changes in economic conditions and
the real estate market.
Mortgage Loan Information in Prospectus Supplements
Each prospectus supplement will contain information, as of the dates
specified in such prospectus supplement and to the extent then applicable and
specifically known to the Depositor, with respect to the Mortgage Loans,
including:
o the aggregate outstanding principal balance and the largest, smallest
and average outstanding principal balance of the Mortgage Loans as of
the applicable cut-off date (the "Cut-off Date") specified in the
prospectus supplement,
o the type of property securing the Mortgage Loans,
o the weighted average (by principal balance) of the original and
remaining terms to maturity of the Mortgage Loans,
o the earliest and latest origination date and maturity date of the
Mortgage Loans,
o the range of the Loan-to-Value Ratios at origination of the Mortgage
Loans,
o the Mortgage Rates or range of Mortgage Rates and the weighted average
Mortgage Rate borne by the Mortgage Loans,
o the state or states in which most of the Mortgaged Properties are
located,
o information with respect to the prepayment provisions, if any, of the
Mortgage Loans,
o with respect to Mortgage Loans with adjustable Mortgage Rates ("ARM
Loans"), the index, the frequency of the adjustment dates, the range
of margins added to the index, and
24
the maximum Mortgage Rate or monthly payment variation at the time of
any adjustment thereof and over the life of the ARM Loan,
o information regarding the payment characteristics of the Mortgage
Loans, including without limitation balloon payment and other
amortization provisions,
o the number of Mortgage Loans that are delinquent and the number of
days or ranges of the number of days such Mortgage Loans are
delinquent and
o the material underwriting standards used for the Mortgage Loans.
If specific information respecting the Mortgage Loans is not known to the
Depositor at the time Securities are initially offered, more general information
of the nature described above will be provided in the prospectus supplement, and
specific information will be set forth in a report which will be available to
purchasers of the related Securities at or before the initial issuance thereof
and will be filed as part of a Current Report on Form 8-K with the Securities
and Exchange Commission (the "SEC") after such initial issuance. Notwithstanding
the foregoing, the characteristics of the Mortgage Loans included in a Trust
Fund will not vary by more than five percent (by aggregate principal balance as
of the Cut-off Date) from the characteristics thereof that are described in the
related prospectus supplement.
The related prospectus supplement will specify whether the Mortgage Loans
include (i) First Lien Mortgage Loans, (ii) Home Equity Loans, which may be
secured by Mortgages that are junior to other liens on the related Mortgaged
Property and/or (iii) Home Improvement Contracts originated by a home
improvement contractor and secured by a Mortgage on the related Mortgaged
Property that is junior to other liens on the Mortgaged Property. The home
improvements purchased with the Home Improvement Contracts typically include
replacement windows, house siding, roofs, swimming pools, satellite dishes,
kitchen and bathroom remodeling goods, solar heating panels, patios, decks, room
additions and garages. The related prospectus supplement will specify whether
the Home Improvement Contracts are partially insured under Title I of the
National Housing Act of 1934 (the "National Housing Act") and, if so, the
limitations on such insurance. In addition, the related prospectus supplement
will specify whether the Mortgage Loans contain certain Mortgage Loans evidenced
by Land Sale Contracts.
Payment Provisions of the Mortgage Loans
All of the Mortgage Loans will provide for payments of principal, interest
or both, on due dates that occur monthly, quarterly or semi-annually or at such
other interval as is specified in the related prospectus supplement or for
payments in another manner described in the related prospectus supplement. Each
Mortgage Loan may provide for no accrual of interest or for accrual of interest
thereon at an interest rate (a "Mortgage Rate") that is fixed over its term or
that adjusts from time to time, or that may be converted from an adjustable to a
fixed Mortgage Rate or a different adjustable Mortgage Rate, or from a fixed to
an adjustable Mortgage Rate, from time to time pursuant to an election or as
otherwise specified on the related Mortgage Note, in each case as described in
the related prospectus supplement. Each Mortgage Loan may provide for scheduled
payments to maturity or payments that adjust from time to time to accommodate
changes in the Mortgage Rate or to reflect the occurrence of certain events or
that adjust on the basis of other methodologies, and may provide for negative
amortization or
25
accelerated amortization, in each case as described in the related prospectus
supplement. Each Mortgage Loan may be fully amortizing or require a balloon
payment due on its stated maturity date, in each case as described in the
related prospectus supplement. Each Mortgage Loan may contain prohibitions on
prepayment (a "Lock-out Period" and, the date of expiration thereof, a "Lock-out
Date") or require payment of a premium or a yield maintenance penalty (a
"Prepayment Premium") in connection with a prepayment, in each case as described
in the related prospectus supplement. In the event that holders of any Class or
Classes of Offered Securities will be entitled to all or a portion of any
Prepayment Premiums collected in respect of Mortgage Loans, the related
prospectus supplement will specify the method or methods by which any such
amounts will be allocated. See "--Assets" above.
Revolving Credit Line Loans
As more fully described in the related prospectus supplement, the Mortgage
Loans may consist, in whole or in part, of revolving Home Equity Loans or
certain balances thereof ("Revolving Credit Line Loans"). Interest on each
Revolving Credit Line Loan, excluding introductory rates offered from time to
time during promotional periods, may be computed and payable monthly on the
average daily outstanding principal balance of such loan. From time to time
prior to the expiration of the related draw period specified in a Revolving
Credit Line Loan, principal amounts on such Revolving Credit Line Loan may be
drawn down (up to a maximum amount as set forth in the related prospectus
supplement) or repaid. If specified in the related prospectus supplement, new
draws by borrowers under the Revolving Credit Line Loans will automatically
become part of the Trust Fund described in such prospectus supplement. As a
result, the aggregate balance of the Revolving Credit Line Loans will fluctuate
from day to day as new draws by borrowers are added to the Trust Fund and
principal payments are applied to such balances and such amounts will usually
differ each day, as more specifically described in the related prospectus
supplement. Under certain circumstances, under a Revolving Credit Line Loan, a
borrower may, during the related draw period, choose an interest only payment
option, during which the borrower is obligated to pay only the amount of
interest which accrues on the loan during the billing cycle, and may also elect
to pay all or a portion of the principal. An interest only payment option may
terminate at the end of the related draw period, after which the borrower must
begin paying at least a minimum monthly portion of the average outstanding
principal balance of the loan.
Unsecured Home Improvement Loans
The Unsecured Home Improvement Loans may consist of conventional unsecured
home improvement loans and FHA insured unsecured home improvement loans. Except
as otherwise set forth in the related prospectus supplement, the Unsecured Home
Improvement Loans will be fully amortizing and will bear interest at a fixed or
variable annual percentage rate.
Unsecured Home Improvement Loan Information in Prospectus Supplements
Each prospectus supplement will contain information, as of the dates
specified in such prospectus supplement and to the extent then applicable and
specifically known to the Depositor, with respect to the Unsecured Home
Improvement Loans, including:
26
o the aggregate outstanding principal balance and the largest, smallest
and average outstanding principal balance of the Unsecured Home
Improvement Loans as of the applicable Cut-Off Date,
o the weighted average (by principal balance) of the original and
remaining terms to maturity of the Unsecured Home Improvement Loans,
o the earliest and latest origination date and maturity date of the
Unsecured Home Improvements Loans,
o the interest rates or range of interest rates and the weighted average
interest rates borne by the Unsecured Home Improvement Loans,
o the state or states in which most of the Unsecured Home Improvement
Loans were originated, o information with respect to the prepayment
provisions, if any, of the Unsecured Home Improvement Loans,
o with respect to the Unsecured Home Improvement Loans with adjustable
interest rates ("ARM Unsecured Home Improvement Loans"), the index,
the frequency of the adjustment dates, the range of margins added to
the index, and the maximum interest rate or monthly payment variation
at the time of any adjustment thereof and over the life of the ARM
Unsecured Home Improvement Loan,
o information regarding the payment characteristics of the Unsecured
Home Improvement Loan,
o the number of Unsecured Home Improvement Loans that are delinquent and
the number of days or ranges of the number of days such Unsecured Home
Improvement Loans are delinquent and
o the material underwriting standards used for the Unsecured Home
Improvement Loans.
If specific information respecting the Unsecured Home Improvement Loans is not
known to the Depositor at the time Securities are initially offered, more
general information of the nature described above will be provided in the
prospectus supplement, and specific information will be set forth in a report
which will be available to purchasers of the related Securities at or before the
initial issuance thereof and will be filed as part of a Current Report on Form
8-K with the SEC after such initial issuance. Notwithstanding the foregoing, the
characteristics of the Unsecured Home Improvement Loans included in a Trust Fund
will not vary by more than five percent (by aggregate principal balance as of
the Cut-off Date) from the characteristics thereof that are described in the
related prospectus supplement.
27
Contracts
General
To the extent provided in the related prospectus supplement, each Contract
will be secured by a security interest in a new or used manufactured home (each,
a "Manufactured Home"). Such prospectus supplement will specify the states or
other jurisdictions in which the Manufactured Homes are located as of the
related Cut-off Date. The method of computing the "Loan-to-Value Ratio" of a
Contract will be described in the related prospectus supplement.
Contract Information in Prospectus Supplements
Each prospectus supplement will contain certain information, as of the
dates specified in such prospectus supplement and to the extent then applicable
and specifically known to the Depositor, with respect to the Contracts,
including:
o the aggregate outstanding principal balance and the largest, smallest
and average outstanding principal balance of the Contracts as of the
applicable Cut-off Date,
o whether the Manufactured Homes were new or used as of the origination
of the related Contracts,
o the weighted average (by principal balance) of the original and
remaining terms to maturity of the Contracts,
o the earliest and latest origination date and maturity date of the
Contracts,
o the range of the Loan-to-Value Ratios at origination of the Contracts,
o the Contract Rates or range of Contract Rates and the weighted average
Contract Rate borne by the Contracts,
o the state or states in which most of the Manufactured Homes are
located at origination,
o information with respect to the prepayment provisions, if any, of the
Contracts,
o with respect to Contracts with adjustable Contract Rates ("ARM
Contracts"), the index, the frequency of the adjustment dates, and the
maximum Contract Rate or monthly payment variation at the time of any
adjustment thereof and over the life of the ARM Contract,
o the number of Contracts that are delinquent and the number of days or
ranges of the number of days such Contracts are delinquent,
o information regarding the payment characteristics of the Contracts and
o the material underwriting standards used for the Contracts.
If specific information respecting the Contracts is not known to the Depositor
at the time Securities are initially offered, more general information of the
nature described above will be
28
provided in the prospectus supplement, and specific information will be set
forth in a report which will be available to purchasers of the related
Securities at or before the initial issuance thereof and will be filed as part
of a Current Report on Form 8-K with the SEC after such initial issuance.
Notwithstanding the foregoing, the characteristics of the Contracts included in
a Trust Fund will not vary by more than five percent (by aggregate principal
balance as of the Cut-off Date) from the characteristics thereof that are
described in the related prospectus supplement.
Payment Provisions of the Contracts
All of the Contracts will provide for payments of principal, interest or
both, on due dates that occur monthly or at such other interval as is specified
in the related prospectus supplement or for payments in another manner described
in the prospectus supplement. Each Contract may provide for no accrual of
interest or for accrual of interest thereon at an annual percentage rate (a
"Contract Rate") that is fixed over its term or that adjusts from time to time,
or as otherwise specified in the related prospectus supplement. Each Contract
may provide for scheduled payments to maturity or payments that adjust from time
to time to accommodate changes in the Contract Rate as otherwise described in
the related prospectus supplement. See "--Assets" above.
Pre-Funding Account
To the extent provided in a prospectus supplement, a portion of the
proceeds of the issuance of Securities may be deposited into an account
maintained with the Trustee (a "Pre-Funding Account"). In such event, the
Depositor will be obligated (subject only to the availability thereof) to sell
at a predetermined price, and the Trust Fund for the related Series of
Securities will be obligated to purchase (subject to the availability thereof),
additional Assets (the "Subsequent Assets") from time to time (as frequently as
daily) within the period (generally not to exceed three months) specified in the
related prospectus supplement (the "Pre-Funding Period") after the issuance of
such Series of Securities having an aggregate principal balance approximately
equal to the amount on deposit in the Pre-Funding Account (the "Pre-Funded
Amount") for such Series on the date of such issuance. The Pre-Funded Amount
with respect to a Series is not expected to exceed 25% of the aggregate initial
Security Balance of the related Securities. Any Subsequent Assets will be
required to satisfy certain eligibility criteria more fully set forth in the
applicable Agreement, which eligibility criteria will be consistent with the
eligibility criteria of the Assets initially included in the Trust Fund, subject
to such exceptions as are expressly stated in the prospectus supplement. For
example, the Subsequent Assets will be subject to the same underwriting
standards, representations and warranties as the Assets initially included in
the Trust Fund. In addition, certain conditions must be satisfied before the
Subsequent Assets are transferred into the Trust Fund such as the delivery to
the Rating Agencies and the Trustee of certain opinions of counsel (including
bankruptcy, corporate and tax opinions).
Any portion of the Pre-Funded Amount remaining in the Pre-Funding Account
at the end of the Pre-Funding Period will be used to prepay one or more Classes
of Securities in the amounts and in the manner specified in the related
prospectus supplement. In addition, if specified in the related prospectus
supplement, the Depositor may be required to deposit cash into an account
maintained by the Trustee (the "Capitalized Interest Account") for the purpose
of assuring the availability of funds to pay interest with respect to the
Securities during the Pre-Funding Period.
29
Any amount remaining in the Capitalized Interest Account at the end of the
Pre-Funding Period will be remitted as specified in the related prospectus
supplement.
Accounts
Each Trust Fund will include one or more accounts, established and
maintained on behalf of the Securityholders into which the person or persons
designated in the related prospectus supplement will, to the extent described
herein and in such prospectus supplement deposit all payments and collections
received or advanced with respect to the Assets and other assets in the Trust
Fund. Such an account may be maintained as an interest bearing or a non-interest
bearing account, and funds held therein may be held as cash or invested in
certain short-term, investment grade obligations, in each case as described in
the related prospectus supplement. See "Description of the Agreements--Material
Terms of the Pooling and Servicing Agreements and Underlying Servicing
Agreements--Collection Account and Related Accounts."
Credit Support
If so provided in the related prospectus supplement, partial or full
protection against certain defaults and losses on the Assets in the related
Trust Fund may be provided to one or more Classes of Securities in the related
Series in the form of subordination of one or more other Classes of Securities
in such Series or by one or more other types of credit support, such as a letter
of credit, insurance policy, guarantee, reserve fund or another type of credit
support, or a combination thereof (any such coverage with respect to the
Securities of any Series, "Credit Support"). The amount and types of coverage,
the identification of the entity providing the coverage (if applicable) and
related information with respect to each type of Credit Support, if any, will be
described in the prospectus supplement for a Series of Securities. See "Risk
Factors--Risks Associated with the Securities--Credit Enhancement is Limited in
Amount and Coverage" and "Description of Credit Support."
Cash Flow Agreements
If so provided in the related prospectus supplement, the Trust Fund may
include guaranteed investment contracts pursuant to which moneys held in the
funds and accounts established for the related Series will be invested at a
specified rate. The Trust Fund may also include certain other agreements, such
as interest rate exchange agreements, interest rate cap or floor agreements,
currency exchange agreements or similar agreements provided to reduce the
effects of interest rate or currency exchange rate fluctuations on the Assets or
on one or more Classes of Securities. Currency exchange agreements might be
included in the Trust Fund if some or all of the Mortgage Loans were denominated
in a non-United States currency. The principal terms of any such guaranteed
investment contract or other agreement (any such agreement, a "Cash Flow
Agreement"), including, without limitation, provisions relating to the timing,
manner and amount of payments thereunder and provisions relating to the
termination thereof, will be described in the prospectus supplement for the
related Series. In addition, the related prospectus supplement will provide
certain information with respect to the obligor under any such Cash Flow
Agreement.
30
USE OF PROCEEDS
The net proceeds to be received from the sale of the Securities will be
applied by the Depositor to the purchase of Assets, or the repayment of the
financing incurred in such purchase, and to pay for certain expenses incurred in
connection with such purchase of Assets and sale of Securities. The Depositor
expects to sell the Securities from time to time, but the timing and amount of
offerings of Securities will depend on a number of factors, including the volume
of Assets acquired by the Depositor, prevailing interest rates, availability of
funds and general market conditions.
YIELD CONSIDERATIONS
General
The yield on any Offered Security will depend on the price paid by the
holder of the Security (the "Securityholder"), the Pass-Through Rate of the
Security, the receipt and timing of receipt of distributions on the Security and
the weighted average life of the Assets in the related Trust Fund (which may be
affected by prepayments, defaults, liquidations or repurchases). See "Risk
Factors--Risks Associated with the Securities--Rate of Prepayment on Mortgage
Loans May Adversely Affect Average Lives and Yields on the Securities."
Pass-Through Rate and Interest Rate
Securities of any Class within a Series may have fixed, variable or
adjustable Pass-Through Rates or interest rates, which may or may not be based
upon the interest rates borne by the Assets in the related Trust Fund. The
prospectus supplement with respect to any Series of Securities will specify the
Pass-Through Rate or interest rate for each Class of such Securities or, in the
case of a variable or adjustable Pass-Through Rate or interest rate, the method
of determining the Pass-Through Rate or interest rate; the effect, if any, of
the prepayment of any Asset on the Pass-Through Rate or interest rate of one or
more Classes of Securities; and whether the distributions of interest on the
Securities of any Class will be dependent, in whole or in part, on the
performance of any obligor under a Cash Flow Agreement.
If so specified in the related prospectus supplement, the effective yield
to maturity to each holder of Securities entitled to payments of interest will
be below that otherwise produced by the applicable Pass-Through Rate or interest
rate and purchase price of such Security because, while interest may accrue on
each Asset during a certain period (each, an "Accrual Period"), the distribution
of such interest will be made on a day which may be several days, weeks or
months following the period of accrual.
Timing of Payment of Interest
Each payment of interest on the Securities (or addition to the Security
Balance of a Class of Accrual Securities) on the monthly, quarterly or other
periodic date specified in the related prospectus supplement on which
distributions will be made to holders of Securities (a "Distribution Date") will
include interest accrued during the Accrual Period for such Distribution Date.
As indicated above under "--Pass-Through Rate and Interest Rate," if the Accrual
Period ends on a date other than the day before a Distribution Date for the
related Series,
31
the yield realized by the holders of such Securities may be lower than the yield
that would result if the Accrual Period ended on such day before the
Distribution Date.
Payments of Principal; Prepayments
The yield to maturity on the Securities will be affected by the rate of
principal payments on the Assets, including principal prepayments on Mortgage
Loans and Contracts resulting from both voluntary prepayments by the borrowers
and involuntary liquidations. The rate at which principal prepayments occur on
the Mortgage Loans and Contracts will be affected by a variety of factors,
including, without limitation, the terms of the Mortgage Loans and Contracts,
the level of prevailing interest rates, the availability of mortgage credit and
economic, demographic, geographic, tax, legal and other factors. In general,
however, if prevailing interest rates fall significantly below the Mortgage
Rates on the Mortgage Loans comprising or underlying the Assets in a particular
Trust Fund, such Mortgage Loans are likely to be the subject of higher principal
prepayments than if prevailing rates remain at or above the rates borne by such
Mortgage Loans. In this regard, it should be noted that certain Assets may
consist of Mortgage Loans with different Mortgage Rates. The rate of principal
payments on some or all of the Classes of Securities of a Series will correspond
to the rate of principal payments on the Assets in the related Trust Fund and is
likely to be affected by the existence of Lock-out Periods and Prepayment
Premium provisions of the Mortgage Loans underlying or comprising such Assets,
and by the extent to which the servicer of any such Mortgage Loan is able to
enforce such provisions. Mortgage Loans with a Lock-out Period or a Prepayment
Premium provision, to the extent enforceable, generally would be expected to
experience a lower rate of principal prepayments than otherwise identical
Mortgage Loans without such provisions, with shorter Lock-out Periods or with
lower Prepayment Premiums. Because of the depreciating nature of manufactured
housing, which limits the possibilities for refinancing, and because the terms
and principal amounts of manufactured housing contracts are generally shorter
and smaller than the terms and principal amounts of mortgage loans secured by
site-built homes, changes in interest rates have a correspondingly smaller
effect on the amount of the monthly payments on manufactured housing contracts
than on the amount of the monthly payments on mortgage loans secured by
site-built homes. Consequently, changes in interest rates may play a smaller
role in prepayment behavior of manufactured housing contracts than they do in
the prepayment behavior of loans secured by mortgage on site-built homes.
Conversely, local economic conditions and certain of the other factors mentioned
above may play a larger role in the prepayment behavior of manufactured housing
contracts than they do in the prepayment behavior of loans secured by mortgages
on site-built homes.
If the purchaser of a Security offered at a discount calculates its
anticipated yield to maturity based on an assumed rate of distributions of
principal that is faster than that actually experienced on the Assets, the
actual yield to maturity will be lower than that so calculated. Conversely, if
the purchaser of a Security offered at a premium calculates its anticipated
yield to maturity based on an assumed rate of distributions of principal that is
slower than that actually experienced on the Assets, the actual yield to
maturity will be lower than that so calculated. In either case, if so provided
in the prospectus supplement for a Series of Securities, the effect on yield on
one or more Classes of the Securities of such Series of prepayments of the
Assets in the related Trust Fund may be mitigated or exacerbated by any
provisions for sequential or selective distribution of principal to such
Classes.
32
When a full prepayment is made on a Mortgage Loan or a Contract, the
obligor is charged interest on the principal amount of the Mortgage Loan or
Contract so prepaid for the number of days in the month actually elapsed up to
the date of the prepayment or such other period specified in the related
prospectus supplement. Generally, the effect of prepayments in full will be to
reduce the amount of interest paid in the following month to holders of
Securities entitled to payments of interest because interest on the principal
amount of any Mortgage Loan or Contract so prepaid will be paid only to the date
of prepayment rather than for a full month. A partial prepayment of principal is
applied so as to reduce the outstanding principal balance of the related
Mortgage Loan or Contract as of the Due Date in the month in which such partial
prepayment is received or such other date as is specified in the related
prospectus supplement.
The timing of changes in the rate of principal payments on the Assets may
significantly affect an investor's actual yield to maturity, even if the average
rate of distributions of principal is consistent with an investor's expectation.
In general, the earlier a principal payment is received on the Mortgage Loans
and distributed on a Security, the greater the effect on such investor's yield
to maturity. The effect on an investor's yield of principal payments occurring
at a rate higher (or lower) than the rate anticipated by the investor during a
given period may not be offset by a subsequent like decrease (or increase) in
the rate of principal payments.
The Securityholder will bear the risk of being able to reinvest principal
received in respect of a Security at a yield at least equal to the yield on such
Security.
Prepayments--Maturity and Weighted Average Life
The rates at which principal payments are received on the Assets included
in or comprising a Trust Fund and the rate at which payments are made from any
Credit Support or Cash Flow Agreement for the related Series of Securities may
affect the ultimate maturity and the weighted average life of each Class of such
Series. Prepayments on the Mortgage Loans or Contracts comprising or underlying
the Assets in a particular Trust Fund will generally accelerate the rate at
which principal is paid on some or all of the Classes of the Securities of the
related Series.
If so provided in the prospectus supplement for a Series of Securities, one
or more Classes of Securities may have a final scheduled Distribution Date,
which is the date on or prior to which the stated principal amount (the
"Security Balance") thereof is scheduled to be reduced to zero, calculated on
the basis of the assumptions applicable to such Series set forth therein.
Weighted average life refers to the average amount of time that will elapse from
the date of issue of a security until each dollar of principal of such security
will be repaid to the investor. The weighted average life of a Class of
Securities of a Series will be influenced by the rate at which principal on the
Assets is paid to such Class, which may be in the form of scheduled amortization
or prepayments (for this purpose, the term "prepayment" includes prepayments, in
whole or in part, and liquidations due to default).
In addition, the weighted average life of the Securities may be affected by
the varying maturities of the Assets in a Trust Fund. If any Assets in a
particular Trust Fund have actual terms to maturity less than those assumed in
calculating final scheduled Distribution Dates for the Classes of Securities of
the related Series, one or more Classes of such Securities may be fully paid
prior to their respective final scheduled Distribution Dates, even in the
absence of prepayments. Accordingly, the prepayment experience of the Assets
will, to some extent, be a
33
function of the mix of Mortgage Rates or Contract Rates and maturities of the
Mortgage Loans or Contracts comprising or underlying such Assets. See
"Description of the Trust Funds."
Prepayments on loans are also commonly measured relative to a prepayment
standard or model, such as the Constant Prepayment Rate ("CPR") prepayment model
or the Standard Prepayment Assumption ("SPA") prepayment model, each as
described below. CPR represents a constant assumed rate of prepayment each month
relative to the then outstanding principal balance of a pool of loans for the
life of such loans. SPA represents an assumed rate of prepayment each month
relative to the then outstanding principal balance of a pool of loans. A
prepayment assumption of 100% of SPA assumes prepayment rates of 0.2% per annum
of the then outstanding principal balance of such loans in the first month of
the life of the loans and an additional 0.2% per annum in each month thereafter
until the thirtieth month. Beginning in the thirtieth month and in each month
thereafter during the life of the loans, 100% of SPA assumes a constant
prepayment rate of 6% per annum each month.
Neither CPR nor SPA nor any other prepayment model or assumption purports
to be a historical description of prepayment experience or a prediction of the
anticipated rate of prepayment of any pool of loans, including the Mortgage
Loans or Contracts underlying or comprising the Assets.
The prospectus supplement with respect to each Series of Securities may
contain tables, if applicable, setting forth the projected weighted average life
of each Class of Offered Securities of such Series and the percentage of the
initial Security Balance of each such Class that would be outstanding on
specified Distribution Dates based on the assumptions stated in such prospectus
supplement, including assumptions that prepayments on the Mortgage Loans
comprising or underlying the related Assets are made at rates corresponding to
various percentages of CPR, SPA or such other standard specified in such
prospectus supplement. Such tables and assumptions are intended to illustrate
the sensitivity of the weighted average life of the Securities to various
prepayment rates and will not be intended to predict or to provide information
that will enable investors to predict the actual weighted average life of the
Securities. It is unlikely that prepayment of any Mortgage Loans or Contracts
comprising or underlying the Assets for any Series will conform to any
particular level of CPR, SPA or any other rate specified in the related
prospectus supplement.
Other Factors Affecting Weighted Average Life
Type of Asset
If so specified in the related prospectus supplement, a number of Mortgage
Loans may have balloon payments due at maturity, (which may be a substantial
amount), and because the ability of a mortgagor to make a balloon payment
typically will depend upon its ability either to refinance the loan or to sell
the related Mortgaged Property, there is a risk that a number of Balloon Payment
Assets may default at maturity. The ability to obtain refinancing will depend on
a number of factors prevailing at the time refinancing or sale is required,
including, without limitation, real estate values, the mortgagor's financial
situation, prevailing mortgage loan interest rates, the mortgagor's equity in
the related Mortgaged Property, tax laws and prevailing general economic
conditions. Neither the Depositor, the Servicer, the Master Servicer (if any),
nor any of their affiliates will be obligated to refinance or repurchase any
Mortgage Loan or to
34
sell the Mortgaged Property except to the extent provided in the related
prospectus supplement. In the case of defaults, recovery of proceeds may be
delayed by, among other things, bankruptcy of the mortgagor or adverse
conditions in the market where the property is located. In order to minimize
losses on defaulted Mortgage Loans, the Servicer may, to the extent and under
the circumstances set forth in the related prospectus supplement, be permitted
to modify Mortgage Loans that are in default or as to which a payment default is
reasonably foreseeable. Any defaulted balloon payment or modification that
extends the maturity of a Mortgage Loan will tend to extend the weighted average
life of the Securities and may thereby lengthen the period of time elapsed from
the date of issuance of a Security until it is retired.
With respect to certain Mortgage Loans, including ARM Loans, the Mortgage
Rate at origination may be below the rate that would result if the index and
margin relating thereto were applied at origination. With respect to certain
Contracts, the Contract Rate may be "stepped up" during its term or may
otherwise vary or be adjusted. Under the applicable underwriting standards, the
mortgagor or obligor under each Mortgage Loan or Contract generally will be
qualified on the basis of the Mortgage Rate or Contract Rate in effect at
origination. The repayment of any such Mortgage Loan or Contract may thus be
dependent on the ability of the mortgagor or obligor to make larger level
monthly payments following the adjustment of the Mortgage Rate or Contract Rate.
In addition, certain Mortgage Loans may be subject to temporary buydown plans
("Buydown Mortgage Loans") pursuant to which the monthly payments made by the
mortgagor during the early years of the Mortgage Loan will be less than the
scheduled monthly payments thereon (the "Buydown Period"). The periodic increase
in the amount paid by the mortgagor of a Buydown Mortgage Loan during or at the
end of the applicable Buydown Period may create a greater financial burden for
the mortgagor, who might not have otherwise qualified for a mortgage, and may
accordingly increase the risk of default with respect to the related Mortgage
Loan.
The Mortgage Rates on certain ARM Loans subject to negative amortization
generally adjust monthly and their amortization schedules adjust less
frequently. During a period of rising interest rates as well as immediately
after origination (initial Mortgage Rates are generally lower than the sum of
the applicable index at origination and the related margin over such index at
which interest accrues), the amount of interest accruing on the principal
balance of such Mortgage Loans may exceed the amount of the minimum scheduled
monthly payment thereon. As a result, a portion of the accrued interest on
negatively amortizing Mortgage Loans may be added to the principal balance
thereof and will bear interest at the applicable Mortgage Rate. The addition of
any such deferred interest to the principal balance of any related Class or
Classes of Securities will lengthen the weighted average life thereof and may
adversely affect yield to holders thereof, depending upon the price at which
such Securities were purchased. In addition, with respect to certain ARM Loans
subject to negative amortization, during a period of declining interest rates,
it might be expected that each minimum scheduled monthly payment on such a
Mortgage Loan would exceed the amount of scheduled principal and accrued
interest on the principal balance thereof, and since such excess will be applied
to reduce the principal balance of the related Class or Classes of Securities,
the weighted average life of such Securities will be reduced and may adversely
affect yield to holders thereof, depending upon the price at which such
Securities were purchased.
35
As may be described in the related prospectus supplement, the applicable
Agreement may provide that all or a portion of the principal collected on or
with respect to the related Mortgage Loans may be applied by the related Trustee
to the acquisition of additional Mortgage Loans during a specified period
(rather than used to fund payments of principal to Securityholders during such
period) with the result that the related securities possess an interest-only
period, also commonly referred to as a revolving period, which will be followed
by an amortization period. Any such interest-only or revolving period may, upon
the occurrence of certain events to be described in the related prospectus
supplement, terminate prior to the end of the specified period and result in the
earlier than expected amortization of the related Securities.
In addition, and as may be described in the related prospectus supplement,
the related Agreement may provide that all or a portion of such collected
principal may be retained by the Trustee (and held in certain temporary
investments, including Mortgage Loans) for a specified period prior to being
used to fund payments of principal to Securityholders.
The result of such retention and temporary investment by the Trustee of
such principal would be to slow the amortization rate of the related Securities
relative to the amortization rate of the related Mortgage Loans, or to attempt
to match the amortization rate of the related Securities to an amortization
schedule established at the time such Securities are issued. Any such feature
applicable to any Securities may terminate upon the occurrence of events to be
described in the related prospectus supplement, resulting in the current funding
of principal payments to the related Securityholders and an acceleration of the
amortization of such Securities.
Termination
If so specified in the related prospectus supplement, a Series of
Securities may be subject to optional early termination through the repurchase
of the Assets in the related Trust Fund by the party specified therein, on any
date on which the aggregate principal balance of the Assets or the aggregate
Security Balance of the Securities of such Series declines to a percentage
specified in the related prospectus supplement (not to exceed 10%) of the
aggregate initial principal balance of such Assets or initial Security Balance
of such Securities, as the case may be, under the circumstances and in the
manner set forth therein. In addition, if so provided in the related prospectus
supplement, certain Classes of Securities may be purchased or redeemed in the
manner set forth therein. See "Description of the Securities--Termination."
Defaults
The rate of defaults on the Assets will also affect the rate, timing and
amount of principal payments on the Assets and thus the yield on the Securities.
In general, defaults on mortgage loans or contracts are expected to occur with
greater frequency in their early years. The rate of default on Mortgage Loans
which are refinance or limited documentation mortgage loans, and on Mortgage
Loans with high Loan-to-Value Ratios, may be higher than for other types of
Mortgage Loans. Furthermore, the rate and timing of prepayments, defaults and
liquidations on the Mortgage Loans and Contracts will be affected by the general
economic condition of the region of the country in which the related Mortgage
Properties or Manufactured Homes are located. The risk of delinquencies and loss
is greater and prepayments are less likely in regions where a weak or
deteriorating economy exists, as may be evidenced by, among other factors,
increasing unemployment or falling property values.
36
Foreclosures
The number of foreclosures or repossessions and the principal amount of the
Mortgage Loans or Contracts comprising or underlying the Assets that are
foreclosed or repossessed in relation to the number and principal amount of
Mortgage Loans or Contracts that are repaid in accordance with their terms will
affect the weighted average life of the Mortgage Loans or Contracts comprising
or underlying the Assets and that of the related Series of Securities.
Refinancing
At the request of a mortgagor, the Servicer may allow the refinancing of a
Mortgage Loan or Contract in any Trust Fund by accepting prepayments thereon and
permitting a new loan secured by a mortgage on the same property. In the event
of such a refinancing, the new loan would not be included in the related Trust
Fund and, therefore, such refinancing would have the same effect as a prepayment
in full of the related Mortgage Loan or Contract. A Servicer may, from time to
time, implement programs designed to encourage refinancing. Such programs may
include, without limitation, modifications of existing loans, general or
targeted solicitations, the offering of pre-approved applications, reduced
origination fees or closing costs, or other financial incentives. In addition,
Servicers may encourage the refinancing of Mortgage Loans or Contracts,
including defaulted Mortgage Loans or Contracts, that would permit creditworthy
borrowers to assume the outstanding indebtedness of such Mortgage Loans or
Contracts.
Due-on-Sale Clauses
Acceleration of mortgage payments as a result of certain transfers of
underlying Mortgaged Property is another factor affecting prepayment rates that
may not be reflected in the prepayment standards or models used in the relevant
prospectus supplement. A number of the Mortgage Loans comprising or underlying
the Assets may include "due-on-sale clauses" that allow the holder of the
Mortgage Loans to demand payment in full of the remaining principal balance of
the Mortgage Loans upon sale, transfer or conveyance of the related Mortgaged
Property. With respect to any Mortgage Loans, except as set forth in the related
prospectus supplement, the Servicer will generally enforce any due-on-sale
clause to the extent it has knowledge of the conveyance or proposed conveyance
of the underlying Mortgaged Property and it is entitled to do so under
applicable law; provided, however, that the Servicer will not take any action in
relation to the enforcement of any due-on-sale provision which would adversely
affect or jeopardize coverage under any applicable insurance policy. See
"Certain Legal Aspects of Mortgage Loans--Due-on-Sale Clauses" and "Description
of the Agreements--Material Terms of the Pooling and Servicing Agreements and
Underlying Servicing Agreements--Due-on-Sale Provisions." The Contracts, in
general, prohibit the sale or transfer of the related Manufactured Homes without
the consent of the Servicer and permit the acceleration of the maturity of the
Contracts by the Servicer upon any such sale or transfer that is not consented
to. It is expected that the Servicer will permit most transfers of Manufactured
Homes and not accelerate the maturity of the related Contracts. In certain
cases, the transfer may be made by a delinquent obligor in order to avoid a
repossession of the Manufactured Home. In the case of a transfer of a
Manufactured Home after which the Servicer desires to accelerate the maturity of
the related Contract, the Servicer's ability to do so will depend on the
enforceability under state law of the "due-on-sale clause". See "Certain Legal
Aspects of the Contracts--Transfers of Manufactured Homes; Enforceability of
Due-on-Sale Clauses."
37
THE DEPOSITOR
Wachovia Asset Securitization Issuance, Inc.LLC (the "Depositor") is an
===
indirect wholly-owned subsidiary of Wachovia Corporation and was
incorporatedconverted to a limited liability company in the State of North
============================================
Carolina on October 30, 2003. The Depositor was formerly Wachovia Asset
=======================================================================
Securitization, Inc., a North Carolina corporation formed on February 27, 1996.
==========================================================
The principal executive offices of the Depositor are located at One Wachovia
Center, 301 South College Street, Suite D, Charlotte, North Carolina 28288.
Its telephone number is (704) 371-2702.383-4634.
=========
The Depositor formerly was an indirect wholly-owned subsidiary of First
Union Corporation. On September 1, 2001, Wachovia Corporation was merged with
and into First Union Corporation with the later entity surviving. Upon
completion of the merger, the surviving entity changed its name to Wachovia
Corporation. As a result, the Depositor is now an indirect wholly-owned
subsidiary of Wachovia Corporation.
The Securities are not debt of the Depositor and the Depositor does not
==================================================
have, nor is it expected in the future to have, any significant assets any
===
obligation to make payments with respect to the Securities.
==========================================================
38
DESCRIPTION OF THE SECURITIES
General
The asset-backed certificates (the "Certificates") of a series (each, a
"Series") (including any Class of Certificates not offered hereby) will
represent the entire beneficial ownership interest in the trust fund (the
"Trust" or the "Trust Fund") created pursuant to the applicable Agreement. If a
Series of Securities includes asset-backed notes (the "Notes" and, together with
the Certificates, the "Securities"), such Notes will represent indebtedness of
the related Trust Fund and will be issued and secured pursuant to an Indenture.
Each Series of Securities will consist of one or more classes (each, a "Class")
of Securities that may:
o provide for the accrual of interest thereon based on
fixed, variable or adjustable rates;
o be senior (the "Senior Certificates" or the "Senior Notes" and,
collectively, "Senior Securities") or subordinate (the "Subordinate
Certificates" or the "Subordinate Notes" and, collectively,
"Subordinate Securities") to one or more other Classes of Securities
in respect of certain distributions on the Securities;
o be entitled either to (A) principal distributions, with
disproportionately low, nominal or no interest distributions or (B)
interest distributions, with disproportionately low, nominal or no
principal distributions (collectively, "Strip Securities");
o provide for distributions of accrued interest thereon commencing only
following the occurrence of certain events, such as the retirement of
one or more other Classes of Securities of such Series (collectively,
"Accrual Securities");
o provide for payments of principal as described in the related
prospectus supplement, from all or only a portion of the Assets in
such Trust Fund, to the extent of available funds, in each case as
described in the related prospectus supplement; and/or
o provide for distributions based on a combination of two or more
components thereof with one or more of the characteristics described
in this paragraph including a Strip Security component.
If so specified in the related prospectus supplement, distributions on one or
more Classes of a Series of Securities may be limited to collections from a
designated portion of the Assets in the related Trust Fund (each such portion of
Assets, an "Asset Group"). Any such Classes may include Classes of Securities of
a Series offered pursuant to this prospectus and a related prospectus supplement
(the "Offered Securities").
Each Class of Offered Securities of a Series will be issued in minimum
denominations corresponding to the Security Balances or, in the case of certain
Classes of Strip Securities, notional amounts or percentage interests specified
in the related prospectus supplement. The transfer of any Offered Securities may
be registered and such Securities may be exchanged without the payment of any
service charge payable in connection with such registration of transfer or
exchange, but the Depositor or the Trustee or any agent thereof may require
payment
39
of a sum sufficient to cover any tax or other governmental charge. One or more
Classes of Securities of a Series may be issued in fully registered,
certificated form ("Definitive Securities") or in book-entry form ("Book-Entry
Securities"), as provided in the related prospectus supplement. See "Risk
Factors--Risks Associated with the Securities--Book-Entry Securities May
Experience Certain Problems and "Description of the Securities--Book-Entry
Registration and Definitive Securities." Definitive Securities will be
exchangeable for other Securities of the same Class and Series of a like
aggregate Security Balance, notional amount or percentage interest but of
different authorized denominations. See "Risk Factors--Risks Associated with the
Securities--Securities May Not be Liquid."
Distributions
Distributions on the Securities of each Series will be made by or on behalf
of the Trustee on each Distribution Date as specified in the related prospectus
supplement from the Available Distribution Amount for such Series and such
Distribution Date. Distributions (other than the final distribution) will be
made to the persons in whose names the Securities are registered at the close of
business on, unless a different date is specified in the related prospectus
supplement, the last business day of the month preceding the month in which the
Distribution Date occurs (the "Record Date"), and the amount of each
distribution will be determined as of the close of business on the date
specified in the related prospectus supplement (the "Determination Date"). All
distributions with respect to each Class of Securities on each Distribution Date
will be allocated pro rata among the outstanding Securityholders in such Class
or by random selection or as described in the related prospectus supplement.
Payments will be made either by wire transfer in immediately available funds to
the account of a Securityholder at a bank or other entity having appropriate
facilities therefor, if such Securityholder has so notified the Trustee or other
person required to make such payments no later than the date specified in the
related prospectus supplement (and, if so provided in the related prospectus
supplement, holds Securities in the requisite amount specified therein), or by
check mailed to the address of the person entitled thereto as it appears on the
security register; provided, however, that the final distribution in retirement
of the Securities will be made only upon presentation and surrender of the
Securities at the location specified in the notice to Securityholders of such
final distribution.
Available Distribution Amount
All distributions on the Securities of each Series on each Distribution
Date will be made from the Available Distribution Amount described below, in
accordance with the terms described in the related prospectus supplement.
Generally, the "Available Distribution Amount" for each Distribution Date equals
the sum of the following amounts:
o the total amount of all cash on deposit in the related Collection
Account as of the corresponding Determination Date, exclusive of:
(a) all scheduled payments of principal and interest collected
but due on a date subsequent to the related Due Period (unless a
different period is specified in the related prospectus supplement, a
"Due Period" with respect to any Distribution Date will commence on
the second day of the month in which the immediately preceding
Distribution Date occurs, or the day after the Cut-off Date in the
case of the first Due Period, and will end on the first day of the
month of the related Distribution Date),
40
(b) all prepayments,
together with related payments of the interest thereon and related
Prepayment Premiums, all proceeds of any insurance policies to be
maintained in respect of each Asset (to the extent such proceeds are
not applied to the restoration of the Asset or released in accordance
with the normal servicing procedures of a Servicer, subject to the
terms and conditions applicable to the related Asset) (collectively,
"Insurance Proceeds"), all other amounts received and retained in
connection with the liquidation of Assets in default in the Trust Fund
("Liquidation Proceeds"), and other unscheduled recoveries received
subsequent to the related Due Period,
(c) all amounts in the Collection Account that are due or
reimbursable to the Depositor, the Trustee, an Asset Seller, a
Servicer, the Master Servicer or any other entity as specified in the
related prospectus supplement or that are payable in respect of
certain expenses of the related Trust Fund, and (d) all amounts
received for a repurchase of an Asset from the Trust Fund for
defective documentation or a breach of representation or warranty
received subsequent to the related Due Period;
o if the related prospectus supplement so provides, interest or
investment income on amounts on deposit in the Collection Account,
including any net amounts paid under any Cash Flow Agreements;
o all advances made by a Servicer or the Master Servicer (if any) or any
other entity as specified in the related prospectus supplement with
respect to such Distribution Date;
o if and to the extent the related prospectus supplement so provides,
amounts paid by a Servicer or any other entity as specified in the
related prospectus supplement with respect to interest shortfalls
resulting from prepayments during the related Prepayment Period; and
o to the extent not on deposit in the related Collection Account as of
the corresponding Determination Date, any amounts collected under,
from or in respect of any Credit Support with respect to such
Distribution Date.
As described below, the entire Available Distribution Amount will be
distributed among the related Securities (including any Securities not offered
hereby) on each Distribution Date, and accordingly will be released from the
Trust Fund and will not be available for any future distributions.
The related prospectus supplement for a Series of Securities will describe
any variation in the calculation of the Available Distribution Amount for such
Series.
Distributions of Interest on the Securities
Each Class of Securities (other than Classes of Strip Securities that have
no Pass-Through Rate or interest rate) may have a different Pass-Through Rate or
interest rate, which will be a fixed, variable or adjustable rate at which
interest will accrue on such Class or a Component thereof (the "Pass-Through
Rate" in the case of Certificates). The related prospectus supplement will
specify the Pass-Through Rate or interest rate for each Class or Component or,
in the case of a variable or adjustable Pass-Through Rate or interest rate, the
method for determining the Pass-Through Rate or interest rate. Interest on the
Securities will be calculated
41
on the basis of a 360-day year consisting of twelve 30-day months unless the
related prospectus supplement specifies a different basis.
Distributions of interest in respect of the Securities of any Class will be
made on each Distribution Date (other than any Class of Accrual Securities,
which will be entitled to distributions of accrued interest commencing only on
the Distribution Date, or under the circumstances, specified in the related
prospectus supplement, and any Class of Strip Securities that are not entitled
to any distributions of interest) based on the Accrued Security Interest for
such Class and such Distribution Date, subject to the sufficiency of the portion
of the Available Distribution Amount allocable to such Class on such
Distribution Date. Prior to the time interest is distributable on any Class of
Accrual Securities, the amount of Accrued Security Interest otherwise
distributable on such Class will be added to the Security Balance thereof on
each Distribution Date. With respect to each Class of Securities and each
Distribution Date (other than certain Classes of Strip Securities), "Accrued
Security Interest" will be equal to interest accrued during the related Accrual
Period on the outstanding Security Balance thereof immediately prior to the
Distribution Date, at the applicable Pass-Through Rate or interest rate, reduced
as described below. Accrued Security Interest on certain Classes of Strip
Securities will be equal to interest accrued during the related Accrual Period
on the outstanding notional amount thereof immediately prior to each
Distribution Date, at the applicable Pass-Through Rate or interest rate, reduced
as described below, or interest accrual in the manner described in the related
prospectus supplement. The method of determining the notional amount for a
certain Class of Strip Securities will be described in the related prospectus
supplement. Reference to notional amount is solely for convenience in certain
calculations and does not represent the right to receive any distributions of
principal. Unless otherwise provided in the related prospectus supplement, the
Accrued Security Interest on a Series of Securities will be reduced in the event
of prepayment interest shortfalls, which are shortfalls in collections of
interest for a full accrual period resulting from prepayments prior to the due
date in such accrual period on the Mortgage Loans or Contracts comprising or
underlying the Assets in the Trust Fund for such Series. The particular manner
in which such shortfalls are to be allocated among some or all of the Classes of
Securities of that Series will be specified in the related prospectus
supplement. The related prospectus supplement will also describe the extent to
which the amount of Accrued Security Interest that is otherwise distributable on
(or, in the case of Accrual Securities, that may otherwise be added to the
Security Balance of) a Class of Offered Securities may be reduced as a result of
any other contingencies, including delinquencies, losses and deferred interest
on or in respect of the Mortgage Loans or Contracts comprising or underlying the
Assets in the related Trust Fund. Unless otherwise provided in the related
prospectus supplement, any reduction in the amount of Accrued Security Interest
otherwise distributable on a Class of Securities by reason of the allocation to
such Class of a portion of any deferred interest on the Mortgage Loans or
Contracts comprising or underlying the Assets in the related Trust Fund will
result in a corresponding increase in the Security Balance of such Class. See
"Risk Factors--Risk Associated with the Securities--Rate of Prepayment on Assets
May Adversely Affect Average Lives and Yields on the Securities" and "Yield
Considerations."
Distributions of Principal of the Securities
The Securities of each series, other than certain Classes of Strip
Securities, will have a Security Balance which, at any time, will equal the then
maximum amount that the holder will be
42
entitled to receive in respect of principal out of the future cash flow on the
Assets and other assets included in the related Trust Fund. The outstanding
Security Balance of a Security will be reduced to the extent of distributions of
principal thereon from time to time and, if and to the extent so provided in the
related prospectus supplement, by the amount of losses incurred in respect of
the related Assets, may be increased in respect of deferred interest on the
related Mortgage Loans to the extent provided in the related prospectus
supplement and, in the case of Accrual Securities prior to the Distribution Date
on which distributions of interest are required to commence, will be increased
by any related Accrued Security Interest. If so specified in the related
prospectus supplement, the initial aggregate Security Balance of all Classes of
Securities of a Series will be greater than the outstanding aggregate principal
balance of the related Assets as of the applicable Cut-off Date. The initial
aggregate Security Balance of a series and each Class thereof will be specified
in the related prospectus supplement. Distributions of principal will be made on
each Distribution Date to the Class or Classes of Securities in the amounts and
in accordance with the priorities specified in the related prospectus
supplement. Certain Classes of Strip Securities with no Security Balance are not
entitled to any distributions of principal.
Categories of Classes of Securities
The Securities of any Series may be comprised of one or more Classes. Such
Classes, in general, fall into different categories. The following chart
identifies and generally defines certain of the more typical categories. The
prospectus supplement for a Series of Securities may identify the Classes which
comprise such Series by reference to the following categories or another
category specified in the applicable prospectus supplement.
Categories of Classes Definition
- --------------------- ----------
PRINCIPAL TYPES
Accretion Directed Certificates
or Notes.................................... A Class of Certificates or Notes that
receives principal payments from amounts
that would otherwise be distributed as
interest on specified Accrual
Certificates or Notes. Such principal
payments may be in lieu of or in
addition to principal payments from
principal receipts on the Assets for the
related Series.
Companion Certificates or Notes (also
sometimes referred to as "Support
Certificates" or "Support Notes")........... A Class of Certificates or Notes that is
entitled to receive principal payments
on any Distribution Date only if
scheduled payments have been made on
specified Planned Amortization
Certificates or Notes, Targeted
Amortization Certificates or Notes
and/or Scheduled Amortization
Certificates or Notes.
43
Component Certificates or Notes................ A Class of Certificates or Notes
consisting of two or more specified
components (each, a "Component") as
described in the applicable prospectus
supplement. The Components of a Class of
Component Certificates or Notes may have
different principal and/or interest
payment characteristics but together
constitute a single Class and do not
represent severable interests. Each
Component of a Class of Component
Certificates or Notes may be identified
as falling into one or more of the
categories in this chart.
Lockout Certificates or Notes.................. A Class of Senior Certificates or Notes
that is designed not to participate in
or to participate to a limited extent in
(i.e., to be "locked out" of), for a
specified period, the receipt of (1)
principal prepayments on the Assets that
are allocated disproportionately to the
Classes of Senior Certificates or Notes
of such Series as a group pursuant to a
"shifting interest" structure and/or (2)
scheduled principal payments on the
Assets that are allocated to the Classes
of Senior Certificates or Notes as a
group. A Class of Lockout Certificates
or Notes will typically not be entitled
to receive, or will be entitled to
receive only a restricted portion of,
distributions or principal prepayments
and/or scheduled principal payments, as
applicable, for a period of several
years, during which time all or a
portion of such principal payments that
it would otherwise be entitled to
receive in the absence of a "lockout"
structure will be distributed in
reduction of the principal balances of
other Classes of Senior Certificates or
Notes. Lockout Certificates or Notes are
designed to minimize weighted average
life volatility during the lockout
period.
Notional Amount Certificates or
Notes....................................... A Class of Certificates or Notes having
no principal balance and bearing
interest on the related notional amount.
The notional amount is used for purposes
of the determination of interest
distributions.
Pass-Through Certificates or
Notes ...................................... A Class of Senior Securities that is
entitled to receive all or a specified
percentage of the principal payments
that are distributable to the Senior
Certificates or applicable group of
Senior Certificates or Notes (other than
any Ratio Strip Certificates or Notes)
in the
44
aggregate on a Distribution Date and
that is not designated as a Class of
Sequential Pay Certificates or Notes.
Planned Amortization Certificates or
Notes (also sometimes referred to
as a "PAC Certificates" or "PAC
Notes")..................................... A Class of Certificates or Notes that is
designed to receive principal payments
using a predetermined principal balance
schedule derived by assuming two
constant prepayment rates for the
underlying Assets. These two rates are
the endpoints for the "structuring
range" for the Class of Planned
Amortization Certificates or Notes. The
Planned Amortization Certificates or
Notes in any Series of Securities may be
subdivided into different categories
(e.g., Planned Amortization Certificates
or Notes I ("PAC I"), Planned
Amortization Certificates or Notes II
("PAC II") and so forth) derived using
different structuring ranges and/or
payment priorities. A Class of PAC
Certificates or Notes is designed to
provide protection against volatility of
weighted average life if prepayments
occur at a constant rate within the
structuring range.
Ratio Strip Certificates or Notes.............. A Class of Certificates or Notes that is
entitled to receive a constant
proportion, or "ratio strip," of the
principal payments on the underlying
Assets.
Scheduled Amortization Certificates
or Notes (also sometimes referred
to as "Scheduled Certificates" or
"Scheduled Notes").......................... A Class of Certificates or Notes that is
designed to receive principal payments
using a predetermined principal balance
schedule but is not designated as a
Class of Planned Amortization
Certificates or Notes or Targeted
Amortization Certificates or Notes. The
schedule is derived by assuming either
two constant prepayment rates or a
single constant prepayment rate for the
underlying Assets. In the former case,
the two rates are the endpoints for the
"structuring range" for the Scheduled
Amortization Certificates or Notes and
such range generally is narrower than
that for a
45
Planned Amortization Certificates or
Notes. Typically, the Companion
Certificates or Notes for the applicable
Series of Certificates or Notes
generally will represent a smaller
percentage of the Class of Scheduled
Amortization Certificates or Notes than
Companion Certificates or Notes
generally would represent in relation to
a Class of Planned Amortization
Certificates or Notes or Targeted
Amortization Certificates or Notes. A
Class of Scheduled Amortization
Certificates or Notes is generally less
sensitive to weighted average life
volatility as a result of prepayments
than a Class of Companion Certificates
or Notes but more sensitive than a Class
of Planned Amortization Certificates or
Notes or Targeted Amortization
Certificates or Notes.
Senior Certificates or Notes................... A Class of Certificates or Notes that is
entitled to receive payments of
principal and interest on each
Distribution Date prior to the Classes
of Subordinated Securities.
Sequential Pay Certificates or
Notes....................................... A Class of Certificates or Notes that is
entitled to receive principal payments
in a prescribed sequence, that does not
have a predetermined principal balance
schedule and that, in most cases, is
entitled to receive payments of
principal continuously from the first
Distribution Date on which it receives
principal until it is retired. A Class
of Sequential Pay Certificates or Notes
may receive principal payments
concurrently with one or more other
Classes of Sequential Pay Certificates
or Notes. A single Class the is entitled
to receive principal payments before or
after other Classes in the same Series
of Securities may be identified as a
Class of Sequential Pay Certificates or
Notes.
Subordinated Certificates or
Notes....................................... A Class of Certificates or Notes that is
entitled to receive payments of
principal and interest on each
Distribution Date only after the Senior
Securities and Classes of Subordinated
Securities with higher priority of
distributions, if any, have received
their full principal and interest
entitlements.
Super Senior Certificates or Notes............. A Class of Senior Certificates or Notes
that will not
46
bear its share of certain losses after
the Classes of Subordinated Certificates
or Notes are no longer outstanding for
so long as one or more other specified
Classes of Senior Certificates or Notes
are outstanding.
Super Senior Support Certificates or
Notes....................................... A Class of Senior Certificates or Notes
that bears certain losses allocated to
one or more Classes of Super Senior
Certificates or Notes after the Classes
of Subordinated Certificates or Notes
are no longer outstanding.
Targeted Amortization Certificates or
Notes
(also sometimes referred to as a
"TAC Certificates" or "TAC Notes").......... A Class of Certificates or Notes that is
designed to receive principal payments
using a predetermined principal balance
schedule derived by assuming a single
constant prepayment rate for the
underlying Assets. A Class of TAC
Certificates or TAC Notes is designed to
provide some protection against
shortening of weighted average life if
prepayments occur at a rate exceeding
the assumed constant prepayment rate
used to derive the principal balances
schedule of such Class of Certificates
or Notes.
INTEREST TYPES
Accrual Certificates or Notes.................. A Class of Certificates or Notes that
accretes the amount of accrued interest
otherwise distributable on such Class,
which amount will be added as principal
to the principal balance of such Class
on each applicable Distribution Date.
Such accretion may continue until some
specified event has occurred or until
such Accrual Certificates or Notes are
retired.
Fixed Rate Certificates or Notes............... A Class of Certificates or Notes with an
interest rate that is fixed throughout
the life of the Class.
Floating Rate Certificates or
Notes....................................... A Class of Certificates or Notes with an
interest rate that resets periodically
based upon a designated index and that
varies directly with changes in such
index.
47
Interest Only Certificates or
Notes....................................... A Class that is entitled to receive some
or all of the interest payments made on
the Assets and little or no principal.
Interest Only Certificates or Notes have
either no principal balance, a nominal
principal balance or a notional amount.
A nominal principal balance represents
actual principal that will be paid on
the Certificates or Notes. It is
referred to as nominal since it is
extremely small compared to other
Classes. A notional amount is the amount
used as a reference to calculate the
amount of interest due on a Class of
Interest Only Certificates or Notes that
is not entitled to any distributions in
respect of principal.
Inverse Floating Rate
Certificates or Notes....................... A Class of Certificates or Notes with an
interest rate that resets periodically
based upon a designated index and that
varies inversely with changes in such
index and with changes in the interest
rate payable on the related Class of
Floating Rate Certificates or Notes.
Prepayment Premium Certificates
or Notes.................................... A Class of Certificates or Notes that is
only entitled to penalties or premiums,
if any, due in connection with a full or
partial prepayment of an Asset.
Principal Only Certificates or
Notes....................................... A Class of Certificates or Notes that
does not bear interest and is entitled
to receive only distributions in respect
of principal.
Step Coupon Certificates or Notes.............. A Class of Certificates or Notes with a
fixed interest rate that is reduced to a
lower fixed rate after a specific period
of time. The difference between the
initial interest rate and the lower
interest rate will be supported by a
reserve fund established on the closing
date.
Variable Rate Certificates or
Notes....................................... A Class of Certificates or Notes with an
interest rate that resets periodically
and is calculated by reference to the
rate or rates of interest applicable to
the Assets.
48
Components
To the extent specified in the related prospectus supplement, distribution
on a Class of Securities may be based on a combination of two or more different
Components as described under "--General" above. To such extent, the
descriptions set forth under "--Distributions of Interest on the Securities" and
"--Distributions of Principal of the Securities" above also relate to Components
of such a Class of Securities. In such case, reference in such sections to
Security Balance and Pass-Through Rate or interest rate refer to the principal
balance, if any, of any such Component and the Pass-Through Rate or interest
rate, if any, on any such Component, respectively.
Distributions on the Securities of Prepayment Premiums
If so provided in the related prospectus supplement, Prepayment Premiums
that are collected on the Mortgage Loans in the related Trust Fund will be
distributed on each Distribution Date to the Class or Classes of Securities
entitled thereto in accordance with the provisions described in such prospectus
supplement.
Allocation of Losses and Shortfalls
If so provided in the prospectus supplement for a Series of Securities
consisting of one or more Classes of Subordinate Securities, on any Distribution
Date in respect of which losses or shortfalls in collections on the Assets have
been incurred, the amount of such losses or shortfalls will be borne first by a
Class of Subordinate Securities in the priority and manner and subject to the
limitations specified in such prospectus supplement. See "Description of Credit
Support" for a description of the types of protection that may be included in a
Trust Fund against losses and shortfalls on Assets comprising such Trust Fund.
Advances in Respect of Delinquencies
With respect to any Series of Securities evidencing an interest in a Trust
Fund, if so provided in the related prospectus supplement, the Servicer or
another entity described therein will be required as part of its servicing
responsibilities to advance on or before each Distribution Date its own funds or
funds held in the Collection Account that are not included in the Available
Distribution Amount for such Distribution Date, in an amount equal to the
aggregate of payments of principal (other than any balloon payments) and
interest (net of related servicing fees and Retained Interest) that were due on
the Assets in such Trust Fund during the related Due Period and were delinquent
on the related Determination Date, subject to the Servicer's (or another
entity's) good faith determination that such advances will be reimbursable from
Related Proceeds (as defined below). In the case of a Series of Securities that
includes one or more Classes of Subordinate Securities and if so provided in the
related prospectus supplement, the Servicer's (or another entity's) advance
obligation may be limited only to the portion of such delinquencies necessary to
make the required distributions on one or more Classes of Senior Securities
and/or may be subject to the Servicer's (or another entity's) good faith
determination that such advances will be reimbursable not only from Related
Proceeds but also from collections on other Assets otherwise distributable on
one or more Classes of such Subordinate Securities. See "Description of Credit
Support."
49
Advances are intended to maintain a regular flow of scheduled interest and
principal payments to holders of the Class or Classes of Securities entitled
thereto, rather than to guarantee or insure against losses. Advances of the
Servicer's (or another entity's) funds will be reimbursable only out of related
recoveries on the Assets, including amounts received under any form of Credit
Support, respecting which such advances were made (as to any Assets, "Related
Proceeds") and from any other amounts specified in the related prospectus
supplement, including out of any amounts otherwise distributable on one or more
Classes of Subordinate Securities of such Series; provided, however, that any
such advance will be reimbursable from any amounts in the Collection Account
prior to any distributions being made on the Securities to the extent that the
Servicer (or such other entity) shall determine in good faith that such advance
(a "Nonrecoverable Advance") is not ultimately recoverable from Related Proceeds
or, if applicable, from collections on other Assets otherwise distributable on
such Subordinate Securities. If advances have been made by the Servicer from
excess funds in the Collection Account, the Servicer is required to replace such
funds in the Collection Account on any future Distribution Date to the extent
that funds in the Collection Account on such Distribution Date are less than
payments required to be made to Securityholders on such date. If so specified in
the related prospectus supplement, the obligations of the Servicer (or another
entity) to make advances may be secured by a cash advance reserve fund, a surety
bond, a letter of credit or another form of limited guaranty. If applicable,
information regarding the characteristics of, and the identity of any obligor
on, any such surety bond, will be set forth in the related prospectus
supplement.
If and to the extent so provided in the related prospectus supplement, the
Servicer (or another entity) will be entitled to receive interest at the rate
specified therein on its outstanding advances and will be entitled to pay itself
such interest periodically from general collections on the Assets prior to any
payment to Securityholders or as otherwise provided in the applicable Agreement
and described in such prospectus supplement.
If specified in the related prospectus supplement, the Master Servicer or
the Trustee will be required to make advances, subject to certain conditions
described in the prospectus supplement, in the event of a Servicer default.
Reports to Securityholders
With each distribution to holders of any Class of Securities of a Series,
the Servicer, the Master Servicer or the Trustee, as provided in the related
prospectus supplement, will forward or cause to be forwardedmake available to
===============
each such holder, to the Depositor and to such other parties as may be specified
in the applicable Agreement, a statement generally setting forth the information
===============
provided below or in lieu thereof, such other information as may be described in
================================================================================
the related prospectus supplement, in each case to the extent applicable and
==================================
available:
o the amount of such distribution to holders of Securities of such Class
applied to reduce the Security Balance thereof; , separately,
===========
identifying the aggregate amount of principal prepayments and
======================================================================
Liquidation Proceeds included therein;
=====================================
o the amount of such distribution to holders of Securities of such Class
allocable to Accrued Security Interest;
50
o the amount of such distribution allocable to Prepayment Premiums;
o the amount of related servicing compensation and such other customary
information as is required to enable Securityholders to prepare their
tax returns;
o the aggregate amount of advances included in such distribution, and
the aggregate amount of unreimbursed advances at the close of business
on such Distribution Date;
o the aggregate principal balance of the Assets at the close of business
on such Distribution Date;
o the number and aggregate principal balance of Mortgage Loans or
Contracts in respect of which (a) one scheduled payment is delinquent,
(b) two scheduled payments are delinquent, (c) three or more scheduled
payments are delinquent and (d) foreclosure proceedings have been
commenced;
o with respect to any Mortgage Loan or Contract liquidated during the
related Due Period, (a) the portion of such liquidation proceeds
payable or reimbursable to a Servicer (or any other entity) in respect
of such Mortgage Loan and (b) the amount of any loss to
Securityholders;
o with respect to collateral acquired by the Trust Fund through
foreclosure or otherwise (a "REO Property") relating to a Mortgage
Loan or Contract and included in the Trust Fund as of the end of the
related Due Period, the loan number, principal balance and date of
=====================================
acquisition thereof;
=======
o with respect to eachthe REO PropertyProperties relating to a Mortgage
=== ==========
LoanLoans or ContractContracts and included in the Trust Fund as of
===== =========
the end of the related Due Period, (a) the book valuetotal number, (b)
============
the aggregate principal balance of the related Mortgage Loan or
=========
Contract immediately following such Distribution Date (calculated as
if such Mortgage Loan or Contract were still outstanding taking into
account certain limited modifications to the terms thereof specified
in the applicable Agreement), (c) the aggregate amount of unreimbursed
servicing expenses and unreimbursed advances in respect thereof and
(d) if applicable, the aggregate amount of interest accrued and
payable on related servicing expenses and related advances;
o with respect to any such REO Property sold during the related Due
Period (a) the aggregate amount of sale proceeds, (b) the portion of
such sales proceeds payable or reimbursable to the Master Servicer in
respect of such REO Property or the related Mortgage Loan or Contract
and (c) the amount of any loss to Securityholders in respect of the
related Mortgage Loan and (d) if available, the aggregate market value;
================================================
o the aggregate Security Balance or notional amount, as the case may be,
of each Class of Securities (including any Class of Securities not
offered hereby) at the close of business on such Distribution Date,
separately identifying any reduction in such Security Balance due to
the allocation of any loss and increase in the Security Balance of a
Class of Accrual Securities in the event that Accrued Security
Interest has been added to such balance;
51
o the aggregate amount of principal prepayments made during the related
Due Period;
o the amount deposited in the reserve fund, if any, on such Distribution
Date;
o the amount remaining in the reserve fund, if any, as of the close of
business on such Distribution Date;
o the aggregate unpaid Accrued Security Interest, if any, on each Class
of Securities for such Distribution Date and any remaining unpaid
=======================================================
Accrued Security Interest at the close of business on such
=============================
Distribution Date;
o in the case of Securities with a variable Pass-Through Rate or interest
rate, the Pass-Through Rate or interest rate applicable to such
Distribution Date, and, if available, the immediately succeeding
Distribution Date, as calculated in accordance with the method
specified in the related prospectus supplement;
o in the casethe Pass-Through Rate or interest rate applicable to such
Distribution Date for each Class of Securities with an adjustable
Pass-Through Rate or interest rate, for statements to be distributed
in any month in which an adjustment date occurs, the adjustable
Pass-Through Rate or interest rate applicable to such Distribution
Date, if available, and the immediately succeeding Distribution Date,
as calculated in accordance with the method specified in the related
prospectus supplement;
o as to any Series which includes Credit Support, the amount of coverage
of each instrument of Credit Support included therein as of the close
of business on such Distribution Date;
o during the Pre-Funding Period, the remaining Pre-Funded Amount and the
portion of the Pre-Funding Amount used to acquire Subsequent Mortgage
Loans since the preceding Distribution Date; and
===
o during the Pre-Funding Period, the amount remaining in the Capitalized
Interest Account; and
o the aggregate amount of payments by the obligors of (a) default
interest, (b) late charges and (c) assumption and modification fees
collected during the related Due Period.
Within a reasonable period of time after the end of each calendar year, the
Servicer, the Master Servicer or the Trustee, as provided in the related
prospectus supplement, shall furnish to each Securityholder of record at any
time during the calendar year such information required by the Code and
applicable regulations thereunder to enable Securityholders to prepare their tax
returns. See "Description of the Securities--Book-Entry Registration and
Definitive Securities."
Termination; Optional Purchase of Mortgage Loans
The obligations created by the applicable Agreement for each Series of
Securities will terminate upon the payment to Securityholders of that Series of
all amounts held in the Collection Account or by a Servicer, the Master
Servicer, if any, or the Trustee and required to be paid to them pursuant to
such Agreement following the earlier of (i) the final payment or
52
other liquidation of the last Asset subject thereto or the disposition of all
property acquired upon foreclosure of any Mortgage Loan or Contract subject
thereto and (ii) the purchase of all of the assets of the Trust Fund by the
party entitled to effect such termination, under the circumstances and in the
manner set forth in the related prospectus supplement. In no event, however,
will the Trust Fund continue beyond the expiration of 21 years from the death of
the last survivor of certain persons named in the Agreement. Written notice of
termination of the applicable Agreement will be given to each Securityholder,
and the final distribution will be made only upon presentation and surrender of
the Securities at the location to be specified in the notice of termination.
If so specified in the related prospectus supplement, a Series of
Securities may be subject to optional early termination through the repurchase
of the Assets in the related Trust Fund by the party specified therein, under
the circumstances and in the manner set forth therein. In the event that any
such party has caused the related Trust Fund (or any segregated pool of assets
therein) to be treated as a REMIC, any such purchase will be affected only
pursuant to either (a) a "clean up call" as defined in Treasury Regulations
Section 1.860G-2(j) or (b) a "qualified liquidation" as defined in Code Section
860F(a)(4)(A). Any qualified liquidation will effect early retirement of the
Securities of that Series, but the right to purchase may be exercised only after
the aggregate principal balance of the Assets for such Series at the time of
purchase is less than a specified percentage, not exceeding 10%, of the
aggregate principal balance as of the Cut-off Date for the Series, or after the
date set forth in the applicable prospectus supplement. If so provided in the
related prospectus supplement, upon the reduction of the Security Balance of a
specified Class or Classes of Securities by a specified percentage, the party
specified therein will solicit bids for the purchase of all assets of the Trust
Fund, or of a sufficient portion of such assets to retire such Class or Classes
or purchase such Class or Classes at a price set forth in the related prospectus
supplement, in each case, under the circumstances and in the manner set forth
therein. Such price will at least equal the outstanding Security Balances and
any accrued and unpaid interest thereon (including any unpaid interest
shortfalls for prior Distribution Dates specified in the applicable prospectus
=======================================
supplement). Any sale of the Assets of the Trust Fund will be without recourse
==========
to the Trust Fund or the Securityholders. Any such purchase or solicitation of
bids may be made only when the aggregate Security Balance of such Class or
Classes declines to a percentage of the Initial Security Balance of such
Securities (not to exceed 10%) specified in the related prospectus supplement.
In addition, if so provided in the related prospectus supplement, certain
Classes of Securities may be purchased or redeemed in the manner set forth
therein.
Optional Purchases
Subject to the provisions of the applicable Agreement, the Depositor, the
Servicer or such other party specified in the related prospectus supplement may,
at such party's option, repurchase (i) any Asset which is in default or as to
which default is reasonably foreseeable if, in the Depositor's, the Servicer's
or such other party's judgment, the related default is not likely to be cured by
the borrower or default is not likely to be averted and (ii) any Asset as to
which the origination of such Asset breached a representation or warranty made
with respect of such Mortgage Loan to the Depositor, the Servicer or such other
party at a price equal to the unpaid principal balance thereof plus accrued
interest thereon and under the conditions set forth in the applicable prospectus
supplement.
53
Definitive Form
If so specified in the related prospectus supplement, Securities of a
Series may be issued in fully registered certificated form (such Securities,
"Definitive Securities"). Distributions of principal of, and interest on,
Definitive Securities will be made directly to holders of Definitive Securities
in accordance with the procedures set forth in the Agreement. The Definitive
Securities of a Series offered hereby and by means of the applicable prospectus
supplement will be transferable and exchangeable at the office or agency
maintained by the Trustee or such other entity for such purpose set forth in the
applicable prospectus supplement. No service charge will be made for any
transfer or exchange of Definitive Securities, but the Trustee or such other
entity may require payment of a sum sufficient to cover any tax or other
governmental charge in connection with such transfer or exchange.
In the event that an election is made to treat the Trust Fund (or one or
more pools of segregated assets therein) as a REMIC, the Residual Securities
thereof will be issued as Definitive Securities. No legal or beneficial interest
in all or a portion of any Residual Security may be transferred without the
receipt by the transferor and the Trustee of an affidavit described under
"--Taxation of Owners of Residual Securities--Tax-Related Restrictions on
Transfer of Residual Securities."
Book-Entry Registration and Form
If so specified in the related prospectus supplement, one or more Classes
of Securities of a Series will be transferable and exchangeable at the office of
the registrar identified in the related prospectus supplement. Unless otherwise
specified in the related prospectus supplement, no service charge will be made
for any such registration or transfer of such Securities, but the owner may be
required to pay a sum sufficient to cover any tax or other governmental charge.
If so specified in the related prospectus supplement, Book-Entry Securities
may be initially represented by one or more Securities registered in the name of
DTC and be available only in the form of book-entries. If specified in the
related prospectus supplement, holders of Securities may hold beneficial
interests in Book-Entry Securities through DTC (in the United States) or
Clearstream or Euroclear (in Europe) directly if they are participants of such
systems, or indirectly through organizations which are participants in such
systems.
Clearstream and Euroclear will hold omnibus positions on behalf of their
participants through customers' securities accounts in their respective names on
the books of their respective Depositaries which in turn will hold such
positions in customers' securities accounts in the Depositaries' names on the
books of DTC.
Transfers between Participants will occur in accordance with DTC rules.
Transfers between Clearstream Participants and Euroclear Participants will occur
in accordance with their applicable rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Clearstream or
Euroclear, on the other, will be effected in DTC in accordance with DTC rules on
behalf of the relevant European international clearing system by its Depositary.
However, each such cross-market transaction will require delivery of
instructions to the relevant European international clearing system by the
54
counterparty in such system in accordance with its rules and procedures and
within its established deadlines. The relevant European international clearing
system will, if the transaction meets its settlement requirements, deliver
instructions to its Depositary to take action to effect final settlement on its
behalf by delivering or receiving securities through DTC, and making or
receiving payment in accordance with normal procedures for same-day funds
settlement applicable to DTC. Clearstream Participants and Euroclear
Participants may not deliver instructions directly to the Depositaries.
Because of time-zone differences, credits of securities received in
Clearstream or Euroclear as a result of a transaction with a Participant will be
made during subsequent securities settlement processing and dated the business
day following the DTC settlement date. Such credits or any transactions in such
securities settled during such processing will be reported to the Clearstream
Participant or Euroclear Participant on such business day. Cash received in
Clearstream or Euroclear as a result of sales of Securities by or through a
Clearstream Participant or a Euroclear Participant to a Participant will be
received with value on the DTC settlement date but will be available in the
relevant Clearstream or Euroclear cash account only as of the business day
following settlement in DTC.
DTC is a limited purpose trust company organized under the laws of the
State of New York, a "banking organization" within the meaning of the New York
Banking Law, a member of the Federal Reserve System, a "clearing corporation"
within the meaning of the New York Uniform Commercial Code ("UCC") and a
"clearing agency" registered pursuant to Section 17A of the Securities Exchange
Act of 1934, as amended ("Exchange Act"). DTC was created to hold securities for
its participating members ("Participants") and to facilitate the clearance and
settlement of securities transactions between Participants through electronic
book-entries, thereby eliminating the need for physical movement of securities.
Participants include securities brokers and dealers, banks, trust companies and
clearing corporations which may include underwriters, agents or dealers with
respect to the Securities of any Class or Series. Indirect access to the DTC
system also is available to others such as banks, brokers, dealers and trust
companies that clear through or maintain a custodial relationship with a
Participant, either directly or indirectly ("Indirect Participants"). The rules
applicable to DTC and Participants are on file with the SEC.
Beneficial owners ("Security Owners") that are not Participants or Indirect
Participants but desire to purchase, sell or otherwise transfer ownership of, or
other interests in, Book-Entry Securities may do so only through Participants
and Indirect Participants. Participants who are Security Owners of Book-Entry
Securities will receive a credit for such Securities on DTC's records. The
ownership interest of such holder will in turn be recorded on respective records
of the Participants and Indirect Participants. Such holders will not receive
written confirmation from DTC of their purchase, but are expected to receive
written confirmations providing details of the transaction, as well as periodic
statements of their holdings, from the Participant or Indirect Participant
through which the Securityholders entered into the transaction. Unless and until
Definitive Securities are issued as described below, it is anticipated that the
only "holder" of Book-Entry Securities of any Series will be Cede & Co. ("Cede"
), as nominee of DTC. Security Owners will only permitted to exercise the rights
of holders indirectly through Participants and DTC.
55
Under the rules, regulations and procedures creating and affecting DTC and
its operations, DTC is required to make book-entry transfers among Participants
on whose behalf it acts with respect to the Book-Entry Securities and is
required to receive and transmit distributions of principal of and interest on
the Book-Entry Securities. Participants and Indirect Participants with which
Security Owners have accounts with respect to the Book-Entry Securities
similarly are required to make book-entry transfers and receive and transmit
such payments on behalf of their respective Securityholders.
DTC has advised the Servicer and the Depositors that, unless and until
Definitive Securities are issued, DTC will take any action permitted to be taken
by a holder only at the direction of one or more Participants to whose DTC
accounts the Securities are credited. DTC has advised the Servicer and the
Depositors that DTC will take such action with respect to any Percentage
Interests of the Book-Entry Securities of a Series only at the direction of and
on behalf of such Participants with respect to such Percentage Interests of the
Book-Entry Securities. DTC may take actions, at the direction of the related
Participants, with respect to some Book-Entry Securities which conflict with
actions taken with respect to other Book-Entry Securities.
Clearstream, 67 Bd Grande-Duchesse Charlotte, L-1331 Luxembourg
("Clearstream"), was incorporated in 1970 as a"Cedel S.A.," a company with
limited company under Luxembourg law. Clearstream is owned byliability under
Luxembourg law, or a societe anonyme. Cedel S.A. subsequently changed its name
to Cedelbank. On January 10, 2000, Cedelbank's parent company, Cedel
International, societe anonyme ("CI") merged its clearing, settlement and
custody business with that of Deutsche Borse Clearing AG ("DBC"). The merger
involved the transfer by CI of substantially all of its assets and liabilities
(including its shares in CB) to a new Luxembourg company, New Cedel
International, societe anonyme ("New CI"), which is 50% owned by CI and 50%
owned by DBC's parent company Deutsche Borse AG. The shareholders of these two
entities are banks, securities dealers and financial institutions, and. Cedel
International currently has about 10092 shareholders, including U.S. financial
institutions or their subsidiaries. No single entity may own more than five5
percent of ClearstreamCedel International's stock.
Clearstream is registered as a bank in Luxembourg, and as such is subject
to regulation by the Institute Monetaire Luxembourgeois, the Luxembourg Monetary
Authority, which supervises Luxembourg banks.
Further to the merger, the Board of Directors of New Cedel International
decided to re-name the companies in the group in order to give them a cohesive
brand name. The new brand name that was chosen is "Clearstream." Effective
January 14, 2000 New CI has been renamed "Clearstream International, societe
anonyme." On January 18, 2000, Cedelbank was renamed "Clearstream Banking,
societe anonyme," and Cedel Global Services was renamed "Clearstream Services,
societe anonyme."
On January 17, 2000 DBC was renamed "Clearstream Banking AG." This means
that there are now two entities in the corporate group headed by Clearstream
International which share the name "Clearstream Banking," the entity previously
named "Cedelbank" and the entity previously named "Deutsche Borse Clearing AG."
56
Clearstream, Luxembourg holds securities for its customers ("Clearstream
Participants") and facilitates the clearance and settlement of securities
transactions by electronic book-entry transfers between their accounts.
Clearstream provides various services, includingbetween Clearstream, Luxembourg
customers through electronic book-entry changes in accounts of Clearstream,
Luxembourg customers, thereby eliminating the need for physical movement of
certificates. Transactions may be settled by Clearstream, Luxembourg in any of
36 currencies, including United States Dollars. Clearstream, Luxembourg provides
to its customers, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. Clearstream, Luxembourg also deals with domestic
securities markets in severalover 30 countries through established depository
and custodial relationships. Clearstream has established an electronic bridge
with Euroclear Bank S.A./N.V. as the Euroclear Operator in Brussels to
facilitate settlement of trades between systems. Clearstream currently accepts
over 70,000 securities issues on its books.Clearstream, Luxembourg is registered
as a bank in Luxembourg, and as such is subject to regulation by the Commission
de Surveillance du Secteur Financier, `CSSF', which supervises Luxembourg banks.
Clearstream, Luxembourg's customers are world-wide financial institutions
including underwriters, securities brokers and dealers, banks, trust companies
and clearing corporations. Clearstream, Luxembourg's United StatesU.S. customers
are limited to securities brokers and dealers, and banks. Currently,
Clearstream, Luxembourg has approximately 3,0002,000 customers located in over
6080 countries, including all major European countries, Canada, and the United
States. Indirect access to Clearstream, Luxembourg is available to other
institutions whichthat clear through or maintain a custodial relationship with
an account holder of Clearstream, Luxembourg. Clearstream, Luxembourg has
established an electronic bridge with Euroclear Bank S.A./N.V., as the Operator
of the Euroclear System (EOB/EOC) to facilitate settlement of trades between
Clearstream, Luxembourg and EOB/EOC.
The Euroclear System ("Euroclear") was created in 1968 to hold securities
for its participants ("Euroclear Participants") and to clear and settle
transactions between Euroclear Participants through simultaneous electronic
book-entry delivery against payment, thereby eliminating the need for physical
movement of certificates and any risk from lack of simultaneous transfers of
securities and cash. Transactions may be settled in a variety of currencies,
including United States dollars. Euroclear includes various other services,
including securities lending and borrowing and interfaces with domestic markets
in several countries generally similar to the arrangements for cross-market
transfers with DTC described above. Euroclear is operated by Euroclear Bank
S.A./N.V. (the "Euroclear Operator"), under contract with Euroclear Clearance
Systems S.C., a Belgian cooperative corporation (the "Cooperative"). All
operations are conducted by the Euroclear Operator, and all Euroclear securities
clearance accounts and Euroclear cash accounts are accounts with the Euroclear
Operator, not the Cooperative. The Cooperative establishes policy for Euroclear
on behalf of Euroclear Participants. Euroclear Participants include banks
(including central banks), securities brokers and dealers and other professional
financial intermediaries. Indirect access to Euroclear is also available to
other firms that clear through or maintain a custodial relationship with a
Euroclear Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the
57
Board of Governors of the Federal Reserve System and the New York State Banking
Department, as well as the Belgian Banking Commission.
Securities clearance accounts and cash accounts with the Euroclear Operator
are governed by the Terms and Conditions Governing Use of Euroclear and the
related Operating Procedures of the Euroclear System and applicable Belgian law
(collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within the Euroclear System, withdrawals of
securities and cash from the Euroclear System and receipts of payments with
respect to securities in the Euroclear System. All securities in the Euroclear
System are held on a fungible basis without attribution of specific Securities
to specific securities clearance accounts. The Euroclear Operator acts under the
Terms and Conditions only on behalf of Euroclear Participants, and has no record
of or relationship with persons holding through Euroclear Participants.
Payments and distributions with respect to Book-Entry Securities held
through Clearstream or Euroclear will be credited to the cash accounts of
Clearstream Participants or Euroclear Participants in accordance with the
relevant system's rules and procedures, to the extent received by Citibank, N.A.
or JPMorgan Chase Bank, the relevant depositary of Clearstream and Euroclear
(the "Depositaries" ), respectively. Such payments and distributions will be
subject to tax withholding in accordance with relevant United States tax laws
and regulations. See "Federal Income Tax Consequences". Clearstream or the
Euroclear Operator, as the case may be, will take any other action permitted to
be taken by a Certificateholder on behalf of a Clearstream Participant or
Euroclear Participant only in accordance with its relevant rules and procedures
and subject to its Depositary's ability to effect such actions on its behalf
through DTC.
Although DTC, Clearstream and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of Securities among participants of
DTC, Clearstream and Euroclear, they are under no obligation to perform or
continue to perform such procedures and such procedures may be discontinued at
any time.
Book-Entry Securities of a Series will be converted to Definitive
Securities and reissued to beneficial owners or their nominees, rather than to
DTC or its nominee, only under the circumstances provided in the related Pooling
and Servicing Agreement, which generally will include, except if otherwise
provided therein, if (i) DTC or the Servicer advises the Trustee in writing that
DTC is no longer willing or able to discharge properly its responsibilities as
nominee and depository with respect to the Book-Entry Securities of such Series
and the Servicer is unable to locate a qualified successor, (ii) the Servicer,
at its sole option, elects to terminate the book-entry system through DTC or
(iii) after the occurrence of a Servicer Termination Event, a majority of the
aggregate Percentage Interest of any Class of Securities of such Series advises
DTC in writing that the continuation of a book-entry system through DTC (or a
successor thereto) to the exclusion of any physical Securities being issued to
Security Owners is no longer in the best interests of Security Owners of such
Class of Securities. Upon issuance of Definitive Securities of a Series to
Security Owners, such Book-Entry Securities will be transferable directly (and
not exclusively on a book-entry basis) and registered holders will deal directly
with the Trustee with respect to transfers, notices and distributions.
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DESCRIPTION OF THE AGREEMENTS
Agreements Applicable to a Series
REMIC Securities, FASIT Securities, Grantor Trust Securities
Securities representing interests in a Trust Fund, or a portion thereof,
that the Trustee will elect to have treated as REMIC Securities, FASIT
Securities or Grantor Trust Securities will be issued, and the related Trust
Fund will be created, pursuant to a pooling and servicing agreement (a "Pooling
and Servicing Agreement") among the Depositor, the Trustee and the sole Servicer
or Master Servicer, as applicable. The Assets of such Trust Fund will be
transferred to the Trust Fund and thereafter serviced in accordance with the
terms of the Pooling and Servicing Agreement. In the event there are multiple
Servicers of the Assets of such Trust Fund, each Servicer will perform its
servicing functions pursuant to a servicing agreement (each, an "Underlying
Servicing Agreement").
Securities That Are Partnership Interests for Tax Purposes and Notes
Partnership Securities that are partnership interests for tax purposes will
be issued, and the related Trust Fund will be created, pursuant to a Pooling and
Servicing Agreement.
A Series of Notes issued by a Trust Fund will be issued pursuant to an
indenture (the "Indenture") between the related Trust Fund and the Indenture
Trustee named in the related prospectus supplement. The Trust Fund will be
established pursuant to a deposit trust agreement (each, a "Deposit Trust
Agreement") between the Depositor and an owner trustee specified in the
prospectus supplement relating to such Series of Notes. The Assets securing
payment on the Notes will be serviced in accordance with a servicing agreement
(each, an "Indenture Servicing Agreement") between the related Trust Fund as
issuer of the Notes (also referred to herein as the "Issuer"), the Servicer and
the Indenture Trustee. The Pooling and Servicing Agreements, the Indenture
Servicing Agreements, the Underlying Servicing Agreements and the Indenture are
referred to each as an "Agreement."
Material Terms of the Pooling and Servicing Agreements and Underlying Servicing
Agreements
General
The following summaries describe the material provisions that may appear in
each Pooling and Servicing Agreement and Underlying Servicing Agreement. The
prospectus supplement for a Series of Securities will describe any provision of
the applicable Agreement relating to such Series that materially differs from
the description thereof contained in this prospectus. The summaries do not
purport to be complete and are subject to, and are qualified in their entirety
by reference to, all of the provisions of the applicable Agreement for each
Trust Fund and the description of such provisions in the related prospectus
supplement. The provisions of each Agreement will vary depending upon the nature
of the Securities to be issued thereunder and the nature of the related Trust
Fund. As used herein with respect to any Series, the term "Security" refers to
all of the Securities of that Series, whether or not offered hereby and by the
related
59
prospectus supplement, unless the context otherwise requires. A form of a
Pooling and Servicing Agreement has been filed as an exhibit to the Registration
Statement of which this prospectus is a part. The Depositor will provide a copy
of the Pooling and Servicing Agreement (without exhibits) relating to any Series
of Securities without charge upon written request of a Securityholder of such
Series addressed to Wachovia Asset Securitization Issuance, Inc.LLC, One
Wachovia Center, 301 South College Street, Charlotte, North Carolina 28288,
Attention: Vice President.
The servicers (the "Servicers"), any master servicer (the "Master
Servicer") and the trustee (the "Trustee") or indenture trustee (the "Indenture
Trustee"), as applicable, with respect to any Series of Securities will be named
in the related prospectus supplement. In the event there are multiple Servicers
for the Assets in a Trust Fund, a Master Servicer will perform certain
administration, calculation and reporting functions with respect to such Trust
Fund and, if specified in the related prospectus supplement, will supervise the
related Servicers pursuant to a Pooling and Servicing Agreement. With respect to
Series involving a Master Servicer, references in this prospectus to the
Servicer will apply to the Master Servicer where non-servicing obligations are
described. If so specified in the related prospectus supplement, a manager or
administrator may be appointed pursuant to the Pooling and Servicing Agreement
for any Trust Fund to administer such Trust Fund or certain administrative
functions which would otherwise be performed by the Servicer or the Master
Servicer may be performed by the Trustee.
Assignment of Assets; Repurchases
At the time of issuance of any Series of Securities, the Depositor will
assign (or cause to be assigned) to the designated Trustee the Assets to be
included in the related Trust Fund, together with all principal and interest to
be received on or with respect to such Assets after the Cut-off Date, other than
principal and interest due on or before the Cut-off Date and other than any
Retained Interest. The Trustee will, concurrently with such assignment, deliver
the Securities to the Depositor in exchange for the Assets and the other assets
comprising the Trust Fund for such Series. Each Asset will be identified in a
schedule appearing as an exhibit to the applicable Agreement. Such schedule will
include detailed information to the extent available and relevant (i) in respect
of each Mortgage Loan included in the related Trust Fund, including without
limitation, the city and state of the related Mortgaged Property and type of
such property, the Mortgage Rate and, if applicable, the applicable index,
margin, adjustment date and any rate cap information, the original and remaining
term to maturity, the original and outstanding principal balance and balloon
payment, if any, the Loan-to-Value Ratio as of the date indicated and payment
and prepayment provisions, if applicable; and (ii) in respect of each Contract
included in the related Trust Fund, including without limitation the outstanding
principal amount and the Contract Rate.
With respect to each Mortgage Loan, except as otherwise specified in the
related prospectus supplement, the Depositor will deliver or cause to be
delivered to the Trustee (or to the custodian hereinafter referred to) certain
loan documents, which will generally include the original Mortgage Note
endorsed, without recourse, in blank or to the order of the Trustee, the
original Mortgage (or a certified copy thereof) with evidence of recording
indicated thereon and an assignment of the Mortgage to the Trustee in recordable
form. Notwithstanding the foregoing, a Trust Fund may include Mortgage Loans
where the original Mortgage Note is not delivered to
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the Trustee if the Depositor delivers to the Trustee or the custodian a copy or
a duplicate original of the Mortgage Note, together with an affidavit certifying
that the original thereof has been lost or destroyed. With respect to such
Mortgage Loans, the Trustee (or its nominee) may not be able to enforce the
Mortgage Note against the related borrower. The Asset Seller or other entity
specified in the related prospectus supplement will be required to agree to
repurchase, or substitute for, each such Mortgage Loan that is subsequently in
default if the enforcement thereof or of the related Mortgage is materially
adversely affected by the absence of the original Mortgage Note. The applicable
Agreement will generally require the Depositor or another party specified in the
related prospectus supplement to promptly cause each such assignment of Mortgage
to be recorded in the appropriate public office for real property records,
unless (i) with respect to a particular state, the Trustee has received an
opinion of counsel acceptable to it that such recording is not required to make
the assignment effective against the parties to the Mortgage or subsequent
purchasers or encumbrancers of the Mortgaged Property or (ii) recordation in a
state is not required by the Rating Agencies rating the Series in order to
obtain the initial ratings on the Securities described in the related prospectus
supplement.
Notwithstanding the preceding paragraph, with respect to any Mortgage Loan
which has been recorded in the name of Mortgage Electronic Registration Systems,
Inc. ("MERS") or its designee, no mortgage assignment in favor of the Trustee
will be required to be prepared or delivered. Instead, the Master Servicer and
the applicable Servicer will be required to take all actions as are necessary to
cause the applicable Trust Fund to be shown as the owner of the related Mortgage
Loan on the records of MERS for purposes of the system of recording transfers of
beneficial ownership of mortgages maintained by MERS.
The Trustee (or a custodian) will review such Mortgage Loan documents
within a specified period of days after receipt thereof, and the Trustee (or a
custodian) will hold such documents in trust for the benefit of the
Securityholders. If any such document is found to be missing or defective in any
material respect, the Trustee (or such custodian) shall immediately notify the
Servicer and the Depositor, and the Servicer shall immediately notify the
relevant Asset Seller or other entity specified in the related prospectus
supplement. If the Asset Seller cannot cure the omission or defect within a
specified number of days after receipt of such notice, then unless otherwise
specified in the related prospectus supplement, the Asset Seller or other entity
specified in the related prospectus supplement will be obligated, within a
specified number of days of receipt of such notice, to repurchase the related
Mortgage Loan from the Trustee at a price equal to the sum of the unpaid
principal balance thereof, plus unpaid accrued interest at the interest rate for
such Asset from the date as to which interest was last paid to the due date in
the Due Period in which the relevant purchase is to occur, plus certain
servicing expenses that are payable to the Servicer or such other price as
specified in the related prospectus supplement (the "Purchase Price") or
substitute for such Mortgage Loan. There can be no assurance that an Asset
Seller or other named entity will fulfill this repurchase or substitution
obligation, and neither the Servicer nor the Depositor will be obligated to
repurchase or substitute for such Mortgage Loan if the Asset Seller or other
named entity defaults on its obligation. This repurchase or substitution
obligation constitutes the sole remedy available to the Securityholders or the
Trustee for omission of, or a material defect in, a constituent document. To the
extent specified in the related prospectus supplement, in lieu of curing any
omission or defect in the Asset or repurchasing or substituting for such Asset,
the Asset Seller or other named entity may agree to cover any losses suffered by
the Trust Fund as a result of such breach or defect.
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Notwithstanding the preceding two paragraphs, the documents with respect to
First Lien Mortgage Loans, Home Equity Loans, Home Improvement Contracts and
Unsecured Home Improvement Loans will be delivered to the Trustee (or a
custodian) only to the extent specified in the related prospectus supplement.
Generally such documents will be retained by the Servicer, which may also be the
Asset Seller. In addition, assignments of the related Mortgages to the Trustee
will be recorded only to the extent specified in the related prospectus
supplement.
With respect to each Contract, the Servicer (which may also be the Asset
Seller) generally will maintain custody of the original Contract and copies of
documents and instruments related to each Contract and the security interest in
the Manufactured Home securing each Contract. In order to give notice of the
right, title and interest of the Trustee in the Contracts, the Depositor will
cause UCC-1 financing statements to be authorized by the related Asset Seller
identifying the Depositor as secured party and by the Depositor identifying the
Trustee as the secured party and, in each case, identifying all Contracts as
collateral. The Contracts will be stamped or otherwise marked to reflect their
assignment from the Company to the Trust Fund only to the extent specified in
the related prospectus supplement. Therefore, if, through negligence, fraud or
otherwise, a subsequent purchaser were able to take physical possession of the
Contracts without notice of such assignment, the interest of the Trustee in the
Contracts could be defeated. See "Certain Legal Aspects of the Contracts."
While the Contract documents will not be reviewed by the Trustee or the
Servicer, if the Servicer finds that any such document is missing or defective
in any material respect, the Servicer will be required to immediately notify the
Depositor and the relevant Asset Seller or other entity specified in the related
prospectus supplement. If the Asset Seller or such other entity cannot cure the
omission or defect within a specified number of days after receipt of such
notice, then the Asset Seller or such other entity will be obligated, within a
specified number of days of receipt of such notice, to repurchase the related
Contract from the Trustee at the Purchase Price or substitute for such Contract.
There can be no assurance that an Asset Seller or such other entity will fulfill
this repurchase or substitution obligation, and neither the Servicer nor the
Depositor will be obligated to repurchase or substitute for such Contract if the
Asset Seller or such other entity defaults on its obligation. This repurchase or
substitution obligation constitutes the sole remedy available to the
Securityholders or the Trustee for omission of, or a material defect in, a
constituent document. To the extent specified in the related prospectus
supplement, in lieu of curing any omission or defect in the Asset or
repurchasing or substituting for such Asset, the Asset Seller may agree to cover
any losses suffered by the Trust Fund as a result of such breach or defect.
Representations and Warranties; Repurchases
To the extent provided in the related prospectus supplement the Depositor
will, with respect to each Asset, make or assign certain representations and
warranties, as of a specified date (the person making such representations and
warranties including the Depositor, the "Warranting Party") covering, by way of
example, the following types of matters:
o the accuracy of the information set forth for such Asset on the
schedule of Assets appearing as an exhibit to the applicable
Agreement;
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o in the case of a Mortgage Loan, the existence of title insurance
insuring the lien priority of the Mortgage Loan and, in the case of a
Contract, that the Contract creates a valid first security interest in
or lien on the related Manufactured Home;
o the authority of the Warranting Party to sell the Asset; (iv) the
payment status of the Asset;
o in the case of a Mortgage Loan, the existence of customary provisions
in the related Mortgage Note and Mortgage to permit realization
against the Mortgaged Property of the benefit of the security of the
Mortgage; and
o the existence of hazard and extended perils insurance coverage on the
Mortgaged Property or Manufactured Home.
Any Warranting Party shall be an Asset Seller or an affiliate thereof or
such other person acceptable to the Depositor and shall be identified in the
related prospectus supplement.
Representations and warranties made in respect of an Asset may have been
made as of a date prior to the applicable Cut-off Date. A substantial period of
time may have elapsed between such date and the date of initial issuance of the
related Series of Securities evidencing an interest in such Asset. In the event
of a breach of any such representation or warranty, the Warranting Party will be
obligated to reimburse the Trust Fund for losses caused by any such breach or
either cure such breach or repurchase or replace the affected Asset as described
below. Since the representations and warranties may not address events that may
occur following the date as of which they were made, the Warranting Party will
have a reimbursement, cure, repurchase or substitution obligation in connection
with a breach of such a representation and warranty only if the relevant event
that causes such breach occurs prior to such date. Such party would have no such
obligations if the relevant event that causes such breach occurs after such
date.
Each Agreement will provide that the Servicer and/or Trustee or such other
entity identified in the related prospectus supplement will be required to
notify promptly the relevant Warranting Party of any breach of any
representation or warranty made by it in respect of an Asset that materially and
adversely affects the value of such Asset or the interests therein of the
Securityholders. If such Warranting Party cannot cure such breach within a
specified period following the date on which such party was notified of such
breach, then such Warranting Party will be obligated to repurchase such Asset
from the Trustee within a specified period from the date on which the Warranting
Party was notified of such breach, at the Purchase Price therefor. If so
provided in the prospectus supplement for a Series, a Warranting Party, rather
than repurchase an Asset as to which a breach has occurred, will have the
option, within a specified period after initial issuance of such Series of
Securities, to cause the removal of such Asset from the Trust Fund and
substitute in its place one or more other Assets, as applicable, in accordance
with the standards described in the related prospectus supplement. If so
provided in the prospectus supplement for a Series, a Warranting Party, rather
than repurchase or substitute an Asset as to which a breach has occurred, will
have the option to reimburse the Trust Fund or the Securityholders for any
losses caused by such breach. This reimbursement, repurchase or substitution
obligation will constitute the sole remedy available to Securityholders or the
Trustee for a breach of representation by a Warranting Party.
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Neither the Depositor (except to the extent that it is the Warranting
Party) nor the Servicer will be obligated to purchase or substitute for an Asset
if a Warranting Party defaults on its obligation to do so, and no assurance can
be given that Warranting Parties will carry out such obligations with respect to
the Assets.
A Servicer will make certain representations and warranties regarding its
authority to enter into, and its ability to perform its obligations under, the
applicable Agreement. A breach of any such representation of the Servicer which
materially and adversely affects the interests of the Securityholders and which
continues unremedied for the number of days specified in the applicable
Agreement after the giving of written notice of such breach to the Servicer by
the Trustee or the Depositor, or to the Servicer, the Depositor and the Trustee
by the holders of Securities evidencing not less than 25% of the Voting Rights
or such other percentage specified in the related prospectus supplement, will
constitute an Event of Default under such Agreement. See "--Events of Default
under the Agreements" and "--Rights Upon Event of Default under the Agreements."
Collection Account and Related Accounts
General. The Servicer and/or the Trustee will, as to each Trust Fund,
establish and maintain or cause to be established and maintained one or more
separate accounts for the collection of payments on the related Assets
(collectively, the "Collection Account"), which must be either (i) an account or
accounts the deposits in which are insured by the Bank Insurance Fund or the
Savings Association Insurance Fund of the Federal Deposit Insurance Corporation
("FDIC") (to the limits established by the FDIC) and the uninsured deposits in
which are otherwise secured such that the Securityholders have a claim with
respect to the funds in the Collection Account or a perfected first priority
security interest against any collateral securing such funds that is superior to
the claims of any other depositors or general creditors of the institution with
which the Collection Account is maintained or (ii) otherwise maintained with a
bank or trust company, and in a manner, satisfactory to the Rating Agency or
Agencies rating any Class of Securities of such Series. The collateral eligible
to secure amounts in the Collection Account is limited to United States
government securities and other investment grade obligations specified in the
applicable Agreement ("Permitted Investments"). A Collection Account may be
maintained as an interest bearing or a non-interest bearing account and the
funds held therein may be invested pending each succeeding Distribution Date in
certain short-term Permitted Investments. Unless otherwise specified in the
applicable prospectus supplement, any interest or other income earned on funds
in the Collection Account will be paid to the Servicer or its designee as
additional servicing compensation. The Collection Account may be maintained with
an institution that is an affiliate of the Servicer, if applicable, provided
that such institution meets the standards imposed by the Rating Agency or
Agencies. If permitted by the Rating Agency or Agencies, a Collection Account
may contain funds relating to more than one Series of mortgage pass-through
certificates and may contain other funds respecting payments on mortgage loans
belonging to the Servicer or serviced or master serviced by it on behalf of
others.
Deposits. A Servicer or the Trustee will deposit or cause to be deposited
in the Collection Account for one or more Trust Funds on a daily basis, or such
other period provided in the applicable Agreement, the following payments and
collections received, or advances made, by the Servicer or the Trustee or on its
behalf subsequent to the Cut-off Date (other than payments
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due on or before the Cut-off Date, and exclusive of any amounts representing a
Retained Interest):
o all payments on account of principal, including principal prepayments,
on the Assets;
o all payments on account of interest on the Assets, including any
default interest collected, in each case net of any portion thereof
retained by a Servicer as its servicing compensation and net of any
Retained Interest;
o Liquidation Proceeds and Insurance Proceeds, together with the net
proceeds on a monthly basis with respect to any Assets acquired for
the benefit of Securityholders;
o any amounts paid under any instrument or drawn from any fund that
constitutes Credit Support for the related Series of Securities as
described under "Description of Credit Support";
o any advances made as described under "Description of the
Securities--Advances in Respect of Delinquencies";
o any amounts paid under any Cash Flow Agreement, as described under
"Description of the Trust Funds--Cash Flow Agreements";
o all proceeds of any Asset or, with respect to a Mortgage Loan,
property acquired in respect thereof purchased by the Depositor, any
Asset Seller or any other specified person as described under
"--Assignment of Assets; Repurchases" and "--Representations and
Warranties; Repurchases," all proceeds of any defaulted Mortgage Loan
purchased as described under "--Realization Upon Defaulted Assets,"
and all proceeds of any Asset purchased as described under
"Description of the Securities--Termination";
o any amounts paid by a Servicer to cover certain interest shortfalls
arising out of the prepayment of Assets in the Trust Fund as described
under "Description of the Agreements--Retained Interest; Servicing
Compensation and Payment of Expenses";
o to the extent that any such item does not constitute additional
servicing compensation to a Servicer, any payments on account of
modification or assumption fees, late payment charges or Prepayment
Premiums on the Assets;
o all payments required to be deposited in the Collection Account with
respect to any deductible clause in any blanket insurance policy
described under "--Hazard Insurance Policies";
o any amount required to be deposited by a Servicer or the Trustee in
connection with losses realized on investments for the benefit of the
Servicer or the Trustee, as the case may be, of funds held in the
Collection Account; and
o any other amounts required to be deposited in the Collection Account
as provided in the applicable Agreement and described in the related
prospectus supplement.
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Withdrawals. A Servicer or the Trustee may, from time to time, make
withdrawals from the Collection Account for each Trust Fund for any of the
following purposes:
o to make distributions to the Securityholders on each Distribution
Date;
o to reimburse a Servicer for unreimbursed amounts advanced as described
under "Description of the Securities--Advances in Respect of
Delinquencies," such reimbursement to be made out of amounts received
which were identified and applied by the Servicer as late collections
of interest (net of related servicing fees and Retained Interest) on
and principal of the particular Assets with respect to which the
advances were made or out of amounts drawn under any form of Credit
Support with respect to such Assets;
o to reimburse a Servicer for unpaid servicing fees earned and certain
unreimbursed servicing expenses incurred with respect to Assets and
properties acquired in respect thereof, such reimbursement to be made
out of amounts that represent Liquidation Proceeds and Insurance
Proceeds collected on the particular Assets and properties, and net
income collected on the particular properties, with respect to which
such fees were earned or such expenses were incurred or out of amounts
drawn under any form of Credit Support with respect to such Assets and
properties;
o to reimburse a Servicer for any advances described above and any
servicing expenses described above which, in the Servicer's good faith
judgment, will not be recoverable from the amounts described in such
clauses, such reimbursement to be made from amounts collected on other
Assets or, if and to the extent so provided by the applicable
Agreement and described in the related prospectus supplement, just
from that portion of amounts collected on other Assets that is
otherwise distributable on one or more Classes of Subordinate
Securities, if any, remain outstanding, and otherwise any outstanding
Class of Securities, of the related Series;
o if and to the extent described in the related prospectus supplement,
to pay a Servicer interest accrued on the advances described above and
the servicing expenses described above while such advances and
servicing expenses remain outstanding and unreimbursed;
o to reimburse a Servicer, the Depositor, or any of their respective
directors, officers, employees and agents, as the case may be, for
certain expenses, costs and liabilities incurred thereby, as and to
the extent described under "--Certain Matters Regarding Servicers, the
Master Servicer and the Depositor";
o if and to the extent described in the related prospectus supplement,
to pay (or to transfer to a separate account for purposes of escrowing
for the payment of) the Trustee's fees;
o to reimburse the Trustee or any of its directors, officers, employees
and agents, as the case may be, for certain expenses, costs and
liabilities incurred thereby, as and to the extent described under
"--Certain Matters Regarding the Trustee";
o to pay a Servicer, as additional servicing compensation, interest and
investment income earned in respect of amounts held in the Collection
Account;
66
o to pay the person entitled thereto any amounts deposited in the
Collection Account that were identified and applied by the Servicer as
recoveries of Retained Interest;
o to pay for costs reasonably incurred in connection with the proper
management and maintenance of any Mortgaged Property acquired for the
benefit of Securityholders by foreclosure or by deed in lieu of
foreclosure or otherwise, such payments to be made out of income
received on such property;
o if one or more elections have been made to treat the Trust Fund or
designated portions thereof as a REMIC or a FASIT, to pay any federal,
state or local taxes imposed on the Trust Fund or its assets or
transactions, as and to the extent described under "Federal Income Tax
Consequences--REMICs--Taxes That May Be Imposed on the REMIC Pool" or
in the applicable prospectus supplement, respectively;
o to pay for the cost of an independent appraiser or other expert in
real estate matters retained to determine a fair sale price for a
defaulted Mortgage Loan or a property acquired in respect thereof in
connection with the liquidation of such Mortgage Loan or property;
o to pay for the cost of various opinions of counsel obtained pursuant
to the applicable Agreement for the benefit of Securityholders;
o to pay for the costs of recording the applicable Agreement if such
recordation materially and beneficially affects the interests of
Securityholders, provided that such payment shall not constitute a
waiver with respect to the obligation of the Warranting Party to
remedy any breach of representation or warranty under the applicable
Agreement;
o to pay the person entitled thereto any amounts deposited in the
Collection Account in error, including amounts received on any Asset
after its removal from the Trust Fund whether by reason of purchase or
substitution as contemplated by "--Assignment of Assets; Repurchase"
and "--Representations and Warranties; Repurchases" or otherwise;
o to make any other withdrawals permitted by the applicable Agreement;
and
o to clear and terminate the Collection Account at the termination of
the Trust Fund.
Other Collection Accounts. Notwithstanding the foregoing, if so specified
in the related prospectus supplement, the applicable Agreement for any Series of
Securities may provide for the establishment and maintenance of a separate
collection account into which the Servicer will deposit on a daily basis the
amounts described under "--Deposits" above for one or more Series of Securities.
Any amounts on deposit in any such collection account will be withdrawn
therefrom and deposited into the appropriate Collection Account by a time
specified in the related prospectus supplement. To the extent specified in the
related prospectus supplement, any amounts which could be withdrawn from the
Collection Account as described under "--Withdrawals" above, may also be
withdrawn from any such collection account. The prospectus supplement will set
forth any restrictions with respect to any such collection account,
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including investment restrictions and any restrictions with respect to financial
institutions with which any such collection account may be maintained.
Collection and Other Servicing Procedures. The Servicer is required to make
reasonable efforts to collect all scheduled payments under the Assets and will
follow or cause to be followed such collection procedures as it would follow
with respect to assets that are comparable to the Assets and held for its own
account, provided such procedures are consistent with (i) the terms of the
applicable Agreement and any related hazard insurance policy or instrument of
Credit Support, if any, included in the related Trust Fund described herein or
under "Description of Credit Support," (ii) applicable law and (iii) the general
servicing standard specified in the related prospectus supplement or, if no such
standard is so specified, its normal servicing practices (in either case, the
"Servicing Standard"). In connection therewith, the Servicer will be permitted
in its discretion to waive any late payment charge or penalty interest in
respect of a late payment on an Asset.
Each Servicer will also be required to perform other customary functions of
a servicer of comparable assets, including maintaining hazard insurance policies
as described herein and in any related prospectus supplement, and filing and
settling claims thereunder; maintaining, to the extent required by the
applicable Agreement, escrow or impoundment accounts of obligors for payment of
taxes, insurance and other items required to be paid by any obligor pursuant to
the terms of the Assets; processing assumptions or substitutions in those cases
where the Servicer has determined not to enforce any applicable due-on-sale
clause; attempting to cure delinquencies; supervising foreclosures or
repossessions; inspecting and managing Mortgaged Properties or Manufactured
Homes under certain circumstances; and maintaining accounting records relating
to the Assets. The Servicer or such other entity specified in the related
prospectus supplement will be responsible for filing and settling claims in
respect of particular Assets under any applicable instrument of Credit Support.
See "Description of Credit Support."
The Servicer may agree to modify, waive or amend any term of any Asset in a
manner consistent with the Servicing Standard so long as the modification,
waiver or amendment will not (i) affect the amount or timing of any scheduled
payments of principal or interest on the Asset or (ii) in its judgment,
materially impair the security for the Asset or reduce the likelihood of timely
payment of amounts due thereon. The Servicer also may agree to any modification,
waiver or amendment that would so affect or impair the payments on, or the
security for, an Asset if, unless otherwise provided in the related prospectus
supplement, (i) in its judgment, a material default on the Asset has occurred or
a payment default is reasonably foreseeable and (ii) in its judgment, such
modification, waiver or amendment is reasonably likely to produce a greater
recovery with respect to the Asset on a present value basis than would
liquidation. The Servicer is required to notify the Trustee in the event of any
modification, waiver or amendment of any Asset.
In the case of Multifamily Mortgage Loans, a mortgagor's failure to make
required Mortgage Loan payments may mean that operating income is insufficient
to service the Mortgage Loan debt, or may reflect the diversion of that income
from the servicing of the Mortgage Loan debt. In addition, a mortgagor under a
Multifamily Mortgage Loan that is unable to make Mortgage Loan payments may also
be unable to make timely payment of all required taxes and otherwise to maintain
and insure the related Mortgaged Property. In general, the Servicer will be
required to monitor any Multifamily Loan that is in default, evaluate whether
the causes of the default can
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be corrected over a reasonable period without significant impairment of the
value of the related Mortgaged Property, initiate corrective action in
cooperation with the mortgagor if cure is likely, inspect the related
Multifamily Property and take such other actions as are consistent with the
applicable Agreement. A significant period of time may elapse before the
Servicer is able to assess the success of any such corrective action or the need
for additional initiatives. The time within which the Servicer can make the
initial determination of appropriate action, evaluate the success of corrective
action, develop additional initiatives, institute foreclosure proceedings and
actually foreclose may vary considerably depending on the particular Multifamily
Mortgage Loan, the Multifamily Property, the mortgagor, the presence of an
acceptable party to assume the Multifamily Mortgage Loan and the laws of the
jurisdiction in which the Multifamily Property is located.
Realization Upon Defaulted Assets
Generally, the Servicer is required to monitor any Assets which is in
default, initiate corrective action in cooperation with the mortgagor or obligor
if cure is likely, inspect the Asset and take such other actions as are
consistent with the Servicing Standard. A significant period of time may elapse
before the Servicer is able to assess the success of such corrective action or
the need for additional initiatives.
Any Agreement relating to a Trust Fund that includes Mortgage Loans or
Contracts may grant to the Servicer and/or the holder or holders of certain
Classes of Securities a right of first refusal to purchase from the Trust Fund
at a predetermined purchase price any such Mortgage Loan or Contract as to which
a specified number of scheduled payments thereunder are delinquent. Any such
right granted to the holder of an Offered Security will be described in the
related prospectus supplement. The related prospectus supplement will also
describe any such right granted to any person if the predetermined purchase
price is less than the Purchase Price described under "--Representations and
Warranties; Repurchases."
If so specified in the related prospectus supplement, the Servicer may
offer to sell any defaulted Mortgage Loan or Contract described in the preceding
paragraph and not otherwise purchased by any person having a right of first
refusal with respect thereto, if and when the Servicer determines, consistent
with the Servicing Standard, that such a sale would produce a greater recovery
on a present value basis than would liquidation through foreclosure,
repossession or similar proceedings. The applicable Agreement will provide that
any such offering be made in a commercially reasonable manner for a specified
period and that the Servicer accept the highest cash bid received from any
person (including itself, an affiliate of the Servicer or any Securityholder)
that constitutes a fair price for such defaulted Mortgage Loan or Contract. In
the absence of any bid determined in accordance with the applicable Agreement to
be fair, the Servicer shall proceed with respect to such defaulted Mortgage Loan
or Contract as described below. Any bid in an amount at least equal to the
Purchase Price described under "--Representations and Warranties; Repurchases"
will in all cases be deemed fair.
The Servicer, on behalf of the Trustee, may at any time institute
foreclosure proceedings, exercise any power of sale contained in any mortgage,
obtain a deed in lieu of foreclosure, or otherwise acquire title to a Mortgaged
Property securing a Mortgage Loan by operation of law or otherwise and may at
any time repossess and realize upon any Manufactured Home, if such
69
action is consistent with the Servicing Standard and a default on such Mortgage
Loan or Contract has occurred or, in the Servicer's judgment, is imminent.
If title to any Mortgaged Property is acquired by a Trust Fund as to which
a REMIC election has been made, the Servicer, on behalf of the Trust Fund, will
be required to sell the Mortgaged Property by the close of the third calendar
year after the year of acquisition, unless (i) the Internal Revenue Service (the
"IRS") grants an extension of time to sell such property or (ii) the Trustee
receives an opinion of independent counsel to the effect that the holding of the
property by the Trust Fund subsequent to twothree years after its acquisition
will not result in the imposition of a tax on the Trust Fund or cause the Trust
Fund to fail to qualify as a REMIC under the Code at any time that any
Securities are outstanding. Subject to the foregoing, the Servicer will be
required to (i) solicit bids for any Mortgaged Property so acquired in such a
manner as will be reasonably likely to realize a fair price for such property
and (ii) accept the first (and, if multiple bids are contemporaneously received,
the highest) cash bid received from any person that constitutes a fair price.
The applicability of these limitations if a FASIT election is made with respect
to all or a part of the Trust Fund will be described in the applicable
prospectus supplement.
The limitations imposed by the applicable Agreement and the REMIC
provisions or the FASIT provisions of the Code (if a REMIC election or a FASIT
election, respectively, has been made with respect to the related Trust Fund) on
the ownership and management of any Mortgaged Property acquired on behalf of the
Trust Fund may result in the recovery of an amount less than the amount that
would otherwise be recovered. See "Certain Legal Aspects of Mortgage
Loans--Foreclosure."
If recovery on a defaulted Asset under any related instrument of Credit
Support is not available, the Servicer nevertheless will be obligated to follow
or cause to be followed such normal practices and procedures as it deems
necessary or advisable to realize upon the defaulted Asset. If the proceeds of
any liquidation of the property securing the defaulted Asset are less than the
outstanding principal balance of the defaulted Asset plus interest accrued
thereon at the applicable interest rate, plus the aggregate amount of expenses
incurred by the Servicer in connection with such proceedings and which are
reimbursable under the applicable Agreement, the Trust Fund will realize a loss
in the amount of such difference. The Servicer will be entitled to withdraw or
cause to be withdrawn from the Collection Account out of the Liquidation
Proceeds recovered on any defaulted Asset, prior to the distribution of such
Liquidation Proceeds to Securityholders, amounts representing its normal
servicing compensation on the Security, unreimbursed servicing expenses incurred
with respect to the Asset and any unreimbursed advances of delinquent payments
made with respect to the Asset.
If any property securing a defaulted Asset is damaged, the Servicer is not
required to expend its own funds to restore the damaged property unless it
determines (i) that such restoration will increase the proceeds to
Securityholders on liquidation of the Asset after reimbursement of the Servicer
for its expenses and (ii) that such expenses will be recoverable by it from
related Insurance Proceeds or Liquidation Proceeds.
As servicer of the Assets, a Servicer, on behalf of itself, the Trustee and
the Securityholders, will present claims to the obligor under each instrument of
Credit Support, and will take such
70
reasonable steps as are necessary to receive payment or to permit recovery
thereunder with respect to defaulted Assets.
If a Servicer or its designee recovers payments under any instrument of
Credit Support with respect to any defaulted Assets, the Servicer will be
entitled to withdraw or cause to be withdrawn from the Collection Account out of
such proceeds, prior to distribution thereof to Securityholders, amounts
representing its normal servicing compensation on such Asset, unreimbursed
servicing expenses incurred with respect to the Asset and any unreimbursed
advances of delinquent payments made with respect to the Asset. See "--Hazard
Insurance Policies" and "Description of Credit Support."
Hazard Insurance Policies
Mortgage Loans. Generally, each Agreement for a Trust Fund comprised of
Mortgage Loans will require the Servicer to cause the mortgagor on each Mortgage
Loan to maintain a hazard insurance policy providing for such coverage as is
required under the related Mortgage or, if any Mortgage permits the holder
thereof to dictate to the mortgagor the insurance coverage to be maintained on
the related Mortgaged Property, then such coverage as is consistent with the
Servicing Standard. Such coverage will be in general in an amount equal to the
lesser of the principal balance owing on such Mortgage Loan (but not less than
the amount necessary to avoid the application of any co-insurance clause
contained in the hazard insurance policy) and the amount necessary to fully
compensate for any damage or loss to the improvements on the Mortgaged Property
on a replacement cost basis or such other amount specified in the related
prospectus supplement. The ability of the Servicer to assure that hazard
insurance proceeds are appropriately applied may be dependent upon its being
named as an additional insured under any hazard insurance policy and under any
other insurance policy referred to below, or upon the extent to which
information in this regard is furnished by mortgagors. All amounts collected by
the Servicer under any such policy (except for amounts to be applied to the
restoration or repair of the Mortgaged Property or released to the mortgagor in
accordance with the Servicer's normal servicing procedures, subject to the terms
and conditions of the related Mortgage and Mortgage Note) will be deposited in
the Collection Account. The applicable Agreement may provide that the Servicer
may satisfy its obligation to cause each mortgagor to maintain such a hazard
insurance policy by the Servicer's maintaining a blanket policy insuring against
hazard losses on the Mortgage Loans. If such blanket policy contains a
deductible clause, the Servicer will be required to deposit in the Collection
Account all sums that would have been deposited therein but for such clause.
In general, the standard form of fire and extended coverage policy covers
physical damage to or destruction of the improvements of the property by fire,
lightning, explosion, smoke, windstorm and hail, and riot, strike and civil
commotion, subject to the conditions and exclusions specified in each policy.
Although the policies relating to the Mortgage Loans will be underwritten by
different insurers under different state laws in accordance with different
applicable state forms, and therefore will not contain identical terms and
conditions, the basic terms thereof are dictated by respective state laws, and
most such policies typically do not cover any physical damage resulting from
war, revolution, governmental actions, floods and other water-related causes,
earth movement (including earthquakes, landslides and mudflows), wet or dry rot,
vermin, domestic animals and certain other kinds of uninsured risks.
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The hazard insurance policies covering the Mortgaged Properties securing
the Mortgage Loans will typically contain a coinsurance clause that in effect
requires the insured at all times to carry insurance of a specified percentage
(generally 80% to 90%) of the full replacement value of the improvements on the
property in order to recover the full amount of any partial loss. If the
insured's coverage falls below this specified percentage, such clause generally
provides that the insurer's liability in the event of partial loss does not
exceed the lesser of (i) the replacement cost of the improvements less physical
depreciation and (ii) such proportion of the loss as the amount of insurance
carried bears to the specified percentage of the full replacement cost of such
improvements.
Each Agreement for a Trust Fund comprised of Mortgage Loans will require
the Servicer to cause the mortgagor on each Mortgage Loan to maintain all such
other insurance coverage with respect to the related Mortgaged Property as is
consistent with the terms of the related Mortgage and the Servicing Standard,
which insurance may typically include flood insurance (if the related Mortgaged
Property was located at the time of origination in a federally designated flood
area).
Any cost incurred by the Servicer in maintaining any such insurance policy
will be added to the amount owing under the Mortgage Loan where the terms of the
Mortgage Loan so permit; provided, however, that the addition of such cost will
not be taken into account for purposes of calculating the distribution to be
made to Securityholders. Such costs may be recovered by the Servicer from the
Collection Account, with interest thereon, as provided by the applicable
Agreement.
Under the terms of the Mortgage Loans, mortgagors will generally be
required to present claims to insurers under hazard insurance policies
maintained on the related Mortgaged Properties. The Servicer, on behalf of the
Trustee and Securityholders, is obligated to present or cause to be presented
claims under any blanket insurance policy insuring against hazard losses on
Mortgaged Properties securing the Mortgage Loans. However, the ability of the
Servicer to present or cause to be presented such claims is dependent upon the
extent to which information in this regard is furnished to the Servicer by
mortgagors.
Contracts
Generally, the terms of the applicable Agreement for a Trust Fund comprised
of Contracts will require the Servicer to cause to be maintained with respect to
each Contract one or more hazard insurance policies which provide, at a minimum,
the same coverage as a standard form fire and extended coverage insurance policy
that is customary for manufactured housing, issued by a company authorized to
issue such policies in the state in which the Manufactured Home is located, and
in an amount which is not less than the maximum insurable value of such
Manufactured Home or the principal balance due from the obligor on the related
Contract, whichever is less; provided, however, that the amount of coverage
provided by each such hazard insurance policy shall be sufficient to avoid the
application of any co-insurance clause contained therein. When a Manufactured
Home's location was, at the time of origination of the related Contract, within
a federally designated special flood hazard area, the Servicer shall cause such
flood insurance to be maintained, which coverage shall be at least equal to the
minimum amount specified in the preceding sentence or such lesser amount as may
be available under the federal flood insurance program. Each hazard insurance
policy caused to be maintained by the Servicer shall contain a standard loss
payee clause in favor of the Servicer and its successors and assigns.
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If any obligor is in default in the payment of premiums on its hazard insurance
policy or policies, the Servicer shall pay such premiums out of its own funds,
and may add separately such premium to the obligor's obligation as provided by
the Contract, but may not add such premium to the remaining principal balance of
the Contract.
The Servicer may maintain, in lieu of causing individual hazard insurance
policies to be maintained with respect to each Manufactured Home, and shall
maintain, to the extent that the related Contract does not require the obligor
to maintain a hazard insurance policy with respect to the related Manufactured
Home, one or more blanket insurance policies covering losses on the obligor's
interest in the Contracts resulting from the absence or insufficiency of
individual hazard insurance policies. The Servicer shall pay the premium for
such blanket policy on the basis described therein and shall pay any deductible
amount with respect to claims under such policy relating to the Contracts.
Fidelity Bonds and Errors and Omissions Insurance
Each Agreement will require that the Servicer obtain and maintain in effect
a fidelity bond or similar form of insurance coverage (which may provide blanket
coverage) or any combination thereof insuring against loss occasioned by fraud,
theft or other intentional misconduct of the officers, employees and agents of
the Servicer. The applicable Agreement will allow the Servicer to self-insure
against loss occasioned by the errors and omissions of the officers, employees
and agents of the Servicer so long as certain criteria set forth in such
Agreement are met.
Due-on-Sale Provisions
The Mortgage Loans may contain clauses requiring the consent of the
mortgagee to any sale or other transfer of the related Mortgaged Property, or
due-on-sale clauses entitling the mortgagee to accelerate payment of the
Mortgage Loan upon any sale, transfer or conveyance of the related Mortgaged
Property. The Servicer will generally enforce any due-on-sale clause to the
extent it has knowledge of the conveyance or proposed conveyance of the
underlying Mortgaged Property and it is entitled to do so under applicable law;
provided, however, that the Servicer will not take any action in relation to the
enforcement of any due-on-sale provision which would adversely affect or
jeopardize coverage under any applicable insurance policy. Any fee collected by
or on behalf of the Servicer for entering into an assumption agreement will be
retained by or on behalf of the Servicer as additional servicing compensation.
See "Certain Legal Aspects of Mortgage Loans--Due-on-Sale Clauses." The
Contracts may also contain such clauses. The Servicer will generally permit such
transfer so long as the transferee satisfies the Servicer's then applicable
underwriting standards. The purpose of such transfers is often to avoid a
default by the transferring obligor. See "Certain Legal Aspects of the
Contracts--Transfers of Manufactured Homes; Enforceability of "Due-on-Sale"
Clauses."
Retained Interest; Servicing Compensation and Payment of Expenses
The prospectus supplement for a Series of Securities will specify whether
there will be any Retained Interest in the Assets, and, if so, the initial owner
thereof. If so, the Retained Interest will be established on a loan-by-loan
basis and will be specified on an exhibit to the applicable Agreement. A
"Retained Interest" in an Asset represents a specified portion of the interest
73
payable thereon. The Retained Interest will be deducted from mortgagor payments
as received and will not be part of the related Trust Fund.
The Servicer's primary servicing compensation with respect to a Series of
Securities will come from the periodic payment to it of a portion of the
interest payment on each Asset or such other amount specified in the related
prospectus supplement. Since any Retained Interest and a Servicer's primary
compensation are percentages of the principal balance of each Asset, such
amounts will decrease in accordance with the amortization of the Assets. The
prospectus supplement with respect to a Series of Securities evidencing
interests in a Trust Fund that includes Mortgage Loans or Contracts may provide
that, as additional compensation, the Servicer may retain all or a portion of
assumption fees, modification fees, late payment charges or Prepayment Premiums
collected from mortgagors and any interest or other income which may be earned
on funds held in the Collection Account or any account established by a Servicer
pursuant to the applicable Agreement.
The Servicer may, to the extent provided in the related prospectus
supplement, pay from its servicing compensation certain expenses incurred in
connection with its servicing and managing of the Assets, including, without
limitation, payment of the fees and disbursements of the Trustee and independent
accountants, payment of expenses incurred in connection with distributions and
reports to Securityholders, and payment of any other expenses described in the
related prospectus supplement. Certain other expenses, including certain
expenses relating to defaults and liquidations on the Assets and, to the extent
so provided in the related prospectus supplement, interest thereon at the rate
specified therein may be borne by the Trust Fund.
If and to the extent provided in the related prospectus supplement, the
Servicer may be required to apply a portion of the servicing compensation
otherwise payable to it in respect of any Due Period to certain interest
shortfalls resulting from the voluntary prepayment of any Assets in the related
Trust Fund during such period prior to their respective due dates therein.
Evidence as to Compliance
Each Agreement relating to Assets which include Mortgage Loans or Contracts
will provide that on or before a specified date in each year, beginning with the
first such date at least six months after the related Cut-off Date, a firm of
independent public accountants will furnish a statement to the Trustee to the
effect that, on the basis of the examination by such firm conducted
substantially in compliance with either the Uniform Single Attestation Program
for Mortgage Bankers, the Audit Program for Mortgages serviced for Freddie Mac
or such other program used by the Servicer, the servicing by or on behalf of the
Servicer of mortgage loans under agreements substantially similar to each other
(including the applicable Agreement) was conducted in compliance with the terms
of such agreements or such program except for any significant exceptions or
errors in records that, in the opinion of the firm, either the Audit Program for
Mortgages serviced for Freddie Mac, or paragraph 4 of the Uniform Single
Attestation Program for Mortgage Bankers, or such other program, requires it to
report.
Each such Agreement will also provide for delivery to the Trustee, on or
before a specified date in each year, of an annual statement signed by two
officers of the Servicer to the effect that the Servicer has fulfilled its
obligations under the applicable Agreement throughout the preceding calendar
year or other specified twelve-month period.
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Copies of such annual accountants' statement and such statements of
officers will be obtainable by Securityholders without charge upon written
request to the Servicer or other entity specified in the related prospectus
supplement at the address set forth in the related prospectus supplement.
Certain Matters Regarding Servicers, the Master Servicer and the Depositor
The Servicers and Master Servicer, if any, under each Agreement will be
named in the related prospectus supplement. The entities serving as Servicer or
Master Servicer may be affiliates of the Depositor and may have other normal
business relationships with the Depositor or the Depositor's affiliates.
Reference herein to the Servicer shall be deemed to be to the Master Servicer,
if applicable.
The applicable Agreement will provide that the Servicer may resign from its
obligations and duties thereunder only upon a determination that its duties
under such Agreement are no longer permissible under applicable law or are in
material conflict by reason of applicable law with any other activities carried
on by it, the other activities of the Servicer so causing such a conflict being
of a type and nature carried on by the Servicer at the date of such Agreement.
No such resignation will become effective until the Trustee or a successor
servicer has assumed the Servicer's obligations and duties under the applicable
Agreement.
Each Agreement will further provide that neither any Servicer, the
Depositor nor any director, officer, employee, or agent of a Servicer or the
Depositor will be under any liability to the related Trust Fund or
Securityholders for any action taken, or for refraining from the taking of any
action, in good faith pursuant to the applicable Agreement; provided, however,
that neither a Servicer, the Depositor nor any such person will be protected
against any breach of a representation, warranty or covenant made in such
Agreement, or against any liability specifically imposed thereby, or against any
liability which would otherwise be imposed by reason of willful misfeasance, bad
faith or gross negligence in the performance of obligations or duties thereunder
or by reason of reckless disregard of obligations and duties thereunder. Each
Agreement will further provide that any Servicer, the Depositor and any
director, officer, employee or agent of a Servicer or the Depositor will be
entitled to indemnification by the related Trust Fund and will be held harmless
against any loss, liability or expense incurred in connection with any legal
action relating to the applicable Agreement or the Securities; provided,
however, that such indemnification will not extend to any loss, liability or
expense
o specifically imposed by such Agreement or otherwise incidental to the
performance of obligations and duties thereunder, including, in the
case of a Servicer, the prosecution of an enforcement action in
respect of any specific Mortgage Loan or Mortgage Loans or Contract or
Contracts (except as any such loss, liability or expense shall be
otherwise reimbursable pursuant to such Agreement);
o incurred in connection with any breach of a representation, warranty
or covenant made in such Agreement;
o incurred by reason of misfeasance, bad faith or gross negligence in
the performance of obligations or duties thereunder, or by reason of
reckless disregard of such obligations or duties;
75
o incurred in connection with any violation of any state or federal
securities law; or
o imposed by any taxing authority if such loss, liability or expense is
not specifically reimbursable pursuant to the terms of the applicable
Agreement.
In addition, each Agreement will provide that neither any Servicer nor the
Depositor will be under any obligation to appear in, prosecute or defend any
legal action which is not incidental to its respective responsibilities under
the applicable Agreement and which in its opinion may involve it in any expense
or liability. Any such Servicer or the Depositor may, however, in its discretion
undertake any such action which it may deem necessary or desirable with respect
to the applicable Agreement and the rights and duties of the parties thereto and
the interests of the Securityholders thereunder. In such event, the legal
expenses and costs of such action and any liability resulting therefrom will be
expenses, costs and liabilities of the Securityholders, and the Servicer or the
Depositor, as the case may be, will be entitled to be reimbursed therefor and to
charge the Collection Account.
Any person into which the Servicer or the Depositor may be merged or
consolidated, or any person resulting from any merger or consolidation to which
the Servicer or the Depositor is a party, or any person succeeding to the
business of the Servicer or the Depositor, will be the successor of the Servicer
or the Depositor, as the case may be, under the applicable Agreement.
Special Servicers
If and to the extent specified in the related prospectus supplement, a
special servicer (a "Special Servicer") may be a party to the applicable
Agreement or may be appointed by the Servicer or another specified party to
perform certain specified duties in respect of servicing the related Mortgage
Loans that would otherwise be performed by the Servicer, such as the workout
and/or foreclosure of defaulted Mortgage Loans. The rights and obligations of
any Special Servicer will be specified in the related Agreement The Servicer
will be liable for the performance of a Special Servicer only if, and to the
extent, set forth in such Agreement.
Events of Default under the Agreements
Events of default under the applicable Agreement will generally include:
o any failure by the Servicer to distribute or cause to be distributed
to Securityholders, or to remit to the Trustee for distribution to
Securityholders, any required payment that continues after a grace
period, if any;
o any failure by the Servicer duly to observe or perform in any material
respect any of its other covenants or obligations under the applicable
Agreement which continues unremedied for 30 days after written notice
of such failure has been given to the Servicer by the Trustee or the
Depositor, or to the Servicer, the Depositor and the Trustee by
Securityholders evidencing not less than 25% of the Voting Rights;
o any breach of a representation or warranty made by the Servicer under
the applicable Agreement which materially and adversely affects the
interests of Securityholders and which continues unremedied for 30 days
after written notice of such breach has been given to the Servicer by
the Trustee or the Depositor, or to the Servicer, the Depositor and
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the Trustee by the holders of Securities evidencing not less than 25%
of the Voting Rights; and
o certain events of insolvency, readjustment of debt, marshaling of
assets and liabilities or similar proceedings and certain actions by
or on behalf of the Servicer indicating its insolvency or inability to
pay its obligations.
Material variations to the foregoing events of default (other than to shorten
cure periods or eliminate notice requirements) will be specified in the related
prospectus supplement. The Trustee will, not later than the later of 60 days or
such other period specified in the related prospectus supplement after the
occurrence of any event which constitutes or, with notice or lapse of time or
both, would constitute an event of default and five days after certain officers
of the Trustee become aware of the occurrence of such an event, transmit by mail
to the Depositor and all Securityholders of the applicable Series notice of such
occurrence, unless such default shall have been cured or waived.
The manner of determining the "Voting Rights" of a Security or Class or
Classes of Securities will be specified in the related prospectus supplement.
Rights Upon Event of Default under the Agreements
So long as an event of default under an Agreement remains unremedied, the
Depositor or the Trustee may, and at the direction of holders of Securities
evidencing not less than 51% (or such other percentage specified in the related
prospectus supplement) of the Voting Rights, the Trustee shall terminate all of
the rights and obligations of the Servicer under the applicable Agreement and in
and to the Mortgage Loans (other than as a Securityholder or as the owner of any
Retained Interest), whereupon the Trustee will succeed to all of the
responsibilities, duties and liabilities of the Servicer under the applicable
Agreement (except that if the Trustee is prohibited by law from obligating
itself to make advances regarding delinquent Assets, or if the related
prospectus supplement so specifies, then the Trustee will not be obligated to
make such advances) and will be entitled to similar compensation arrangements.
In the event that the Trustee is unwilling or unable so to act, it may or, at
the written request of the holders of Securities entitled to at least 51% (or
such other percentage specified in the related prospectus supplement) of the
Voting Rights, it shall appoint, or petition a court of competent jurisdiction
for the appointment of, a loan servicing institution acceptable to the Rating
Agency with a net worth at the time of such appointment of at least $15,000,000
(or such other amount specified in the related prospectus supplement) to act as
successor to the Servicer under the applicable Agreement. Pending such
appointment, the Trustee is obligated to act in such capacity. The Trustee and
any such successor may agree upon the servicing compensation to be paid, which
in no event may be greater than the compensation payable to the Servicer under
the applicable Agreement.
The holders of Securities representing at least 66 2/3% (or such other
percentage specified in the related prospectus supplement) of the Voting Rights
allocated to the respective Classes of Securities affected by any event of
default will be entitled to waive such event of default; provided, however, that
an Event of Default involving a failure to distribute a required payment to
Securityholders described in the first bullet point above under "--Events of
Default under the Agreements" may be waived only by all of the Securityholders.
Upon any such waiver of an
77
event of default, such event of default shall cease to exist and shall be deemed
to have been remedied for every purpose under the applicable Agreement.
No Securityholders will have the right under any Agreement to institute any
proceeding with respect thereto unless such holder previously has given to the
Trustee written notice of default and unless the holders of Securities
evidencing not less than 25% (or such other percentage specified in the related
prospectus supplement) of the Voting Rights have made written request upon the
Trustee to institute such proceeding in its own name as Trustee thereunder and
have offered to the Trustee reasonable indemnity, and the Trustee for 60 days
(or such other number of days specified in the related prospectus supplement)
has neglected or refused to institute any such proceeding. The Trustee, however,
is under no obligation to exercise any of the trusts or powers vested in it by
any Agreement or to make any investigation of matters arising thereunder or to
institute, conduct or defend any litigation thereunder or in relation thereto at
the request, order or direction of any of the Securityholders covered by such
Agreement, unless such Securityholders have offered to the Trustee reasonable
security or indemnity against the costs, expenses and liabilities which may be
incurred therein or thereby.
Amendment
Each Agreement may be amended by the parties thereto, without the consent
of any Securityholders covered by the applicable Agreement,
o to cure any ambiguity or mistake,
o to correct, modify or supplement any provision therein which may be
inconsistent with any other provision therein or with the related
prospectus supplement,
o to make any other provisions with respect to matters or questions
arising under the applicable Agreement which are not materially
inconsistent with the provisions thereof, provided that, such
amendment pursuant to this clause will not adversely affect in any
material respect the interests of any Securityholders covered by the
applicable Agreement as evidenced either by an opinion of counsel to
such effect or the delivery to the Trustee of written notification
from each Rating Agency that provides, at the request of the
Depositor, a rating for the Offered Securities of the related Series
to the effect that such amendment or supplement will not cause such
Rating Agency to lower or withdraw the then current rating assigned to
such Securities; or
o to comply with any requirements imposed by the Code.
Each Agreement may also be amended by the Depositor, the Servicer, if any, and
the Trustee, with the consent of the Securityholders affected thereby evidencing
not less than 51% (or such other percentage specified in the related prospectus
supplement) of the Voting Rights, for any purpose; provided, however, no such
amendment may (i) reduce in any manner the amount of, or delay the timing of,
payments received or advanced on Assets which are required to be distributed on
any Security without the consent of the Securityholder or (ii) reduce the
consent percentages described in this paragraph without the consent of all the
Securityholders covered by such Agreement then outstanding. However, with
respect to any Series of Securities as to which a REMIC election or a FASIT
election is to be made, the Trustee will not consent to any
78
amendment of the applicable Agreement unless it shall first have received an
opinion of counsel to the effect that such amendment will not result in the
imposition of a tax on the related Trust Fund or cause the related Trust Fund to
fail to qualify as a REMIC or a FASIT, as the case may be, at any time that the
related Securities are outstanding.
The Trustee
The Trustee under each Agreement will be named in the related prospectus
supplement. The commercial bank, national banking association, banking
corporation or trust company serving as Trustee may have a banking relationship
with the Depositor and its affiliates, with any Servicer and its affiliates and
with any Master Servicer and its affiliates. If so specified in the related
prospectus supplement with respect to certain Series of Securities, a
certificate administrator will perform certain duties and functions normally
performed by the Trustee. Any certificate administrator will be a party to the
applicable Agreement and will be named in the applicable prospectus supplement.
Any certificate administrator will have obligations and rights similar to the
Trustee as described in this prospectus. The commercial bank, national banking
association, banking corporation or trust company serving as certificate
administrator may have a banking relationship with the Depositor and its
affiliates, with any Servicer and its affiliates and with any Master Servicer
and its affiliates.
Duties of the Trustee
The Trustee will make no representations as to the validity or sufficiency
of any Agreement, the Securities or any Asset or related document and is not
accountable for the use or application by or on behalf of any Servicer of any
funds paid to the Master Servicer or its designee in respect of the Securities
or the Assets, or deposited into or withdrawn from the Collection Account or any
other account by or on behalf of the Servicer. If no Event of Default has
occurred and is continuing, the Trustee is required to perform only those duties
specifically required under the applicable Agreement, as applicable. However,
upon receipt of the various certificates, reports or other instruments required
to be furnished to it, the Trustee is required to examine such documents and to
determine whether they conform to the requirements of the applicable Agreement.
Certain Matters Regarding the Trustee
The Trustee and any director, officer, employee or agent of the Trustee
shall be entitled to indemnification out of the Collection Account for any loss,
liability or expense (including costs and expenses of litigation, and of
investigation, counsel fees, damages, judgments and amounts paid in settlement)
incurred in connection with the Trustee's
o enforcing its rights and remedies and protecting the interests, of the
Securityholders during the continuance of an Event of Default,
o defending or prosecuting any legal action in respect of the applicable
Agreement or Series of Securities,
79
o being the mortgagee of record with respect to the Mortgage Loans in a
Trust Fund and the owner of record with respect to any Mortgaged
Property acquired in respect thereof for the benefit of
Securityholders, or
o acting or refraining from acting in good faith at the direction of the
holders of the related Series of Securities entitled to not less than
25% (or such other percentage as is specified in the applicable
Agreement with respect to any particular matter) of the Voting Rights
for such Series.
Any such indemnification of the Trustee discussed above will not extend to any
loss, liability or expense that constitutes a specific liability of the Trustee
pursuant to the applicable Agreement, or to any loss, liability or expense
incurred by reason of willful misfeasance, bad faith or negligence on the part
of the Trustee in the performance of its obligations and duties thereunder, or
by reason of its reckless disregard of such obligations or duties, or as may
arise from a breach of any representation, warranty or covenant of the Trustee
made therein.
Resignation and Removal of the Trustee
The Trustee may at any time resign from its obligations and duties under an
Agreement by giving written notice thereof to the Depositor, the Servicer, if
any, and all Securityholders. Upon receiving such notice of resignation, the
Depositor is required promptly to appoint a successor trustee acceptable to the
Servicer, if any. If no successor trustee shall have been so appointed and have
accepted appointment within 30 days after the giving of such notice of
resignation, the resigning Trustee may petition any court of competent
jurisdiction for the appointment of a successor trustee.
If at any time the Trustee shall cease to be eligible to continue as such
under the applicable Agreement, or if at any time the Trustee shall become
incapable of acting, or shall be adjudged bankrupt or insolvent, or a receiver
of the Trustee or of its property shall be appointed, or any public officer
shall take charge or control of the Trustee or of its property or affairs for
the purpose of rehabilitation, conservation or liquidation, or if a change in
the financial condition of the Trustee has adversely affected or will adversely
affect the rating on any Class of the Securities, then the Depositor may remove
the Trustee and appoint a successor trustee acceptable to the Master Servicer,
if any. Securityholders of any Series entitled to at least 51% (or such other
percentage specified in the related prospectus supplement) of the Voting Rights
for such Series may at any time remove the Trustee without cause and appoint a
successor trustee.
Any resignation or removal of the Trustee and appointment of a successor
trustee shall not become effective until acceptance of appointment by the
successor trustee.
Material Terms of the Indenture
General
The following summary describes the material provisions that may appear in
each Indenture. The prospectus supplement for a Series of Notes will describe
any provision of the Indenture relating to such Series that materially differs
from the description thereof contained in this prospectus. The summaries do not
purport to be complete and are subject to, and are qualified in
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their entirety by reference to, all of the provisions of the Indenture for a
Series of Notes. A form of an Indenture has been filed as an exhibit to the
Registration Statement of which this prospectus is a part. The Depositor will
provide a copy of the Indenture (without exhibits) relating to any Series of
Notes without charge upon written request of a Securityholder of such Series
addressed to Wachovia Asset Securitization Issuance, Inc.LLC, One Wachovia
Center, 301 South College Street, Charlotte, North Carolina 28288, Attention:
Vice President.
Events of Default
Events of default under the Indenture for each Series of Notes will
generally include:
o a default for thirtyfive (305) days (or such other number of days
specified in such prospectus supplement) or more in the payment of any
principal of or interest on any Note of such Series;
o failure to perform any other covenant of the Depositor or the Trust
Fund in the Indenture which continues for a period of sixty (60) days
(or such other number of days specified in such prospectus supplement)
after notice thereof is given in accordance with the procedures
described in the related prospectus supplement;
o there occurs a default in the observance or performance in any
======================================================================
material respect of any covenant or agreement of the Issuer made in
======================================================================
the Indenture, or any representation or warranty of the Issuer made by
============
the Depositor or the Trust Fund in the Indenture or in any certificate
or other writing delivered pursuant theretoto or in connection
==
therewith with respect to or affecting such Series havingwith the
=========
Indenture proving to have been incorrect in aany material respect as
==========================
of the time made, and such breach is not cured within sixty (60)when
====
the same shall have been made that has a material adverse effect on
======================================================================
the noteholders or the issuer of a financial guaranty insurance policy
======================================================================
relating to such Series, and the default shall continue or not be
======================================================================
cured, or the circumstance or condition in respect of which the
======================================================================
representation or warranty was incorrect shall not have been
======================================================================
eliminated or otherwise cured, for a period of 30 days (or such other
==================================================
number of days specified in such prospectus supplement) after notice
thereof is given in accordance with the procedures described in the
related prospectus supplement;there shall have been given, by
=====================================
registered or certified mail, to the Issuer by the Indenture Trustee
======================================================================
or to the Issuer and the Indenture Trustee by the holders of at least
======================================================================
25% of the outstanding Note Balance of the Notes or the issuer of a
======================================================================
financial guaranty insurance policy relating to such Series , a notice
======================================================================
specifying the default or incorrect representation or warranty and
======================================================================
requiring it to be remedied and stating that the notice is a notice of
======================================================================
default under the Indenture;
============================
o certain events of bankruptcy, insolvency, receivership or liquidation
of the Depositor or the Trust Fund; orthere occurs the filing of a
=============================
decree or order for relief by a court having jurisdiction in the
======================================================================
premises in respect of the Issuer or any substantial part of the trust
======================================================================
fund in an involuntary case under any applicable federal or state
======================================================================
bankruptcy, insolvency or other similar law now or hereafter in
======================================================================
effect, or appointing a receiver, liquidator, assignee, servicer,
======================================================================
trustee, sequestrator or similar official of the Issuer or for any
======================================================================
substantial part of the trust fund, or ordering the winding-up or
======================================================================
liquidation of the Issuer's affairs, and the decree or order shall
======================================================================
remain unstayed and in effect for a period of 60 consecutive days; or
======================================================================
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o any other event of default provided with respect to Notes of that
Series.there occurs the commencement by the Issuer of a voluntary case
===============================================================
under any applicable federal or state bankruptcy, insolvency or other
======================================================================
similar law now or hereafter in effect, or the consent by the Issuer
======================================================================
to the entry of an order for relief in an involuntary case under any
======================================================================
such law, or the consent by the Issuer to the appointment or taking
======================================================================
possession by a receiver, liquidator, assignee, servicer, trustee,
======================================================================
sequestrator or similar official of the Issuer or for any substantial
======================================================================
part of the assets of the trust fund, or the making by the Issuer of
======================================================================
any general assignment for the benefit of creditors, or the failure by
======================================================================
the Issuer generally to pay its debts as those debts become due, or
======================================================================
the taking of any action by the Issuer in furtherance of any of the
======================================================================
foregoing.
=========
If an event of default with respect to the Notes of any Series at the time
outstanding occurs and is continuing, either the Indenture Trustee or the
Securityholders of a majority of the then aggregate outstanding amount of the
Notes of such Series may declare the principal amount (or, if the Notes of that
Series are Accrual Securities, such portion of the principal amount as may be
specified in the terms of that Series, as provided in the related prospectus
supplement) of all the Notes of such Series to be due and payable immediately.
Such declaration may, under certain circumstances, be rescinded and annulled by
the Securityholders of a majority in aggregate outstanding amount of the Notes
of such Series.
If, following an event of default with respect to any Series of Notes, the
Notes of such Series have been declared to be due and payable, the Indenture
Trustee may, in its discretion, notwithstanding such acceleration, elect to
maintain possession of the collateral securing the Notes of such Series and to
continue to apply distributions on such collateral as if there had been no
declaration of acceleration if such collateral continues to provide sufficient
funds for the payment of principal of and interest on the Notes of such Series
as they would have become due if there had not been such a declaration. In
addition, the Indenture Trustee may not sell or otherwise liquidate the
collateral securing the Notes of a Series following an event of default, other
than a default in the payment of any principal or interest on any Note of such
Series for thirty (30) days or more, unless (a) the Securityholders of 100% (or
such other percentage specified in the related prospectus supplement) of the
then aggregate outstanding amount of the Notes of such Series consent to such
sale, (b) the proceeds of such sale or liquidation are sufficient to pay in full
the principal of and accrued interest, due and unpaid, on the outstanding Notes
of such Series at the date of such sale or (c) the Indenture Trustee determines
that such collateral would not be sufficient on an ongoing basis to make all
payments on such Notes as such payments would have become due if such Notes had
not been declared due and payable, and the Indenture Trustee obtains the consent
of the Securityholders of 66 2/3% (or such other percentage specified in the
related prospectus supplement) of the then aggregate outstanding amount of the
Notes of such Series.
In the event that the Indenture Trustee liquidates the collateral in
connection with an event of default involving a default for thirty (30) days (or
such other number of days specified in the related prospectus supplement) or
more in the payment of principal of or interest on the Notes of a Series, the
Indenture provides that the Indenture Trustee will have a prior lien on the
proceeds of any such liquidation for unpaid fees and expenses. As a result, upon
the occurrence of such an event of default, the amount available for
distribution to the Securityholders would be less than would otherwise be the
case. However, the Indenture Trustee may not institute a proceeding for
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the enforcement of its lien except in connection with a proceeding for the
enforcement of the lien of the Indenture for the benefit of the Securityholders
after the occurrence of such an event of default.
To the extent provided in the related prospectus supplement, in the event
the principal of the Notes of a Series is declared due and payable, as described
above, the Securityholders of any such Notes issued at a discount from par may
be entitled to receive no more than an amount equal to the unpaid principal
amount thereof less the amount of such discount which is unamortized.
Subject to the provisions of the Indenture relating to the duties of the
Indenture Trustee, in case an event of default shall occur and be continuing
with respect to a Series of Notes, the Indenture Trustee shall be under no
obligation to exercise any of the rights or powers under the Indenture at the
request or direction of any of the Securityholders of such Series, unless such
holders offered to the Indenture Trustee security or indemnity satisfactory to
it against the costs, expenses and liabilities which might be incurred by it in
complying with such request or direction. Subject to such provisions for
indemnification and certain limitations contained in the Indenture, the
Securityholders of a majority of the then aggregate outstanding amount of the
Notes of such Series shall have the right to direct the time, method and place
of conducting any proceeding for any remedy available to the Indenture Trustee
or exercising any trust or power conferred on the Indenture Trustee with respect
to the Notes of such Series, and the Securityholders of a majority of the then
aggregate outstanding amount of the Notes of such Series may, in certain cases,
waive any default with respect thereto, except a default in the payment of
principal or interest or a default in respect of a covenant or provision of the
Indenture that cannot be modified without the waiver or consent of all the
Securityholders of the outstanding Notes of such Series affected thereby.
Discharge of Indenture
The Indenture will be discharged with respect to a Series of Notes (except
with respect to certain continuing rights specified in the Indenture) upon the
delivery to the Indenture Trustee for cancellation of all the Notes of such
Series or, with certain limitations, upon deposit with the Indenture Trustee of
funds sufficient for the payment in full of all of the Notes of such Series.
In addition to such discharge with certain limitations, the Indenture will
provide that, if so specified with respect to the Notes of any Series, the
related Trust Fund will be discharged from any and all obligations in respect of
the Notes of such Series (except for certain obligations relating to temporary
Notes and exchange of Notes, to register the transfer of or exchange Notes of
such Series, to replace stolen, lost or mutilated Notes of such Series, to
maintain paying agencies and to hold monies for payment in trust) upon the
deposit with the Indenture Trustee, in trust, of money and/or direct obligations
of or obligations guaranteed by the United States of America which through the
payment of interest and principal in respect thereof in accordance with their
terms will provide money in an amount sufficient to pay the principal of and
each installment of interest on the Notes of such Series on the maturity date
for such Notes and any installment of interest on such Notes in accordance with
the terms of the Indenture and the Notes of such Series. In the event of any
such defeasance and discharge of Notes of such Series, holders of Notes of such
Series would be able to look only to such money and/or direct obligations for
payment of principal and interest, if any, on their Notes until maturity.
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Indenture Trustee's Annual Report
The Indenture Trustee for each Series of Notes will be required to mail
each year to all related Securityholders a brief report relating to its
eligibility and qualification to continue as Indenture Trustee under the related
Indenture, any amounts advanced by it under the Indenture, the amount, interest
rate and maturity date of certain indebtedness owing by such Trust to the
applicable Indenture Trustee in its individual capacity, the property and funds
physically held by such Indenture Trustee as such and any action taken by it
that materially affects such Notes and that has not been previously reported.
The Indenture Trustee
The Indenture Trustee for a Series of Notes will be specified in the
related prospectus supplement. The Indenture Trustee for any Series may resign
at any time, in which event the Depositor will be obligated to appoint a
successor trustee for such Series. The Depositor may also remove any such
Indenture Trustee if such Indenture Trustee ceases to be eligible to continue as
such under the related Indenture or if such Indenture Trustee becomes insolvent.
In such circumstances the Depositor will be obligated to appoint a successor
trustee for the applicable Series of Notes. Any resignation or removal of the
Indenture Trustee and appointment of a successor trustee for any Series of Notes
does not become effective until acceptance of the appointment by the successor
trustee for such Series.
The bank or trust company serving as Indenture Trustee may have a banking
relationship with the Depositor or any of its affiliates, a Servicer or any of
its affiliates or the Master Servicer or any of its affiliates.
DESCRIPTION OF CREDIT SUPPORT
General
For any Series of Securities, Credit Support may be provided with respect
to one or more Classes thereof or the related Assets. Credit Support may be in
the form of the subordination of one or more Classes of Securities, letters of
credit, insurance policies, guarantees, the establishment of one or more reserve
funds or another method of Credit Support described in the related prospectus
supplement, or any combination of the foregoing. If so provided in the related
prospectus supplement, any form of Credit Support may be structured so as to be
drawn upon by more than one Series to the extent described therein.
The coverage provided by any Credit Support will be described in the
related prospectus supplement. Generally, such coverage will not provide
protection against all risks of loss and will not guarantee repayment of the
entire Security Balance of the Securities and interest thereon. If losses or
shortfalls occur that exceed the amount covered by Credit Support or that are
not covered by Credit Support, Securityholders will bear their allocable share
of deficiencies. Moreover, if a form of Credit Support covers more than one
Series of Securities (each, a "Covered Trust"), Securityholders evidencing
interests in any of such Covered Trusts will be subject to the risk that such
Credit Support will be exhausted by the claims of other Covered Trusts prior to
such Covered Trust receiving any of its intended share of such coverage.
84
If Credit Support is provided with respect to one or more Classes of
Securities of a Series, or the related Assets, the related prospectus supplement
will include a description of:
o the nature and amount of coverage under such Credit Support, o any
conditions to payment thereunder not otherwise described herein,
o the conditions, if any, under which the amount of coverage under such
Credit Support may be reduced and under which such Credit Support may
be terminated or replaced and
o the material provisions relating to such Credit Support.
Additionally, the related prospectus supplement will set forth certain
information with respect to the obligor under any instrument of Credit Support,
including:
o a brief description of its principal business activities,
o its principal place of business, place of incorporation and the
jurisdiction under which it is chartered or licensed to do business,
o if applicable, the identity of regulatory agencies that exercise
primary jurisdiction over the conduct of its business and
o its total assets, and its stockholders' or policyholders' surplus, if
applicable, as of the date specified in the prospectus supplement.
See "Risk Factors--Risks Associated with the Securities--Credit Enhancement is
Limited in Amount and Coverage."
Subordinate Securities
If so specified in the related prospectus supplement, one or more Classes
of Securities of a Series may be Subordinate Securities. To the extent specified
in the related prospectus supplement, the rights of the holders of Subordinate
Securities to receive distributions of principal and interest from the
Collection Account on any Distribution Date will be subordinated to such rights
of the holders of Senior Securities. If so provided in the related prospectus
supplement, the subordination of a Class may apply only in the event of (or may
be limited to) certain types of losses or shortfalls. The related prospectus
supplement will set forth information concerning the amount of subordination of
a Class or Classes of Subordinate Securities in a Series, the circumstances in
which such subordination will be applicable and the manner, if any, in which the
amount of subordination will be effected.
Cross-Support Provisions
If the Assets for a Series are divided into separate groups, each
supporting a separate Class or Classes of Securities of a Series, Credit Support
may be provided by cross-support provisions requiring that distributions be made
on Senior Securities evidencing interests in one group of Mortgage Loans prior
to distributions on Subordinate Securities evidencing interests in a different
group of Mortgage Loans within the Trust Fund. The prospectus supplement for a
85
Series that includes a cross-support provision will describe the manner and
conditions for applying such provisions.
Limited Guarantee
If so specified in the related prospectus supplement with respect to a
Series of Securities, credit enhancement may be provided in the form of a
limited guarantee issued by a guarantor named therein.
Financial Guaranty Insurance Policy or Surety Bond
If so specified in the related prospectus supplement with respect to a
Series of Securities, credit enhancement may be provided in the form of a
financial guaranty insurance policy or a surety bond issued by an insurer named
therein.
Letter of Credit
Alternative credit support with respect to a Series of Securities may be
provided by the issuance of a letter of credit by the bank or financial
institution specified in the related prospectus supplement. The coverage, amount
and frequency of any reduction in coverage provided by a letter of credit issued
with respect to a Series of Securities will be set forth in the prospectus
supplement relating to such Series.
Pool Insurance Policies
If so specified in the related prospectus supplement relating to a Series
of Securities, a pool insurance policy for the Mortgage Loans in the related
Trust Fund will be obtained. The pool insurance policy will cover any loss,
subject to the limitations described in the related prospectus supplement, by
reason of default to the extent a related Mortgage Loan is not covered by any
primary mortgage insurance policy. The amount and principal terms of any such
coverage will be set forth in the prospectus supplement.
Special Hazard Insurance Policies
If so specified in the related prospectus supplement, a special hazard
insurance policy may also be obtained for the related Trust Fund in the amount
set forth in such prospectus supplement. The special hazard insurance policy
will, subject to the limitations described in the related prospectus supplement,
protect against loss by reason of damage to Mortgaged Properties caused by
certain hazards not insured against under the standard form of hazard insurance
policy for the respective states, in which the Mortgaged Properties are located.
The amount and principal terms of any such coverage will be set forth in the
prospectus supplement.
Mortgagor Bankruptcy Bond
If so specified in the related prospectus supplement, losses resulting from
a bankruptcy proceeding relating to a mortgagor affecting the Mortgage Loans in
a Trust Fund with respect to a Series of Securities will be covered under a
mortgagor bankruptcy bond, or any other instrument that will not result in a
downgrading of the rating of the Securities of a Series by the Rating Agency or
Rating Agencies that rate such Series. Any mortgagor bankruptcy bond or
86
such other instrument will provide for coverage in an amount meeting the
criteria of the Rating Agency or Rating Agencies rating the Securities of the
related Series, which amount will be set forth in the related prospectus
supplement. The amount and principal terms of any such coverage will be set
forth in the prospectus supplement.
Reserve Funds
If so provided in the prospectus supplement for a Series of Securities,
deficiencies in amounts otherwise payable on such Securities or certain Classes
thereof will be covered by one or more reserve funds in which cash, a letter of
credit, Permitted Investments, a demand note or a combination thereof will be
deposited, in the amounts so specified in such prospectus supplement. The
reserve funds for a Series may also be funded over time by depositing therein a
specified amount of the distributions received on the related Assets as
specified in the related prospectus supplement.
Amounts on deposit in any reserve fund for a Series, together with the
reinvestment income thereon, if any, will be applied for the purposes, in the
manner, and to the extent specified in the related prospectus supplement. A
reserve fund may be provided to increase the likelihood of timely distributions
of principal of and interest on the Securities. If so specified in the related
prospectus supplement, reserve funds may be established to provide limited
protection against only certain types of losses and shortfalls. Following each
Distribution Date amounts in a reserve fund in excess of any amount required to
be maintained therein may be released from the reserve fund under the conditions
and to the extent specified in the related prospectus supplement and will not be
available for further application to the Securities.
Moneys deposited in any reserve funds will be invested in Permitted
Investments, to the extent specified in the related prospectus supplement. To
the extent specified in the related prospectus supplement, any reinvestment
income or other gain from such investments will be credited to the related
reserve fund for such Series, and any loss resulting from such investments will
be charged to such reserve fund. However, such income may be payable to any
related Servicer or another service provider as additional compensation. To the
extent specified in the related prospectus supplement, the reserve fund, if any,
for a Series will not be a part of the Trust Fund.
Additional information concerning any reserve fund will be set forth in the
related prospectus supplement, including the initial balance of such reserve
fund, the balance required to be maintained in the reserve fund, the manner in
which such required balance will decrease over time, the manner of funding such
reserve fund, the purposes for which funds in the reserve fund may be applied to
make distributions to Securityholders and use of investment earnings from the
reserve fund, if any.
Overcollateralization
If specified in the related prospectus supplement, subordination provisions
of a Trust Fund may be used to accelerate to a limited extent the amortization
of one or more Classes of Securities relative to the amortization of the related
Assets. The accelerated amortization is achieved by the application of certain
excess interest to the payment of principal of one or more Classes of
Securities. This acceleration feature creates, with respect to the Assets or
groups
87
thereof, overcollateralization which results from the excess of the aggregate
principal balance of the related Assets, or a group thereof, over the principal
balance of the related Class or Classes of Securities. Such acceleration may
continue for the life of the related Security, or may be limited. In the case of
limited acceleration, once the required level of overcollateralization is
reached, and subject to certain provisions specified in the related prospectus
supplement, such limited acceleration feature may cease, unless necessary to
maintain the required level of overcollateralization.
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS
The following discussion contains summaries, which are general in nature,
of certain legal aspects of loans secured by single-family or multi-family
residential properties. Because such legal aspects are governed primarily by
applicable state law (which laws may differ substantially), the summaries do not
purport to be complete nor to reflect the laws of any particular state, nor to
encompass the laws of all states in which the security for the Mortgage Loans is
situated. The summaries are qualified in their entirety by reference to the
applicable federal and state laws governing the Mortgage Loans. See "Description
of the Trust Funds--Assets."
General
All of the Mortgage Loans are loans evidenced by a note or bond and secured
by instruments granting a security interest in real property which may be
mortgages, deeds of trust, security deeds or deeds to secure debt, depending
upon the prevailing practice and law in the state in which the Mortgaged
Property is located. Mortgages, deeds of trust and deeds to secure debt are
herein collectively referred to as "mortgages." Any of the foregoing types of
mortgages will create a lien upon, or grant a title interest in, the subject
property, the priority of which will depend on the terms of the particular
security instrument, as well as separate, recorded, contractual arrangements
with others holding interests in the mortgaged property, the knowledge of the
parties to such instrument as well as the order of recordation of the instrument
in the appropriate public recording office. However, recording does not
generally establish priority over governmental claims for real estate taxes and
assessments and other charges imposed under governmental police powers.
Types of Mortgage Instruments
A mortgage either creates a lien against or constitutes a conveyance of
real property between two parties--a mortgagor (the borrower and usually the
owner of the subject property) and a mortgagee (the lender). In contrast, a deed
of trust is a three-party instrument, among a trustor (the equivalent of a
mortgagor), a trustee to whom the mortgaged property is conveyed, and a
beneficiary (the lender) for whose benefit the conveyance is made. As used in
this prospectus, unless the context otherwise requires, "mortgagor" includes the
trustor under a deed of trust and a grantor under a security deed or a deed to
secure debt. Under a deed of trust, the mortgagor grants the property,
irrevocably until the debt is paid, in trust, generally with a power of sale as
security for the indebtedness evidenced by the related note. A deed to secure
debt typically has two parties. By executing a deed to secure debt, the grantor
conveys title to, as opposed to merely creating a lien upon, the subject
property to the grantee until such time as the underlying
88
debt is repaid, generally with a power of sale as security for the indebtedness
evidenced by the related mortgage note. In case the mortgagor under a mortgage
is a land trust, there would be an additional party because legal title to the
property is held by a land trustee under a land trust agreement for the benefit
of the mortgagor. At origination of a mortgage loan involving a land trust, the
mortgagor executes a separate undertaking to make payments on the mortgage note.
The mortgagee's authority under a mortgage, the trustee's authority under a deed
of trust and the grantee's authority under a deed to secure debt are governed by
the express provisions of the mortgage, the law of the state in which the real
property is located, certain federal laws (including, without limitation, the
Relief Act) and, in some cases, in deed of trust transactions, the directions of
the beneficiary.
The Mortgages that encumber Multifamily Properties may contain an
assignment of rents and leases, pursuant to which the mortgagor assigns to the
lender the mortgagor's right, title and interest as landlord under each lease
and the income derived therefrom, while retaining a revocable license to collect
the rents for so long as there is no default. If the mortgagor defaults, the
license terminates and the lender is entitled to collect the rents. Local law
may require that the lender take possession of the property and/or obtain a
court-appointed receiver before becoming entitled to collect the rents.
Interest in Real Property
The real property covered by a mortgage, deed of trust, security deed or
deed to secure debt is most often the fee estate in land and improvements.
However, such an instrument may encumber other interests in real property such
as a tenant's interest in a lease of land or improvements, or both, and the
leasehold estate created by such lease. An instrument covering an interest in
real property other than the fee estate requires special provisions in the
instrument creating such interest or in the mortgage, deed of trust, security
deed or deed to secure debt, to protect the mortgagee against termination of
such interest before the mortgage, deed of trust, security deed or deed to
secure debt is paid. The Depositor, the Asset Seller or other entity specified
in the related prospectus supplement will make certain representations and
warranties in the applicable Agreement or certain representations and warranties
will be assigned to the Trustee with respect to any Mortgage Loans that are
secured by an interest in a leasehold estate. Such representation and
warranties, if applicable, will be set forth in the prospectus supplement.
Cooperative Loans
If specified in the prospectus supplement relating to a Series of Offered
Securities, the Mortgage Loans may also consist of cooperative apartment loans
("Cooperative Loans") secured by security interests in shares issued by a
cooperative housing corporation (a "Cooperative") and in the related proprietary
leases or occupancy agreements granting exclusive rights to occupy specific
dwelling units in the cooperatives' buildings. The security agreement will
create a lien upon, or grant a title interest in, the property which it covers,
the priority of which will depend on the terms of the particular security
agreement as well as the order of recordation of the agreement in the
appropriate recording office. Such a lien or title interest is not prior to the
lien for real estate taxes and assessments and other charges imposed under
governmental police powers.
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Each Cooperative owns in fee or has a leasehold interest in all the real
property and owns in fee or leases the building and all separate dwelling units
therein. The Cooperative is directly responsible for property management and, in
most cases, payment of real estate taxes, other governmental impositions and
hazard and liability insurance. If there is a blanket mortgage or mortgages on
the cooperative apartment building or underlying land, as is generally the case,
or an underlying lease of the land, as is the case in some instances, the
Cooperative, as property mortgagor, or lessee, as the case may be, is also
responsible for meeting these mortgage or rental obligations. A blanket mortgage
is ordinarily incurred by the cooperative in connection with either the
construction or purchase of the Cooperative's apartment building or obtaining of
capital by the Cooperative. The interest of the occupant under proprietary
leases or occupancy agreements as to which that Cooperative is the landlord are
generally subordinate to the interest of the holder of a blanket mortgage and to
the interest of the holder of a land lease. If the Cooperative is unable to meet
the payment obligations (i) arising under a blanket mortgage, the mortgagee
holding a blanket mortgage could foreclose on that mortgage and terminate all
subordinate proprietary leases and occupancy agreements or (ii) arising under
its land lease, the holder of the landlord's interest under the land lease could
terminate it and all subordinate proprietary leases and occupancy agreements.
Also, a blanket mortgage on a cooperative may provide financing in the form of a
mortgage that does not fully amortize, with a significant portion of principal
being due in one final payment at maturity. The inability of the Cooperative to
refinance a mortgage and its consequent inability to make such final payment
could lead to foreclosure by the mortgagee. Similarly, a land lease has an
expiration date and the inability of the Cooperative to extend its term or, in
the alternative, to purchase the land could lead to termination of the
Cooperative's interest in the property and termination of all proprietary leases
and occupancy agreement. In either event, a foreclosure by the holder of a
blanket mortgage or the termination of the underlying lease could eliminate or
significantly diminish the value of any collateral held by the lender that
financed the purchase by an individual tenant stockholder of cooperative shares
or, in the case of the Mortgage Loans, the collateral securing the Cooperative
Loans.
The Cooperative is owned by tenant-stockholders who, through ownership of
stock or shares in the corporation, receive proprietary lease or occupancy
agreements which confer exclusive rights to occupy specific units. Generally, a
tenant-stockholder of a Cooperative must make a monthly payment to the
Cooperative representing such tenant-stockholder's pro rata share of the
Cooperative's payments for its blanket mortgage, real property taxes,
maintenance expenses and other capital or ordinary expenses. An ownership
interest in a Cooperative and accompanying occupancy rights are financed through
a Cooperative Loan evidenced by a promissory note and secured by an assignment
of and a security interest in the occupancy agreement or proprietary lease and a
security interest in the related Cooperative shares. The lender generally takes
possession of the share certificate and a counterpart of the proprietary lease
or occupancy agreement and a financing statement covering the proprietary lease
or occupancy agreement and the cooperative shares is filed in the appropriate
state and local offices to perfect the lender's interest in its collateral.
Subject to the limitations discussed below, upon default of the
tenant-stockholder, the lender may sue for judgment on the promissory note,
dispose of the collateral at a public or private sale or otherwise proceed
against the collateral or tenant-stockholder as an individual as provided in the
security agreement covering the assignment of the proprietary lease or occupancy
agreement and the pledge of Cooperative shares. See "Foreclosure--Cooperative
Loans" below.
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Land Sale Contracts
Under an installment land sale contract for the sale of real estate (a
"Land Sale Contract") the contract seller (hereinafter referred to as the
"Contract Lender") retains legal title to the property and enters into an
agreement with the contract purchaser (hereinafter referred to as the "Contract
Borrower") for the payment of the purchase price, plus interest, over the term
of the Land Sale Contract. Only after full performance by the borrower of the
contract is the Contract Lender obligated to convey title to the real estate to
the purchaser. As with mortgage or deed of trust financing, during the effective
period of the Land Sale Contract, the Contract Borrower is responsible for
maintaining the property in good condition and for paying real estate taxes,
assessments and hazard insurance premiums associated with the property.
The method of enforcing the rights of the Contract Lender under an
installment contract varies on a state-by-state basis depending upon the extent
to which state courts are willing, or able pursuant to state statute, to enforce
the contract strictly according to its terms. The terms of Land Sale Contracts
generally provide that upon default by the Contract Borrower, the borrower loses
his or her right to occupy the property, the entire indebtedness is accelerated,
and the buyer's equitable interest in the property is forfeited. The Contract
Lender in such a situation does not have to foreclose in order to obtain title
to the property, although in some cases a quiet title action is in order if the
Contract Borrower has filed the Land Sale Contract in local land records and an
ejectment action may be necessary to recover possession. In a few states,
particularly in cases of Contract Borrower default during the early years of a
Land Sale Contract, the courts will permit ejectment of the buyer and a
forfeiture of his or her interest in the property. However, most state
legislatures have enacted provisions by analogy to mortgage law protecting
borrowers under Land Sale Contracts from the harsh consequences of forfeiture.
Under such statues, a judicial contract may be reinstated upon full payment of
the default amount and the borrower may have a post-foreclosure statutory
redemption right. In other states, courts in equity may permit a Contract
Borrower with significant investment in the property under a Land Sale Contract
for the sale of real estate to share the proceeds of sale of the property after
the indebtedness is repaid or may otherwise refuse to enforce the forfeiture
clause. Nevertheless, generally speaking, the Contract Lender's procedures for
obtaining possession and clear title under a Land Sale Contract for the sale of
real estate in a given state are simpler and less time consuming and costly than
are the procedures for foreclosing and obtaining clear title to a mortgaged
property.
Foreclosure
General
Foreclosure is a legal procedure that allows the mortgagee to recover its
mortgage debt by enforcing its rights and available legal remedies under the
mortgage. If the mortgagor defaults in payment or performance of its obligations
under the note or mortgage, the mortgagee has the right to institute foreclosure
proceedings to sell the mortgaged property at public auction to satisfy the
indebtedness.
Foreclosure procedures with respect to the enforcement of a mortgage vary
from state to state. Two primary methods of foreclosing a mortgage are judicial
foreclosure and non-judicial foreclosure pursuant to a power of sale granted in
the mortgage instrument. There are several
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other foreclosure procedures
available in some states that are either infrequently used or available only in
certain limited circumstances, such as strict foreclosure.
Judicial Foreclosure
A judicial foreclosure proceeding is conducted in a court having
jurisdiction over the mortgaged property. Generally, the action is initiated by
the service of legal pleadings upon all parties having an interest of record in
the real property. Delays in completion of the foreclosure may occasionally
result from difficulties in locating defendants. When the lender's right to
foreclose is contested, the legal proceedings can be time-consuming. Upon
successful completion of a judicial foreclosure proceeding, the court generally
issues a judgment of foreclosure and appoints a referee or other officer to
conduct a public sale of the mortgaged property, the proceeds of which are used
to satisfy the judgment. Such sales are made in accordance with procedures that
vary from state to state.
Equitable Limitations on Enforceability of Certain Provisions
United States courts have traditionally imposed general equitable
principles to limit the remedies available to a mortgagee in connection with
foreclosure. These equitable principles are generally designed to relieve the
mortgagor from the legal effect of mortgage defaults, to the extent that such
effect is perceived as harsh or unfair. Relying on such principles, a court may
alter the specific terms of a loan to the extent it considers necessary to
prevent or remedy an injustice, undue oppression or overreaching, or may require
the lender to undertake affirmative and expensive actions to determine the cause
of the mortgagor's default and the likelihood that the mortgagor will be able to
reinstate the loan. In some cases, courts have substituted their judgment for
the lender's and have required that lenders reinstate loans or recast payment
schedules in order to accommodate mortgagors who are suffering from a temporary
financial disability. In other cases, courts have limited the right of the
lender to foreclose if the default under the mortgage is not monetary, e.g., the
mortgagor failed to maintain the mortgaged property adequately or the mortgagor
executed a junior mortgage on the mortgaged property. The exercise by the court
of its equity powers will depend on the individual circumstances of each case
presented to it. Finally, some courts have been faced with the issue of whether
federal or state constitutional provisions reflecting due process concerns for
adequate notice require that a mortgagor receive notice in addition to
statutorily-prescribed minimum notice. For the most part, these cases have
upheld the reasonableness of the notice provisions or have found that a public
sale under a mortgage providing for a power of sale does not involve sufficient
state action to afford constitutional protections to the mortgagor.
Non-Judicial Foreclosure/Power of Sale
Foreclosure of a deed of trust is generally accomplished by a non-judicial
trustee's sale pursuant to the power of sale granted in the deed of trust. A
power of sale is typically granted in a deed of trust. It may also be contained
in any other type of mortgage instrument. A power of sale allows a non-judicial
public sale to be conducted generally following a request from the
beneficiary/lender to the trustee to sell the property upon any default by the
mortgagor under the terms of the mortgage note or the mortgage instrument and
after notice of sale is given in accordance with the terms of the mortgage
instrument, as well as applicable state law. In some states, prior to such sale,
the trustee under a deed of trust must record a notice of default and
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notice of sale and send a copy to the mortgagor and to any other party who has
recorded a request for a copy of a notice of default and notice of sale. In
addition, in some states the trustee must provide notice to any other party
having an interest of record in the real property, including junior lienholders.
A notice of sale must be posted in a public place and, in most states, published
for a specified period of time in one or more newspapers. The mortgagor or
junior lienholder may then have the right, during a reinstatement period
required in some states, to cure the default by paying the entire actual amount
in arrears (without acceleration) plus the expenses incurred in enforcing the
obligation. In other states, the mortgagor or the junior lienholder is not
provided a period to reinstate the loan, but has only the right to pay off the
entire debt to prevent the foreclosure sale. Generally, the procedure for public
sale, the parties entitled to notice, the method of giving notice and the
applicable time periods are governed by state law and vary among the states.
Foreclosure of a deed to secure debt is also generally accomplished by a
non-judicial sale similar to that required by a deed of trust, except that the
lender or its agent, rather than a trustee, is typically empowered to perform
the sale in accordance with the terms of the deed to secure debt and applicable
law.
Public Sale
A third party may be unwilling to purchase a mortgaged property at a public
sale because of the difficulty in determining the value of such property at the
time of sale, due to, among other things, redemption rights which may exist and
the possibility of physical deterioration of the property during the foreclosure
proceedings. For these reasons, it is common for the lender to purchase the
mortgaged property for an amount equal to or less than the underlying debt and
accrued and unpaid interest plus the expenses of foreclosure. Generally, state
law controls the amount of foreclosure costs and expenses which may be recovered
by a lender. Thereafter, subject to the mortgagor's right in some states to
remain in possession during a redemption period, if applicable, the lender will
become the owner of the property and have both the benefits and burdens of
ownership of the mortgaged property. For example, the lender will become
obligated to pay taxes, obtain casualty insurance and to make such repairs at
its own expense as are necessary to render the property suitable for sale. The
lender will commonly obtain the services of a real estate broker and pay the
broker's commission in connection with the sale of the property. Depending upon
market conditions, the ultimate proceeds of the sale of the property may not
equal the lender's investment in the property. Moreover, a lender commonly
incurs substantial legal fees and court costs in acquiring a mortgaged property
through contested foreclosure and/or bankruptcy proceedings. Generally, state
law controls the amount of foreclosure expenses and costs, including attorneys'
fees, that may be recovered by a lender.
A junior mortgagee may not foreclose on the property securing the junior
mortgage unless it forecloses subject to senior mortgages and any other prior
liens, in which case it may be obliged to make payments on the senior mortgages
to avoid their foreclosure. In addition, in the event that the foreclosure of a
junior mortgage triggers the enforcement of a "due-on-sale" clause contained in
a senior mortgage, the junior mortgagee may be required to pay the full amount
of the senior mortgage to avoid its foreclosure. Accordingly, with respect to
those Mortgage Loans, if any, that are junior mortgage loans, if the lender
purchases the property the lender's title will be subject to all senior
mortgages, prior liens and certain governmental liens.
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The proceeds received by the referee or trustee from the sale are applied
first to the costs, fees and expenses of sale and then in satisfaction of the
indebtedness secured by the mortgage under which the sale was conducted. Any
proceeds remaining after satisfaction of senior mortgage debt are generally
payable to the holders of junior mortgages and other liens and claims in order
of their priority, whether or not the mortgagor is in default. Any additional
proceeds are generally payable to the mortgagor. The payment of the proceeds to
the holders of junior mortgages may occur in the foreclosure action of the
senior mortgage or a subsequent ancillary proceeding or may require the
institution of separate legal proceedings by such holders.
Rights of Redemption
The purposes of a foreclosure action are to enable the mortgagee to realize
upon its security and to bar the mortgagor, and all persons who have an interest
in the property which is subordinate to the mortgage being foreclosed, from
exercise of their "equity of redemption." The doctrine of equity of redemption
provides that, until the property covered by a mortgage has been sold in
accordance with a properly conducted foreclosure and foreclosure sale, those
having an interest which is subordinate to that of the foreclosing mortgagee
have an equity of redemption and may redeem the property by paying the entire
debt with interest. In addition, in some states, when a foreclosure action has
been commenced, the redeeming party must pay certain costs of such action. Those
having an equity of redemption must generally be made parties and joined in the
foreclosure proceeding in order for their equity of redemption to be cut off and
terminated.
The equity of redemption is a common-law (non-statutory) right which exists
prior to completion of the foreclosure, is not waivable by the mortgagor, must
be exercised prior to foreclosure sale and should be distinguished from the
post-sale statutory rights of redemption. In some states, after sale pursuant to
a deed of trust or foreclosure of a mortgage, the mortgagor and foreclosed
junior lienors are given a statutory period in which to redeem the property from
the foreclosure sale. In some states, statutory redemption may occur only upon
payment of the foreclosure sale price. In other states, redemption may be
authorized if the former mortgagor pays only a portion of the sums due. The
effect of a statutory right of redemption is to diminish the ability of the
lender to sell the foreclosed property. The exercise of a right of redemption
would defeat the title of any purchaser from a foreclosure sale or sale under a
deed of trust. Consequently, the practical effect of the redemption right is to
force the lender to maintain the property and pay the expenses of ownership
until the redemption period has expired. In some states, a post-sale statutory
right of redemption may exist following a judicial foreclosure, but not
following a trustee's sale under a deed of trust.
Under the REMIC Provisions currently in effect, property acquired by
foreclosure generally must not be held for more than three calendar years
following the year the Trust Fund acquired the property. With respect to a
Series of Securities for which an election is made to qualify the Trust Fund or
a part thereof as a REMIC, the applicable Agreement will permit foreclosed
property to be held for more than such period of time if the IRS grants an
extension of time within which to sell such property or independent counsel
renders an opinion to the effect that holding such property for such additional
period is permissible under the REMIC Provisions. The applicability of these
limitations if a FASIT election is made with respect to all or a part of the
Trust Fund will be described in the applicable prospectus supplement.
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Cooperative Loans
The Cooperative shares owned by the tenant-stockholder and pledged to the
lender are, in almost all cases, subject to restrictions on transfer as set
forth in the Cooperative's certificate of incorporation and by-laws, as well as
the proprietary lease or occupancy agreement, and may be canceled by the
Cooperative for failure by the tenant-stockholder to pay rent or other
obligations or charges owed by such tenant-stockholder, including mechanics'
liens against the cooperative apartment building incurred by such
tenant-stockholder. The proprietary lease or occupancy agreement generally
permit the Cooperative to terminate such lease or agreement in the event an
obligor fails to make payments or defaults in the performance of covenants
required thereunder. Typically, the lender and the Cooperative enter into a
recognition agreement which establishes the rights and obligations of both
parties in the event of a default by the tenant-stockholder under the
proprietary lease or occupancy agreement will usually constitute a default under
the security agreement between the lender and the tenant-stockholder.
The recognition agreement generally provides that, in the event that the
tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the Cooperative will take no action to terminate such lease or
agreement until the lender has been provided with an opportunity to cure the
default. The recognition agreement typically provides that if the proprietary
lease or occupancy agreement is terminated, the Cooperative will recognize the
lender's lien against proceeds from the sale of the Cooperative apartment,
subject, however, to the Cooperative's right to sums due under such proprietary
lease or occupancy agreement. The total amount owed to the Cooperative by the
tenant-stockholder, which the lender generally cannot restrict and does not
monitor, could reduce the value of the collateral below the outstanding
principal balance of the Cooperative Loan and accrued and unpaid interest
thereon.
Recognition agreements also provide that in the event of a foreclosure on a
Cooperative Loan, the lender must obtain the approval or consent of the
Cooperative as required by the proprietary lease before transferring the
Cooperative shares or assigning the proprietary lease. Generally, the lender is
not limited in any rights it may have to dispossess the tenant-stockholders.
In some states, foreclosure on the Cooperative shares is accomplished by a
sale in accordance with the provisions of Article 9 of the UCC and the security
agreement relating to those shares. Article 9 of the UCC requires that a sale be
conducted in a "commercially reasonable" manner. Whether a foreclosure sale has
been conducted in a "commercially reasonable" manner will depend on the facts in
each case. In determining commercial reasonableness, a court will look to the
notice given the debtor and the method, manner, time, place and terms of the
foreclosure. Generally, a sale conducted according to the usual practice of
banks selling similar collateral will be considered reasonably conducted.
Article 9 of the UCC provides that the proceeds of the sale will be applied
first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to reimbursement
is subject to the right of the Cooperatives to receive sums due under the
proprietary lease or occupancy agreement. If there are proceeds remaining, the
lender must account to the tenant-stockholder for the surplus. Conversely, if a
portion of the indebtedness remains unpaid, the tenant-stockholder is generally
responsible for the deficiency.
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In the case of foreclosure on a building which was converted from a rental
building to a building owned by a Cooperative under a non-eviction plan, some
states require that a purchaser at a foreclosure sale take the property subject
to rent control and rent stabilization laws which apply to certain tenants who
elected to remain in a building so converted.
Junior Mortgages
Some of the Mortgage Loans may be secured by junior mortgages or deeds of
trust, which are subordinate to first or other senior mortgages or deeds of
trust held by other lenders. The rights of the Trust Fund as the holder of a
junior deed of trust or a junior mortgage are subordinate in lien and in payment
to those of the holder of the senior mortgage or deed of trust, including the
prior rights of the senior mortgagee or beneficiary to receive and apply hazard
insurance and condemnation proceeds and, upon default of the mortgagor, to cause
a foreclosure on the property. Upon completion of the foreclosure proceedings by
the holder of the senior mortgage or the sale pursuant to the deed of trust, the
junior mortgagee's or junior beneficiary's lien will be extinguished unless the
junior lienholder satisfies the defaulted senior loan or asserts its subordinate
interest in a property in foreclosure proceedings. See "--Foreclosure" herein.
Furthermore, because the terms of the junior mortgage or deed of trust are
subordinate to the terms of the first mortgage or deed of trust, in the event of
a conflict between the terms of the first mortgage or deed of trust and the
junior mortgage or deed of trust, the terms of the first mortgage or deed of
trust will generally govern. Upon a failure of the mortgagor or trustor to
perform any of its obligations, the senior mortgagee or beneficiary, subject to
the terms of the senior mortgage or deed of trust, may have the right to perform
the obligation itself. Generally, all sums so expended by the mortgagee or
beneficiary become part of the indebtedness secured by the mortgage or deed of
trust. To the extent a first mortgagee expends such sums, such sums will
generally have priority over all sums due under the junior mortgage.
Rights of Redemption
The purposes of a foreclosure action are to enable the mortgagee to realize
upon its security and to bar the mortgagor, and all persons who have an interest
in the property which is subordinate to the mortgage being foreclosed, from
exercise of their "equity of redemption." The doctrine of equity of redemption
provides that, until the property covered by a mortgage has been sold in
accordance with a properly conducted foreclosure and foreclosure sale, those
having an interest which is subordinate to that of the foreclosing mortgagee
have an equity of redemption and may redeem the property by paying the entire
debt with interest. In addition, in some states, when a foreclosure action has
been commenced, the redeeming party must pay certain costs of such action. Those
having an equity of redemption must generally be made parties and joined in the
foreclosure proceeding in order for their equity of redemption to be cut off and
terminated.
The equity of redemption is a common-law (non-statutory) right which exists
prior to completion of the foreclosure, is not waivable by the mortgagor, must
be exercised prior to foreclosure sale and should be distinguished from the
post-sale statutory rights of redemption. In some states, after sale pursuant to
a deed of trust or foreclosure of a mortgage, the mortgagor and foreclosed
junior lienors are given a statutory period in which to redeem the property from
the foreclosure sale. In some states, statutory redemption may occur only upon
payment of the
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foreclosure sale price. In other states, redemption may be authorized if the
former mortgagor pays only a portion of the sums due. The effect of a statutory
right of redemption is to diminish the ability of the lender to sell the
foreclosed property. The exercise of a right of redemption would defeat the
title of any purchaser from a foreclosure sale or sale under a deed of trust.
Consequently, the practical effect of the redemption right is to force the
lender to maintain the property and pay the expenses of ownership until the
redemption period has expired. In some states, a post-sale statutory right of
redemption may exist following a judicial foreclosure, but not following a
trustee's sale under a deed of trust.
Anti-Deficiency Legislation, the Bankruptcy Code and Other Limitations on
Lenders
Certain states have imposed statutory prohibitions which limit the remedies
of a beneficiary under a deed of trust or a mortgagee under a mortgage. In some
states, statutes limit the right of the beneficiary or mortgagee to obtain a
deficiency judgment against the borrower following foreclosure or sale under a
deed of trust. A deficiency judgment would be a personal judgment against the
former borrower equal in most cases to the difference between the net amount
realized upon the public sale of the real property and the amount due to the
lender. Other statutes require the beneficiary or mortgagee to exhaust the
security afforded under a deed of trust or mortgage by foreclosure in an attempt
to satisfy the full debt before bringing a personal action against the borrower.
Finally, other statutory provisions limit any deficiency judgment against the
former borrower following a judicial sale to the excess of the outstanding debt
over the fair market value of the property at the time of the public sale. The
purpose of these statutes is generally to prevent a beneficiary or a mortgagee
from obtaining a large deficiency judgment against the former borrower as a
result of low or no bids at the judicial sale.
In addition to anti-deficiency and related legislation, numerous other
federal and state statutory provisions, including the United States Bankruptcy
Code, 11 U.S.C. Sections 101 et seq. (the "Bankruptcy Code"), and state laws
affording relief to debtors may interfere with or affect the ability of a
secured mortgage lender to obtain payment of a mortgage loan, to realize upon
collateral and/or enforce a deficiency judgment. For example, under the
Bankruptcy Code, virtually all actions (including foreclosure actions and
deficiency judgment proceedings) are automatically stayed upon the filing of a
bankruptcy petition, and, usually, no interest or principal payments aremay not
be made during the course of the bankruptcy case. Foreclosure of an interest in
real property of a debtor in a case under the Bankruptcy Code can typicallycan
occur only if the bankruptcy court vacates the stay; an action the court may be
reluctant to take, particularly if the debtor has the prospect of restructuring
his or her debts and the mortgage collateral is not deteriorating in valuegrants
relief from the stay and the court is not required to grant such relief. The
delay and the consequences thereof caused by such automatic stay can be
significant. Also, under the Bankruptcy Code, the filing of a petition in
bankruptcy by or on behalf of a junior lienor (a subordinate lender secured by a
mortgage on the property) may stay a senior lender from taking action to
foreclose.
A homeowner may file for relief under the Bankruptcy Code under any of
three different chapters of the Bankruptcy Code. Under Chapter 7, the assets of
the debtor are liquidated and a lender secured by a lien may "bid in" (i.e., bid
up to the amount of the debt) at the sale of the asset. See "--Foreclosure." A
homeowner may also file for relief under Chapter 11 of the bankruptcy code and
reorganize his or her debts through his or her reorganization plan.
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Alternatively, a homeowner may file for relief under Chapter 13 of the
Bankruptcy Code and address his or her debts in a rehabilitation plan. Chapter
13 is often referred to as the "wage earner chapter" or "consumer chapter"
because most individuals seeking to restructure their debts file for relief
under Chapter 13 rather than under Chapter 11.
The Bankruptcy Code permits a mortgage loan that is secured by property
that does not consist solely of the debtor's principal residence to be modified
without the consent of the lender provided certain substantive and procedural
safeguards are met. Under the Bankruptcy Code, the lender's security interest in
property may be reduced to the then-current value of the property as determined
by the court if the value is less than the amount due on the loan, thereby
leaving the lender as a general unsecured creditor for the difference between
the value of the collateral and the outstanding balance of the mortgage loan. A
borrower's unsecured indebtedness will typically be discharged in full upon
payment of a substantially reduced amount. Other modifications to a mortgage
loan may include a reduction in the amount of each scheduled payment, which
reduction may result from a reduction in the rate of interest, an alteration of
the repayment schedule, an extension of the final maturity date, and/or a
reduction in the outstanding balance of the secured portion of the loan. In
certain circumstances, subject to the court's approval, a debtor in a case under
Chapter 11 of the Bankruptcy Code may have the power to grant liens senior to
the lien of a mortgage.
A reorganization plan under Chapter 11 and a rehabilitation plan under
Chapter 13 of the Bankruptcy Code may each allow a debtor may be allowed to cure
a default with respect to a mortgage loan on such debtor's residence by paying
arrearages over a period of time and to deaccelerate and reinstate the original
mortgage loan payment schedule, even though the lender accelerated the loan and
a final judgment of foreclosure had been entered in state court (provided no
sale of the property had yet occurred) prior to the filing of the debtor's
petition under the Bankruptcy Code. Under a Chapter 13 plan, curing of defaults
must be accomplished within the five year maximum term permitted for repayment
plans, such term commencing when the repayment plan becomes effective, while
defaults may be cured over a longer period of time under a Chapter 11 plan of
reorganization.
Generally, a repayment plan in a case under Chapter 13 may not modify the
claim of a mortgage lender if the borrower elects to retain the property, the
property is the borrower's principal residence and the property is the lender's
only collateral. Certain courts have allowed modifications when the mortgage
loan is secured both by the debtor's principal residence and by collateral that
is not "inextricably bound" to the real property, such as appliances, machinery,
or furniture. Certain courts have also allowed modifications when the Mortgage
Loan is fully unsecured at the time of bankruptcy.The general protection for
mortgages secured only by the debtor's principal residence is not applicable in
a case under Chapter 13 if the last payment on the original payment schedule is
due before the final date for payment under the debtor's Chapter 13 plan (which
date could be up to five years after the debtor emerges from bankruptcy). Under
several recently decided cases, the terms of such a loan can be modified in the
manner described above. While these decisions are contrary to the holding in a
prior case by a senior appellate court, it is possible that the later decisions
will become the accepted interpretation in view of the language of the
applicable statutory provision. If this interpretation is adopted by a court
considering the treatment in a Chapter 13 repayment plan of a Mortgage Loan, it
is possible that the Mortgage Loan could be modified.
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State statutes and general principles of equity may also provide a
mortgagor with means to halt a foreclosure proceeding or sale and to force a
restructuring of a mortgage loan on terms a lender would not otherwise accept.
In a bankruptcy or similar proceeding of a mortgagor, action may be taken
seeking the recovery, as a preferential transfer or on other grounds, of any
payments made by the mortgagor under the related mortgage loan prior to the
bankruptcy or similar proceeding. Payments on long-term debt may be protected
from recovery as preferences if they are payments in the ordinary course of
business made on debts incurred in the ordinary course of business or if the
value of the collateral exceeds the debt at the time of payment. Whether any
particular payment would be protected depends upon the facts specific to a
particular transaction.
A trustee in bankruptcy, in some cases, may be entitled to collect its
costs and expenses in preserving or selling the mortgaged property ahead of
payment to the lender. Moreover, the laws of certain states also give priority
to certain tax and mechanics liens over the lien of a mortgage. Under the
Bankruptcy Code, if the court finds that actions of the mortgagee have been
unreasonable and inequitable, the lien of the related mortgage may be
subordinated to the claims of unsecured creditors.
Bankruptcy reform legislation being considered by the Senate would amend
the Bankruptcy Code (such amendment, the "TILA Amendment") to authorize
bankruptcy court judges to disallow claims based on secured debt if the creditor
failed to comply with certain provisions of the federal Truth in Lending Act. As
most recently proposed, such provision would apply retroactively to secured debt
incurred by a debtor prior to the date of effectiveness of such legislation,
including the Mortgage Loans. The House bill does not include a comparable
provision as of the date hereof. If the TILA Amendment were to become law, a
violation of the Truth in Lending act with respect to a Mortgage Loan could
result in a total loss with respect to such loan in a bankruptcy proceeding. Any
such violation would be a breach of representation and warranty of the
Depositor, and the Depositor would be obligated to repurchase such Mortgage Loan
as described herein.
Various proposals to amend the Bankruptcy Code in ways that could adversely
affect the value of the Mortgage Loans in a trust have beenare being considered
by Congress, and more such proposed legislation may be considered in the future.
No assurance can be given that any particular proposal will or will not be
enacted into law, or that any provision so enacted will not differ materially
from the proposals described aboveIf enacted into law, such legislation could
============================================
have an adverse impact on the rights of mortgagees in bankruptcy cases.
======================================================================
The Bankruptcy Code provides priority to certain tax liens over the lien of
the mortgage. In addition, substantive requirements are imposed upon mortgage
lenders in connection with the origination and the servicing of mortgage loans
by numerous federal and some state consumer protection laws. These laws include
the federal Truth-in-Lending Act, Real Estate Settlement Procedures Act, Equal
Credit Opportunity Act, Fair Credit Billing Act, Fair Credit Reporting Act, and
related statutes. These federal laws impose specific statutory liabilities upon
lenders who originate mortgage loans and who fail to comply with the provisions
of the applicable laws. In some cases, this liability may affect assignees of
the Mortgage Loans.
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Enforceability of Certain Provisions
Standard forms of note, mortgage and deed of trust generally contain
provisions obligating the borrower to pay a late charge if payments are not
timely made and in some circumstances may provide for prepayment fees or
penalties if the obligation is paid prior to maturity. In certain states, there
are or may be specific limitations upon late charges which a lender may collect
from a borrower for delinquent payments. Certain states also limit the amounts
that a lender may collect from a borrower as an additional charge if the loan is
prepaid.
Courts have imposed general equitable principles upon foreclosure. These
equitable principles are generally designed to relieve the borrower from the
legal effect of defaults under the loan documents. Examples of judicial remedies
that may be fashioned include judicial requirements that the lender undertake
affirmative and expensive actions to determine the causes for the borrower's
default and the likelihood that the borrower will be able to reinstate the loan.
In some cases, courts have substituted their judgment for the lender's judgment
and have required lenders to reinstate loans or recast payment schedules to
accommodate borrowers who are suffering from temporary financial disability. In
some cases, courts have limited the right of lenders to foreclose if the default
under the mortgage instrument is not monetary, such as the borrower failing to
adequately maintain the property or the borrower executing a second mortgage or
deed of trust affecting the property. In other cases, some courts have been
faced with the issue of whether federal or state constitutional provisions
reflecting due process concerns for adequate notice require that borrowers under
the deeds of trust receive notices in addition to the statutorily-prescribed
minimum requirements. For the most part, these cases have upheld the notice
provisions as being reasonable or have found that the sale by a trustee under a
deed of trust or under a mortgage having a power of sale does not involve
sufficient state action to afford constitutional protections to the borrower.
Environmental Considerations
A lender may be subject to unforeseen environmental risks when taking a
security interest in real or personal property. Property subject to such a
security interest may be subject to federal, state, and local laws and
regulations relating to environmental protection. Such laws may regulate, among
other things: emissions of air pollutants; discharges of wastewater or storm
water; generation, transport, storage or disposal of hazardous waste or
hazardous substances; operation, closure and removal of underground storage
tanks; removal and disposal of asbestos-containing materials; management of
electrical or other equipment containing polychlorinated biphenyls ("PCBs").
Failure to comply with such laws and regulations may result in significant
penalties, including civil and criminal fines. Under the laws of certain states,
environmental contamination on a property may give rise to a lien on the
property to ensure the availability and/or reimbursement of cleanup costs.
Generally all subsequent liens on such property are subordinated to such a lien
and, in some states, even prior recorded liens are subordinated to such liens
("Superliens"). In the latter states, the security interest of the Trustee in a
property that is subject to such Superlien could be adversely affected.
Under the federal Comprehensive Environmental Response, Compensation and
Liability Act, as amended ("CERCLA"), and under state law in certain states, a
secured party which takes a deed in lieu of foreclosure, purchases a mortgaged
property at a foreclosure sale, operates a mortgaged property or undertakes
certain types of activities that may constitute management of
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the mortgaged property may become liable in certain circumstances for the costs
of remedial action ("Cleanup Costs") if hazardous wastes or hazardous substances
have been released or disposed of on the property. Such Cleanup Costs may be
substantial. CERCLA imposes strict, as well as joint and several liability for
environmental remediation and/or damage costs on several classes of "potentially
responsible parties," including current "owners and/or operators" of property,
irrespective of whether those owners or operators caused or contributed to the
contamination on the property. In addition, owners and operators of properties
that generate hazardous substances that are disposed of at other "off-site"
locations may be held strictly, jointly and severally liable for environmental
remediation and/or damages at those off-site locations. Many states also have
laws that are similar to CERCLA. Liability under CERCLA or under similar state
law could exceed the value of the property itself as well as the aggregate
assets of the property owner.
The law is unclear as to whether and under what precise circumstances
cleanup costs, or the obligation to take remedial actions, could be imposed on a
secured lender such as the Trust Fund. Under the laws of some states and under
CERCLA, a lender may be liable as an "owner or operator" for costs of addressing
releases or threatened releases of hazardous substances on a mortgaged property
if such lender or its agents or employees have "participated in the management"
of the operations of the borrower, even though the environmental damage or
threat was caused by a prior owner or current owner or operator or other third
party. Excluded from CERCLA's definition of "owner or operator" is a person "who
without participating in the management of . . . [the] facility, holds indicia
of ownership primarily to protect his security interest" (the "secured-creditor
exemption"). This exemption for holders of a security interest such as a secured
lender applies only to the extent that a lender seeks to protect its security
interest in the contaminated facility or property. Thus, if a lender's
activities begin to encroach on the actual management of such facility or
property, the lender faces potential liability as an "owner or operator" under
CERCLA. Similarly, when a lender forecloses and takes title to a contaminated
facility or property, the lender may incur potential CERCLA liability in various
circumstances, including among others, when it holds the facility or property as
an investment (including leasing the facility or property to a third party),
fails to market the property in a timely fashion or fails to properly address
environmental conditions at the property or facility.
The Resource Conservation and Recovery Act, as amended ("RCRA"), contains a
similar secured-creditor exemption for those lenders who hold a security
interest in a petroleum underground storage tank ("UST") or in real estate
containing a UST, or that acquire title to a petroleum UST or facility or
property on which such a UST is located. As under CERCLA, a lender may lose its
secured-creditor exemption and be held liable under RCRA as a UST owner or
operator if such lender or its employees or agents participate in the management
of the UST. In addition, if the lender takes title to or possession of the UST
or the real estate containing the UST, under certain circumstances the
secured-creditor exemption may be deemed to be unavailable.
A decision in May 1990 of the United States Court of Appeals for the
Eleventh Circuit in United States v. Fleet Factors Corp. very narrowly construed
CERCLA's secured-creditor exemption. The court's opinion suggested that a lender
need not have involved itself in the day-to-day operations of the facility or
participated in decisions relating to hazardous waste to be liable under CERCLA;
rather, liability could attach to a lender if its involvement with the
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management of the facility were broad enough to support the inference that the
lender had the capacity to influence the borrower's treatment of hazardous
waste. The court added that a lender's capacity to influence such decisions
could be inferred from the extent of its involvement in the facility's financial
management. A subsequent decision by the United States Court of Appeals for the
Ninth Circuit in In re Bergsoe Metal Corp., apparently disagreeing with, but not
expressly contradicting, the Fleet Factors court, held that a secured lender had
no liability absent "some actual management of the facility" on the part of the
lender.
Court decisions have taken varying views of the scope of the
secured-creditor exemption, leading to administrative and legislative efforts to
provide guidance to lenders on the scope of activities that would trigger CERCLA
and/or RCRA liability. Until recently, these efforts have failed to provide
substantial guidance.
On September 28, 1996, Congress enacted, and on September 30, 1996 the
President signed into law the Asset Conservation Lender Liability and Deposit
Insurance Protection Act of 1996 (the "Asset Conservation Act"). The Asset
Conservation Act was intended to clarify the scope of the secured creditor
exemption. This legislation more clearly defines the kinds of activities that
would constitute "participation in management" and that therefore would trigger
liability for secured parties under CERCLA. It also identified certain
activities that ordinarily would not trigger liability, provided, however, that
such activities did not otherwise rise to the level of "participation in
management." The Asset Conservation Act specifically reverses the Fleet Factors
"capacity to influence" standard. The Asset Conservation Act also provides
additional protection against liability in the event of foreclosure. However,
since the courts have not yet had the opportunity to interpret the new statutory
provisions, the scope of the additional protections offered by the Asset
Conservation Act is not fully defined. It alsoIt is important to note, however,
=======
that the Asset Conservation Act does not offer complete protection to lenders
and that the risk of liability remains.
If a secured lender does become liable, it may be entitled to bring an
action for contribution against the owner or operator who created the
environmental contamination or against some other liable party, but that person
or entity may be bankrupt or otherwise judgment-proof. It is therefore possible
that cleanup or other environmental liability costs could become a liability of
the Trust Fund and occasion a loss to the Trust Fund and to Securityholders in
certain circumstances. The new secured creditor amendments to CERCLA, also,
would not necessarily affect the potential for liability in actions by either a
state or a private party under other federal or state laws which may impose
liability on "owners or operators" but do not incorporate the secured-creditor
exemption.
Traditionally, residential mortgage lenders have not taken steps to
evaluate whether hazardous wastes or hazardous substances are present with
respect to any mortgaged property prior to the origination of the mortgage loan
or prior to foreclosure or accepting a deed-in-lieu of foreclosure. Neither the
Depositor nor any Servicer makes any representations or warranties or assumes
any liability with respect to: environmental conditions of such Mortgaged
Property; the absence, presence or effect of hazardous wastes or hazardous
substances on, near or emanating from such Mortgaged Property; the impact on
Securityholders of any environmental condition or presence of any substance on
or near such Mortgaged Property; or the compliance of any Mortgaged Property
with any environmental laws. In addition, no agent, person or entity
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otherwise affiliated with the Depositor is authorized or able to make any such
representation, warranty or assumption of liability relative to any such
Mortgaged Property.
Due-on-Sale Clauses
Unless the related prospectus supplement indicates otherwise, the Mortgage
Loans will contain due-on-sale clauses. These clauses generally provide that the
lender may accelerate the maturity of the loan if the mortgagor sells, transfers
or conveys the related Mortgaged Property. The enforceability of due-on-sale
clauses has been the subject of legislation or litigation in many states and, in
some cases, the enforceability of these clauses was limited or denied. However,
with respect to certain loans the Garn-St. Germain Depository Institutions Act
of 1982 (the "Garn-St. Germain Act") preempts state constitutional, statutory
and case law that prohibits the enforcement of due-on-sale clauses and permits
lenders to enforce these clauses in accordance with their terms, subject to
certain limited exceptions. Due-on-sale clauses contained in mortgage loans
originated by federal savings and loan associations of federal savings banks are
fully enforceable pursuant to regulations of the United States Federal Home Loan
Bank Board, as succeeded by the Office of Thrift Supervision ("OTS"), which
preempt state law restrictions on the enforcement of such clauses. Similarly,
"due-on-sale" clauses in mortgage loans made by national banks and federal
credit unions are now fully enforceable pursuant to preemptive regulations of
the Comptroller of the Currency and the National Credit Union Administration,
respectively.
The Garn-St. Germain Act also sets forth nine specific instances in which a
mortgage lender covered by the act (including federal savings and loan
associations and federal savings banks) may not exercise a "due-on-sale" clause,
notwithstanding the fact that a transfer of the property may have occurred.
These include intra-family transfers, certain transfers by operation of law,
leases of fewer than three years and the creation of a junior encumbrance.
Regulations promulgated under the Garn-St. Germain Act also prohibit the
imposition of a prepayment penalty upon the acceleration of a loan pursuant to a
due-on-sale clause. The inability to enforce a "due-on-sale" clause may result
in a mortgage that bears an interest rate below the current market rate being
assumed by a new home buyer rather than being paid off, which may affect the
average life of the Mortgage Loans and the number of Mortgage Loans which may
extend to maturity.
Prepayment Charges
Under certain state laws, prepayment charges may not be imposed after a
certain period of time following the origination of mortgagesingle family loans,
cooperative loans or manufactured housing contracts with respect to prepayments
on loans secured by liens encumbering owner-occupied residential properties, if
such loans are paid prior to maturity. With respect to Mortgaged Properties that
are. Since many of the mortgaged properties will be owner-occupied, it is
anticipated that prepayment charges may not be imposed with respect to many of
the Mortgage Loanssingle family loans, cooperative loans and manufactured
housing contracts. The absence of such a restraint on prepayment, particularly
with respect to fixed rate Mortgage Loans having higher Mortgage Ratessingle
family loans, cooperative loans or manufactured housing contracts having higher
specified interest rates or accrual percentage rates, may increase the
likelihood of refinancing or other early retirement of such loans or contracts.
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The Alternative Mortgage Transaction Parity Act of 1982, or the Parity Act,
permits the collection of prepayment charges in connection with some types of
loans subject to the Parity Act, or Parity Act loans, preempting any contrary
state law prohibitions. However, some states may not recognize the preemptive
authority of the Parity Act or have opted out of the Parity Act. Moreover, the
OTS, the agency that administers the application of the Parity Act to some types
of mortgage lenders that are not chartered under federal law, withdrew its
favorable regulations and opinions that previously authorized those lenders,
notwithstanding contrary state law, to charge prepayment charges and late fees
on Parity Act loans in accordance with OTS rules. The withdrawal is effective
with respect to Parity Act loans originated on or after July 1, 2003. The OTS's
action does not affect Parity Act loans originated before July 1, 2003. It is
possible that prepayment charges may not be collected even on loans that provide
for the payment of these charges unless otherwise specified in the accompanying
prospectus supplement.
Legal restrictions, if any, on prepayment of Multifamily Mortgage Loans
will be described in the related prospectus supplement.
Subordinate Financing
Where a mortgagor encumbers mortgaged property with one or more junior
liens, the senior lender is subjected to additional risk. First, the mortgagor
may have difficulty servicing and repaying multiple loans. In addition, if the
junior loan permits recourse to the mortgagor (as junior loans often do) and the
senior loan does not, a mortgagor may be more likely to repay sums due on the
junior loan than those on the senior loan. Second, acts of the senior lender
that prejudice the junior lender or impair the junior lender's security may
create a superior equity in favor of the junior lender. For example, if the
mortgagor and the senior lender agree to an increase in the principal amount of
or the interest rate payable on the senior loan, the senior lender may lose its
priority to the extent any existing junior lender is harmed or the mortgagor is
additionally burdened. Third, if the mortgagor defaults on the senior loan
and/or any junior loan or loans, the existence of junior loans and actions taken
by junior lenders can impair the security available to the senior lender and can
interfere with or delay the taking of action by the senior lender. Moreover, the
bankruptcy of a junior lender may operate to stay foreclosure or similar
proceedings by the senior lender.
Applicability of Usury Laws
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980, enacted in March 1980 ("Title V"), provides that state usury
limitations shall not apply to certain types of residential first mortgage loans
originated by certain lenders after March 31, 1980. A similar federal statute
was in effect with respect to mortgage loans made during the first three months
of 1980. The Office of Thrift Supervision is authorized to issue rules and
regulations and to publish interpretations governing implementation of Title V.
The statute authorized any state to reimpose interest rate limits by adopting,
before April 1, 1983, a law or constitutional provision that expressly rejects
application of the federal law. In addition, even where Title V is not so
rejected, any state is authorized by the law to adopt a provision limiting
discount points or other charges on mortgage loans covered by Title V. Certain
states have taken action to reimpose interest rate limits and/or to limit
discount points or other charges.
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The Depositor believes that a court interpreting Title V would hold that
residential first mortgage loans that are originated on or after January 1, 1980
are subject to federal preemption. Therefore, in a state that has not taken the
requisite action to reject application of Title V or to adopt a provision
limiting discount points or other charges prior to origination of such mortgage
loans, any such limitation under such state's usury law would not apply to such
mortgage loans.
In any state in which application of Title V has been expressly rejected or
a provision limiting discount points or other charges is adopted, no mortgage
loan originated after the date of such state action will be eligible for
inclusion in a Trust Fund unless (i) such mortgage loan provides for such
interest rate, discount points and charges as are permitted in such state or
(ii) such mortgage loan provides that the terms thereof shall be construed in
accordance with the laws of another state under which such interest rate,
discount points and charges would not be usurious and the mortgagor's counsel
has rendered an opinion that such choice of law provision would be given effect.
Statutes differ in their provisions as to the consequences of a usurious
loan. One group of statutes requires the lender to forfeit the interest due
above the applicable limit or impose a specified penalty. Under this statutory
scheme, the mortgagor may cancel the recorded mortgage or deed of trust upon
paying its debt with lawful interest, and the lender may foreclose, but only for
the debt plus lawful interest. A second group of statutes is more severe. A
violation of this type of usury law results in the invalidation of the
transaction, thereby permitting the mortgagor to cancel the recorded mortgage or
deed of trust without any payment or prohibiting the lender from foreclosing.
Alternative Mortgage Instruments
Alternative mortgage instruments, including adjustable rate mortgage loans
and early ownership mortgage loans, originated by non-federally chartered
lenders have historically been subject to a variety of restrictions. Such
restrictions differed from state to state, resulting in difficulties in
determining whether a particular alternative mortgage instrument originated by a
state-chartered lender was in compliance with applicable law. These difficulties
were alleviated substantially as a result of the enactment of Title VIII of the
Garn-St. Germain Act ("Title VIII"). Title VIII provides that, notwithstanding
any state law to the contrary, state-chartered banks may originate alternative
mortgage instruments in accordance with regulations promulgated by the
Comptroller of the Currency with respect to origination of alternative mortgage
instruments by national banks; state-chartered credit unions may originate
alternative mortgage instruments in accordance with regulations promulgated by
the National Credit Union Administration with respect to origination of
alternative mortgage instruments by federal credit unions; and all other
non-federally chartered housing creditors, including state-chartered savings and
loan associations, state-chartered savings banks and mutual savings banks and
mortgage banking companies, may originate alternative mortgage instruments in
accordance with the regulations promulgated by the Federal Home Loan Bank Board,
predecessor to the Office of Thrift Supervision, with respect to origination of
alternative mortgage instruments by federal savings and loan associations. Title
VIII provides that any state may reject applicability of the provisions of Title
VIII by adopting, prior to October 15, 1985, a law or constitutional provision
expressly rejecting the applicability of such provisions. Certain states have
taken such action.
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Homeownership Act and Similar State Laws
Some Mortgage Loans and Contracts may be subject to special rules,
disclosure requirements and other provisions that were added to the federal
Truth-in-Lending Act by the Home Ownership and Equity Protection Act of 1994
(the " Homeownership Act"), if such trust assets were originated on or after
October 1, 1995, are not loans made to finance the purchase of the mortgaged
property and have interest rates or origination costs in excess of certain
prescribed levels (such Mortgage Loans or Contracts, "Homeownership Act Loans").
The Homeownership Act requires certain additional disclosures, specifies the
timing of those disclosures and limits or prohibits inclusion of certain
provisions in mortgages subject to the Homeownership Act. Purchasers or
assignees of any Homeownership Act Loan, including any Trust Fund, could be
liable under federal law for all claims and subject to all defenses that the
borrower could assert against the originator of the Homeownership Act Loan,
under the federal Truth-in-Lending Act or any other law, unless the purchaser or
assignee did not know and could not with reasonable diligence have determined
that the loan was subject to the provisions of the Homeownership Act. Remedies
available to the borrower include monetary penalties, as well as recission
rights if appropriate disclosures were not given as required or if the
particular mortgage includes provisions prohibited by the law. The maximum
damages that may be recovered under these provisions from an assignee, including
the Trust Fund, is the remaining amount of indebtedness plus the total amount
paid by the borrower in connection with the mortgage loan.
In addition to the Homeownership Act, a number of legislative proposals
have been introduced at both the federal and state level that are designed to
discourage predatory lending practices. Some states have enacted, and other
states or local governments may enact, laws that impose requirements and
restrictions greater than those in the Homeownership Act. These laws prohibit
inclusion of some provisions in mortgage loans or contracts that have interest
rates or origination costs in excess of prescribed levels, and require that
borrowers be given certain disclosures prior to the consummation of the mortgage
loans. Purchasers or assignees of a mortgage loan or contract, including the
related Trust Fund, could be exposed to all claims and defenses that the
mortgagor could assert against the originator of the mortgage loan or contract
for a violation of state law. Claims and defenses available to the borrower
could include monetary penalties, rescission and defenses to a foreclosure
action or an action to collect.
Lawsuits have been brought in various states making claims against
assignees of Homeownership Act Loans for violations of federal and state law
allegedly committed by the originator. Named defendants in these cases include
numerous participants within the secondary mortgage market, including some
securitization trusts.
Homeowners Protection Act of 1998
The Homeowners Protection Act of 1998 ("HOPA") provides for certain
disclosure and termination requirements for primary mortgage insurance ("PMI").
The termination provisions of HOPA apply only to mortgage loans relating to
single-family primary residences originated on or after July 29, 1999. Such
termination provisions govern when a mortgagor may cancel the requirement to
maintain PMI and when the requirement to maintain PMI is automatically
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terminated. In general, voluntary termination is permitted and automatic
termination occurs when the principal balance of the mortgage loan is reduced to
80% or 78%, respectively, of the original property value. The disclosure
requirements of HOPA vary depending on whether the mortgage loan was originated
before or after July 29, 1999. Such disclosure requirements include notification
of the circumstances whereby a mortgagor may cancel PMI, the date when PMI
automatically terminates and servicer contact information. In addition, HOPA
provides that no later than 30 days after cancellation or termination of PMI,
the servicer shall provide written notification that such PMI is terminated and
no further payments are due or payable. Any servicer, mortgagee or mortgage
insurer that violates provisions of HOPA is subject to possible liability which
includes, but is not limited to, actual damages, statutory damages and
reasonable attorney's fees.
Texas Home Equity Loans
Generally, any "cash-out" refinance or other non-purchase money transaction
(except for rate/term refinance loans and certain other narrow exceptions)
secured by a Texas resident's principal residence is subject to the provisions
set forth in Section 50(a)(6) of Article XVI of the Constitution of Texas (the
"Texas Home Equity Laws"). The Texas Home Equity Laws provide for certain
disclosure requirements, caps on allowable fees, required loan closing
procedures and other restrictions. Failure, inadvertent or otherwise, to comply
with any requirement may render the Mortgage Loan unenforceable and/or the lien
on the Mortgaged Property invalid. Because mortgage loans which are subject to
the Texas Home Equity Laws can be foreclosed only pursuant to court order,
rather than non-judicial foreclosure as is available for other types of mortgage
loans in Texas, delays and increased losses may result in connection with
foreclosures of such loans. If a court were to find that any requirement of the
Texas Home Equity Laws was not complied with, the court could refuse to allow
foreclosure to proceed, declare the lien on the Mortgaged Property to be
invalid, and/or require the originating lender or the holder of the note to
forfeit some or all principal and interest of the related Mortgage Loan. Title
insurance generally available on such Mortgage Loans may exclude coverage for
some of the risks described in this paragraph.
Soldiers' and Sailors' Civil Relief Act of 1940 and Similar Laws
Generally, under the terms of the Soldiers' and Sailors' Civil Relief Act
of 1940, as amended (the "Relief Act"), a borrower who enters military service
after the origination of such borrower's Mortgage Loan (including a borrower who
is a member of the National Guard or is in reserve status at the time of the
origination of the Mortgage Loan and is later called to active duty) may not be
charged interest above an annual rate of 6% during the period of such borrower's
active duty status, unless a court orders otherwise upon application of the
lender. It is possible that such action could have an effect, for an
indeterminate period of time, on the ability of the Servicer to collect full
amounts of interest on certain of the Mortgage Loans in a Trust Fund. Any
shortfall in interest collections resulting from the application of the Relief
Act could result in losses to the holders of the Certificates or Notes of the
related Series. Further, the Relief Act imposes limitations which would impair
the ability of the Servicer to foreclose on an affected Mortgage Loan during the
borrower's period of active duty status. Thus, in the event that such a Mortgage
Loan goes into default, there may be delays and losses occasioned by the
inability to realize upon the Mortgaged Property in a timely fashion. Certain
states have enacted
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comparable legislation which may interfere with or affect the ability of the
Servicer to timely collect payments of principal and interest on, or to
foreclose on, Mortgage Loans of borrowers in such states who are active or
reserve members of the armed services.
Forfeitures in Drug, RICO and Money Laundering Violations
Federal law provides that property purchased or improved with assets
derived from criminal activity or otherwise tainted, or used in the commission
of certain offenses, can be seized and ordered forfeited to the United States of
America. The offenses which can trigger such a seizure and forfeiture include,
among others, violations of the Racketeer Influenced and Corrupt Organizations
Act, the Bank Secrecy Act, the anti-money laundering laws and regulations,
including the USA Patriot Act of 2001 and the regulations issued thereunder, as
well as the narcotic drug laws. In many instances, the United States may seize
the property even before a conviction occurs.
In the event of a forfeiture proceeding, a lender may be able to establish
its interest in the property by proving that (i) its mortgage was executed and
recorded before the commission of the illegal conduct from which the assets used
to purchase or improve the property were derived or before any other crime upon
which the forfeiture is based, or (ii) the lender, at the time of execution of
the mortgage, "did not know or was reasonably without cause to believe that the
property was subject to forfeiture." However, there can be no assurance that
such a defense will be successful.
CERTAIN LEGAL ASPECTS OF THE CONTRACTS
The following discussion contains summaries, which are general in nature,
of certain legal matters relating to the Contracts. Because such legal aspects
are governed primarily by applicable state law (which laws may differ
substantially), the summaries do not purport to be complete nor to reflect the
laws of any particular state, nor to encompass the laws of all states in which
the security for the Contracts is situated. The summaries are qualified in their
entirety by reference to the appropriate laws of the states in which Contracts
may be originated.
General
As a result of the assignment of the Contracts to the Trustee, the Trustee
will succeed collectively to all of the rights (including the right to receive
payment on the Contracts) of the obligee under the Contracts. Each Contract
evidences both (a) the obligation of the obligor to repay the loan evidenced
thereby, and (b) the grant of a security interest in the Manufactured Home to
secure repayment of such loan. Certain aspects of both features of the Contracts
are described more fully below.
The Contracts generally are "chattel paper" as defined in the UCC in effect
in the states in which the Manufactured Homes initially were registered.
Pursuant to the UCC, the sale of chattel paper is treated in a manner similar to
perfection of a security interest in chattel paper. Under the applicable
Agreement, the Servicer will transfer physical possession of the Contracts to
the Trustee or its custodian or may retain possession of the Contracts as
custodian for the Trustee. In addition, the Servicer will make an appropriate
filing of a UCC-1 financing statement in the appropriate states to give notice
of the Trustee's ownership of the Contracts.
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The Contracts will be stamped or marked otherwise to reflect their assignment
from the Company to the Trustee only if provided in the related prospectus
supplement. Therefore, if, through negligence, fraud or otherwise, a subsequent
purchaser were able to take physical possession of the Contracts without notice
of such assignment, the Trustee's interest in Contracts could be defeated.
Security Interests in the Manufactured Homes
The Manufactured Homes securing the Contracts may be located in all 50
states. Security interests in manufactured homes may be perfected either by
notation of the secured party's lien on the certificate of title or by delivery
of the required documents and payment of a fee to the state motor vehicle
authority, depending on state law. In some nontitle states, perfection pursuant
to the provisions of the UCC is required. The Asset Seller may effect such
notation or delivery of the required documents and fees, and obtain possession
of the certificate of title, as appropriate under the laws of the state in which
any manufactured home securing a manufactured housing conditional sales contract
is registered. In the event the Asset Seller fails, due to clerical error, to
effect such notation or delivery, or files the security interest under the wrong
law (for example, under a motor vehicle title statute rather than under the UCC,
in a few states), the Asset Seller may not have a first priority security
interest in the Manufactured Home securing a Contract. As manufactured homes
have become larger and often have been attached to their sites without any
apparent intention to move them, courts in many states have held that
manufactured homes, under certain circumstances, may become subject to real
estate title and recording laws. As a result, a security interest in a
manufactured home could be rendered subordinate to the interests of other
parties claiming an interest in the home under applicable state real estate law.
In order to perfect a security interest in a manufactured home under real estate
laws, the holder of the security interest must file either a "fixture filing"
under the provisions of the UCC or a real estate mortgage under the real estate
laws of the state where the home is located. These filings must be made in the
real estate records office of the county where the home is located.
Substantially all of the Contracts contain provisions prohibiting the borrower
from permanently attaching the Manufactured Home to its site. So long as the
borrower does not violate this agreement, a security interest in the
Manufactured Home will be governed by the certificate of title laws or the UCC,
and the notation of the security interest on the certificate of title or the
filing of a UCC financing statement will be effective to maintain the priority
of the security interest in the Manufactured Home. If, however, a Manufactured
Home is permanently attached to its site, other parties could obtain an interest
in the Manufactured Home which is prior to the security interest originally
retained by the Asset Seller and transferred to the Depositor. With respect to a
Series of Securities and if so described in the related prospectus supplement,
the Servicer may be required to perfect a security interest in the Manufactured
Home under applicable real estate laws. The Warranting Party will represent that
as of the date of the sale to the Depositor it has obtained a perfected first
priority security interest by proper notation or delivery of the required
documents and fees with respect to substantially all of the Manufactured Homes
securing the Contracts.
The Depositor will cause the security interests in the Manufactured Homes
to be assigned to the Trustee on behalf of the Securityholders. The Depositor or
the Trustee will amend the certificates of title (or file UCC-3 statements) to
identify the Trustee as the new secured party, and will deliver the certificates
of title to the Trustee or note thereon the interest of the Trustee
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only if specified in the related prospectus supplement. Accordingly, the Asset
Seller (or other originator of the Contracts) will continue to be named as the
secured party on the certificates of title relating to the Manufactured Homes.
In some states, such assignment is an effective conveyance of such security
interest without amendment of any lien noted on the related certificate of title
and the new secured party succeeds to Servicer's rights as the secured party.
However, in some states, in the absence of an amendment to the certificate of
title (or the filing of a UCC-3 statement), such assignment of the security
interest in the Manufactured Home may not be held effective or such security
interests may not be perfected and in the absence of such notation or delivery
to the Trustee, the assignment of the security interest in the Manufactured Home
may not be effective against creditors of the Asset Seller (or such other
originator of the Contracts) or a trustee in bankruptcy of the Asset Seller (or
such other originator).
In the absence of fraud, forgery or permanent affixation of the
Manufactured Home to its site by the Manufactured Home owner, or administrative
error by state recording officials, the notation of the lien of the Asset Seller
(or other originator of the Contracts) on the certificate of title or delivery
of the required documents and fees will be sufficient to protect the
Securityholders against the rights of subsequent purchasers of a Manufactured
Home or subsequent lenders who take a security interest in the Manufactured
Home. If there are any Manufactured Homes as to which the security interest
assigned to the Trustee is not perfected, such security interest would be
subordinate to, among others, subsequent purchasers for value of Manufactured
Homes and holders of perfected security interests. There also exists a risk in
not identifying the Trustee as the new secured party on the certificate of title
that, through fraud or negligence, the security interest of the Trustee could be
released.
In the event that the owner of a Manufactured Home moves it to a state
other than the state in which such Manufactured Home initially is registered,
under the laws of most states the perfected security interest in the
Manufactured Home would continue for four months after such relocation and
thereafter only if and after the owner re-registers the Manufactured Home in
such state. If the owner were to relocate a Manufactured Home to another state
and not re-register the Manufactured Home in such state, and if steps are not
taken to re-perfect the Trustee's security interest in such state, the security
interest in the Manufactured Home would cease to be perfected. A majority of
states generally require surrender of a certificate of title to re-register a
Manufactured Home; accordingly, the Servicer must surrender possession if it
holds the certificate of title to such Manufactured Home or, in the case of
Manufactured Homes registered in states which provide for notation of lien, the
Asset Seller (or other originator) would receive notice of surrender if the
security interest in the Manufactured Home is noted on the certificate of title.
Accordingly, the Trustee would have the opportunity to re-perfect its security
interest in the Manufactured Home in the state of relocation. In states which do
not require a certificate of title for registration of a manufactured home,
re-registration could defeat perfection. In the ordinary course of servicing the
manufactured housing contracts, the Servicer takes steps to effect such
re-perfection upon receipt of notice of re-registration or information from the
obligor as to relocation. Similarly, when an obligor under a manufactured
housing contract sells a manufactured home, the Servicer must surrender
possession of the certificate of title or, if it is noted as lienholder on the
certificate of title, will receive notice as a result of its lien noted thereon
and accordingly will have an opportunity to require satisfaction of the related
manufactured housing conditional sales contract before release of the lien.
Under the applicable
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Agreement, the Servicer is obligated to take such steps, at the Servicer's
expense, as are necessary to maintain perfection of security interests in the
Manufactured Homes.
Under the laws of most states, liens for repairs performed on a
Manufactured Home and liens for personal property taxes take priority even over
a perfected security interest. The Warranting Party will represent in the
applicable Agreement that it has no knowledge of any such liens with respect to
any Manufactured Home securing payment on any Contract. However, such liens
could arise at any time during the term of a Contract. No notice will be given
to the Trustee or Securityholders in the event such a lien arises.
Enforcement of Security Interests in Manufactured Homes
The Servicer on behalf of the Trustee, to the extent required by the
applicable Agreement, may take action to enforce the Trustee's security interest
with respect to Contracts in default by repossession and resale of the
Manufactured Homes securing such defaulted Contracts. So long as the
Manufactured Home has not become subject to the real estate law, a creditor can
repossess a Manufactured Home securing a Contract by voluntary surrender, by
"self-help" repossession that is "peaceful" (i.e., without breach of the peace)
or, in the absence of voluntary surrender and the ability to repossess without
breach of the peace, by judicial process. The holder of a Contract must give the
debtor a number of days' notice, which varies from 10 to 30 days depending on
the state, prior to commencement of any repossession. The UCC and consumer
protection laws in most states place restrictions on repossession sales,
including requiring prior notice to the debtor and commercial reasonableness in
effecting such a sale. The law in most states also requires that the debtor be
given notice of any sale prior to resale of the unit so that the debtor may
redeem at or before such resale. In the event of such repossession and resale of
a Manufactured Home, the Trustee would be entitled to be paid out of the sale
proceeds before such proceeds could be applied to the payment of the claims of
unsecured creditors or the holders of subsequently perfected security interests
or, thereafter, to the debtor.
Under the laws applicable in most states, a creditor is entitled to obtain
a deficiency judgment from a debtor for any deficiency on repossession and
resale of the manufactured home securing such debtor's loan. However, some
states impose prohibitions or limitations on deficiency judgments, and in many
cases the defaulting borrower would have no assets with which to pay a judgment.
Certain other statutory provisions, including federal and state bankruptcy
and insolvency laws and general equitable principles, may limit or delay the
ability of a lender to repossess and resell collateral or enforce a deficiency
judgment.
Soldiers' and Sailors' Civil Relief Act of 1940 and Similar Laws
The terms of the Relief Act apply to an obligor on a Contract as described
for a mortgagor on a Mortgage Loan under "Certain Legal Aspects of Mortgage
Loans--Soldiers' and Sailors' Civil Relief Act of 1940 and Similar Laws."
Consumer Protection Laws
The so-called "Holder-in-Due-Course" rule of the Federal Trade Commission
is intended to defeat the ability of the transferor of a consumer credit
contract which is the seller of goods
111
which gave rise to the transaction (and certain related lenders and assignees)
to transfer such contract free of notice of claims by the debtor thereunder. The
effect of this rule is to subject the assignee of such a contract to all claims
and defenses which the debtor could assert against the seller of goods.
Liability under this rule is limited to amounts paid under a Contract; however,
the obligor also may be able to assert the rule to set off remaining amounts due
as a defense against a claim brought by the Trustee against such obligor.
Numerous other federal and state consumer protection laws impose requirements
applicable to the origination and lending pursuant to the Contracts, including
the Truth in Lending Act, the Federal Trade Commission Act, the Fair Credit
Billing Act, the Fair Credit Reporting Act, the Equal Credit Opportunity Act,
the Fair Debt Collection Practices Act and the Uniform Consumer Credit Code. In
the case of some of these laws, the failure to comply with their provisions may
affect the enforceability of the related Contract.
Transfers of Manufactured Homes; Enforceability of Due-on-Sale Clauses
The Contracts, in general, prohibit the sale or transfer of the related
Manufactured Homes without the consent of the Servicer and permit the
acceleration of the maturity of the Contracts by the Servicer upon any such sale
or transfer that is not consented to. Generally, it is expected that the
Servicer will permit most transfers of Manufactured Homes and not accelerate the
maturity of the related Contracts. In certain cases, the transfer may be made by
a delinquent obligor in order to avoid a repossession proceeding with respect to
a Manufactured Home.
In the case of a transfer of a Manufactured Home after which the Servicer
desires to accelerate the maturity of the related Contract, the Servicer's
ability to do so will depend on the enforceability under state law of the
"due-on-sale" clause. The Garn-St. Germain Act preempts, subject to certain
exceptions and conditions, state laws prohibiting enforcement of "due-on-sale"
clauses applicable to the Manufactured Homes. Consequently, in some states the
Servicer may be prohibited from enforcing a "due-on-sale" clause in respect of
certain Manufactured Homes.
Applicability of Usury Laws
Title V provides that, subject to the following conditions, state usury
limitations shall not apply to any loan which is secured by a first lien on
certain kinds of manufactured housing. The Contracts would be covered if they
satisfy certain conditions, among other things, governing the terms of any
prepayments, late charges and deferral fees and requiring a 30-day notice period
prior to instituting any action leading to repossession of or foreclosure with
respect to the related unit.
Title V authorized any state to reimpose limitations on interest rates and
finance charges by adopting before April 1, 1983 a law or constitutional
provision which expressly rejects application of the federal law. Fifteen states
adopted such a law prior to the April 1, 1983 deadline. In addition, even where
Title V was not so rejected, any state is authorized by the law to adopt a
provision limiting discount points or other charges on loans covered by Title V.
The related Asset Seller will represent that all of the Contracts comply with
applicable usury law.
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FEDERAL INCOME TAX CONSEQUENCES
General
The following discussion representsis based on the opinionadvice of
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Cadwalader, Wickersham & Taft LLP and Orrick, Herrington & Sutcliffe LLP, as to
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the anticipated material federal income tax consequences of the purchase,
ownership and disposition of the Securities offered hereunder. As to any
=========
Securities offered pursuant hereto, Cadwalader, Wickersham & Taft LLP or Orrick,
================================================================================
Herrington & Sutcliffe LLP is of the opinion that the following discussion, as
================================================================================
supplemented by the discussion under the heading "Federal Income Tax
================================================================================
Consequences", if any, in the Prospectus Supplement accompanying this Prospectus
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with respect to those Securities, is correct in all material respects as of the
================================================================================
date of such Prospectus Supplement. Except as specifically set forth elsewhere
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herein, the opinion set forth in the preceding sentence is the only opinion
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being rendered with respect to tax matters affecting the Securities offered
================================================================================
hereunder by Cadwalader, Wickersham & Taft LLP or Orrick, Herrington & Sutcliffe
================================================================================
LLP. This discussion is directed solely to Securityholders that hold the
===
Securities as capital assets within the meaning of Section 1221 of the Internal
Revenue Code of 1986, as amended (the "Code") and does not purport to discuss
all federal income tax consequences that may be applicable to particular
categories of investors, some of which (such as banks, insurance companies and
foreign investors) may be subject to special rules. Further, the authorities on
which this discussion, and the opinion referred to below, are based are subject
to change or differing interpretations, which could apply retroactively. In
addition to the federal income tax consequences described herein, potential
investors should consider the state and local tax consequences, if any, of the
purchase, ownership and disposition of the Securities. See "State and Other Tax
Consequences." Securityholders are advised to consult their own tax advisors
concerning the federal, state, local or other tax consequences to them of the
purchase, ownership and disposition of the Securities offered hereunder.
The following discussion addresses securities of four general types:
o securities ("REMIC Securities") representing interests in a Trust
Fund, or a portion thereof, that the Trustee will elect to have
treated as a REMIC under Sections 860A through 860G (the "REMIC
Provisions") of the Code,
o securities ("Grantor Trust Securities") representing interests in a
Trust Fund ("Grantor Trust Fund") as to which no such election will be
made,
o securities ("Partnership Securities") representing interests in a
Trust Fund ("Partnership Trust Fund") which is treated as a
partnership for federal income tax purposes, and
o securities ("Debt Securities") representing indebtedness of a
Partnership Trust Fund for federal income tax purposes.
The prospectus supplement for each Series of Securities will indicate which of
the foregoing treatments will apply to such Series and, if a REMIC election (or
elections) will be made for the related Trust Fund, will identify all "regular
interests" and "residual interests" in the REMIC.
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For purposes of this tax discussion, (i) references to a "Securityholder" or a
"holder" are to the beneficial owner of a Security, (ii) references to "REMIC
Pool" are to an entity or portion thereof as to which a REMIC election will be
made and (iii) unless indicated otherwise in the applicable prospectus
supplement, references to "Mortgage Loans" include Contracts. Except as set
forth in the applicable prospectus supplement, no REMIC election will be made
with respect to Unsecured Home Improvement Loans. The discussion below assumes
that no election will be made to treat the Trust Fund, or any portion thereof,
as a FASIT under Sections 860H through 860L of the Code. If a FASIT election is
made for a particular Series, the prospectus supplement for that Series will
address the material federal income tax consequences of such election.
Securities issued with respect to a Series for which a FASIT election has been
made are referred to herein as "FASIT Securities."
The following discussion is based in part upon the rules governing original
issue discount that are set forth in Sections 1271-1273 and 1275 of the Code and
in the Treasury regulations issued thereunder (the "OID Regulations"), and in
part upon the REMIC Provisions and the Treasury regulations issued thereunder
(the "REMIC Regulations"). The OID Regulations do not adequately address certain
issues relevant to, and in some instances provide that they are not applicable
to, securities such as the Securities.
Taxable Mortgage Pools
Corporate income tax can be imposed on the net income of certain entities
issuing non-REMIC debt obligations secured by real estate mortgages ("Taxable
Mortgage Pools"). Any entity other than a REMIC or a FASIT will be considered a
Taxable Mortgage Pool if:
o substantially all of the assets of the entity consist of debt
obligations and more than 50% of such obligations consist of "real
estate mortgages,"
o such entity is the obligor under debt obligations with two or more
maturities, and
o under the terms of the debt obligations on which the entity is the
obligor, payments on such obligations bear a relationship to payments
on the obligations held by the entity.
Furthermore, a group of assets held by an entity can be treated as a separate
Taxable Mortgage Pool if the assets are expected to produce significant cash
flow that will support one or more of the entity's issues of debt obligations.
The Depositor generally will structure offerings of non-REMIC Securities to
avoid the application of the Taxable Mortgage Pool rules.
REMICS
Classification of REMICs
With respect to each Series of REMIC Securities, assuming compliance with
all provisions of the related Pooling and Servicing Agreement, the related Trust
Fund (or each applicable portion thereof) will qualify as a REMIC and the REMIC
Securities offered with respect thereto will be considered to evidence ownership
of "regular interests" ("Regular Securities") or "residual interests" ("Residual
Securities") in that REMIC within the meaning of the REMIC Provisions.
114
In order for the REMIC Pool to qualify as a REMIC, there must be ongoing
compliance on the part of the REMIC Pool with the requirements set forth in the
Code. The REMIC Pool must fulfill an asset test, which requires that no more
than a de minimis portion of the assets of the REMIC Pool, as of the close of
the third calendar month beginning after the "Startup Day" (which for purposes
of this discussion is the date of issuance of the REMIC Securities) and at all
times thereafter, may consist of assets other than "qualified mortgages" and
"permitted investments." The REMIC Regulations provide a safe harbor pursuant to
which the de minimis requirement will be met if at all times the aggregate
adjusted basis of the nonqualified assets is less than 1% of the aggregate
adjusted basis of all the REMIC Pool's assets. An entity that fails to meet the
safe harbor may nevertheless demonstrate that it holds no more than a de minimis
amount of nonqualified assets. A REMIC Pool also must provide "reasonable
arrangements" to prevent its residual interests from being held by "disqualified
organizations" or agents thereof and must furnish applicable tax information to
transferors or agents that violate this requirement. The Pooling and Servicing
Agreement with respect to each Series of REMIC Securities will contain
provisions meeting these requirements. See "--Taxation of Owners of Residual
Securities--Tax-Related Restrictions on Transfer of Residual
Securities--Disqualified Organizations."
A qualified mortgage is any obligation that is principally secured by an
interest in real property and that is either transferred to the REMIC Pool on
the Startup Day or is purchased by the REMIC Pool within a three-month period
thereafter pursuant to a fixed price contract in effect on the Startup Day.
Qualified mortgages include whole mortgage loans, such as the Mortgage Loans,
and, generally, certificates of beneficial interest in a grantor trust that
holds mortgage loans and regular interests in another REMIC, such as lower-tier
regular interests in Tiered REMICs. The REMIC Regulations specify that loans
secured by timeshare interests, shares held by a tenant stockholder in a
cooperative housing corporation, and manufactured housing that qualifies as a
"single family residence" under Code section 25(e)(10) can be qualified
mortgages. A qualified mortgage includes a qualified replacement mortgage, which
is any property that would have been treated as a qualified mortgage if it were
transferred to the REMIC Pool on the Startup Day and that is received either (i)
in exchange for any qualified mortgage within a three-month period thereafter or
(ii) in exchange for a "defective obligation" within a two-year period
thereafter. A "defective obligation" includes:
o a mortgage in default or as to which default is reasonably
foreseeable,
o a mortgage as to which a customary representation or warranty made at
the time of transfer to the REMIC Pool has been breached,
o a mortgage that was fraudulently procured by the mortgagor, and
o a mortgage that was not in fact principally secured by real property
(but only if such mortgage is disposed of within 90 days of
discovery). A Mortgage Loan that is "defective" as described in this
clause that is not sold or, if within two years of the Startup Day,
exchanged, within 90 days of discovery, ceases to be a qualified
mortgage after such 90-day period.
Permitted investments include cash flow investments, qualified reserve
assets, and foreclosure property. A cash flow investment is an investment,
earning a return in the nature of
115
interest, of amounts received on or with respect to qualified mortgages for a
temporary period, not exceeding 13 months, until the next scheduled distribution
to holders of interests in the REMIC Pool. A qualified reserve asset is any
intangible property held for investment that is part of any reasonably required
reserve maintained by the REMIC Pool to provide for payments of expenses of the
REMIC Pool or amounts due on the regular or residual interests in the event of
defaults (including delinquencies) on the qualified mortgages, lower than
expected reinvestment returns, prepayment interest shortfalls and certain other
contingencies. The reserve fund will be disqualified if more than 30% of the
gross income from the assets in such fund for the year is derived from the sale
or other disposition of property held for less than three months, unless
required to prevent a default on the regular interests caused by a default on
one or more qualified mortgages. A reserve fund must be reduced "promptly and
appropriately" as payments on the Mortgage Loans are received. Foreclosure
property is real property acquired by the REMIC Pool in connection with the
default or imminent default of a qualified mortgage and generally may not be
held beyond the close of the third calendar year beginning after the taxable
year of acquisition unless an extension is granted by the IRS.
In addition to the foregoing requirements, the various interests in a REMIC
Pool also must meet certain requirements. All of the interests in a REMIC Pool
must be either of the following: (i) one or more Classes of regular interests or
(ii) a single class of residual interests on which distributions, if any, are
made pro rata. A regular interest is an interest in a REMIC Pool that is issued
on the Startup Day with fixed terms, is designated as a regular interest, and
unconditionally entitles the holder to receive a specified principal amount (or
other similar amount), and provides that interest payments (or other similar
amounts), if any, at or before maturity either are payable based on a fixed rate
or a qualified variable rate, or consist of a specified, nonvarying portion of
the interest payments on qualified mortgages. Such a specified portion may
consist of a fixed number of basis points, a fixed percentage of the total
interest, or a qualified variable rate, inverse variable rate or difference
between two fixed or qualified variable rates on some or all of the qualified
mortgages. The specified principal amount of a regular interest that provides
for interest payments consisting of a specified, nonvarying portion of interest
payments on qualified mortgages may be zero. A residual interest is an interest
in a REMIC Pool other than a regular interest that is issued on the Startup Day
and that is designated as a residual interest. An interest in a REMIC Pool may
be treated as a regular interest even if payments of principal with respect to
such interest are subordinated to payments on other regular interests or the
residual interest in the REMIC Pool, and are dependent on the absence of
defaults or delinquencies on qualified mortgages or permitted investments, lower
than reasonably expected returns on permitted investments, unanticipated
expenses incurred by the REMIC Pool or prepayment interest shortfalls.
Accordingly, the Regular Securities of a Series will constitute one or more
Classes of regular interests, and the Residual Securities with respect to that
Series will constitute a single Class of residual interests with respect to each
REMIC Pool.
If an entity electing to be treated as a REMIC fails to comply with one or
more of the ongoing requirements of the Code for such status during any taxable
year, the Code provides that the entity will not be treated as a REMIC for such
year and thereafter. In that event, such entity may be taxable as a corporation
under Treasury regulations, and the related REMIC Securities may not be accorded
the status or given the tax treatment described below. Although the Code
authorizes the Treasury Department to issue regulations providing relief in the
event of an inadvertent termination of REMIC status, no such regulations have
been issued. Any such relief,
116
moreover, may be accompanied by sanctions, such as the imposition of a corporate
tax on all or a portion of the Trust Fund's income for the period in which the
requirements for such status are not satisfied. The Pooling and Servicing
Agreement with respect to each REMIC Pool will include provisions designed to
maintain the Trust Fund's status as a REMIC under the REMIC Provisions. It is
not anticipated that the status of any Trust Fund as a REMIC will be terminated.
Characterization of Investments in REMIC Securities
In general, the REMIC Securities will be treated as "real estate assets"
within the meaning of Section 856(c)(4)(A) of the Code and assets described in
Section 7701(a)(19)(C) of the Code in the same proportion that the assets of the
REMIC Pool underlying such Securities would be so treated. Moreover, if 95% or
more of the assets of the REMIC Pool qualify for either of the foregoing
treatments at all times during a calendar year, the REMIC Securities will
qualify for the corresponding status in their entirety for that calendar year.
If the assets of the REMIC Pool include Buydown Mortgage Loans, it is possible
that the percentage of such assets constituting "loans . . . secured by an
interest in real property which is . . . residential real property" for purposes
of Code Section 7701(a)(19)(C)(v) may be required to be reduced by the amount of
the related funds paid thereon (the "Buydown Funds"). Interest (including
original issue discount) on the Regular Securities and income allocated to the
Class of Residual Securities will be interest described in Section 856(c)(3)(B)
of the Code to the extent that such Securities are treated as "real estate
assets" within the meaning of Section 856(c)(4)(A) of the Code. In addition, the
Regular Securities generally will be "qualified mortgages" within the meaning of
Section 860G(a)(3) of the Code if transferred to another REMIC on its Startup
Day in exchange for regular or residual interests therein. Regular Securities
held by a FASIT will qualify for treatment as "permitted assets" within the
meaning of Section 860L(c)(1)(G) of the Code. The determination as to the
percentage of the REMIC Pool's assets that constitute assets described in the
foregoing sections of the Code will be made with respect to each calendar
quarter based on the average adjusted basis of each category of the assets held
by the REMIC Pool during such calendar quarter. The REMIC will report those
determinations to Securityholders in the manner and at the times required by
applicable Treasury regulations. The Small Business Job Protection Act of 1996
(the "SBJPA of 1996") repealed the reserve method of bad debts of domestic
building and loan associations and mutual savings banks, and thus has eliminated
the asset category of "qualifying real property loans" in former Code Section
593(d) for taxable years beginning after December 31, 1995. The requirements in
the SBJPA of 1996 that such institutions must "recapture" a portion of their
existing bad debt reserves is suspended if a certain portion of their assets are
maintained in "residential loans" under Code Section 7701(a)(19)(C)(v), but only
if such loans were made to acquire, construct or improve the related real
property and not for the purpose of refinancing. However, no effort will be made
to identify the portion of the Mortgage Loans of any Series meeting this
requirement, and no representation is made in this regard.
The assets of the REMIC Pool will include, in addition to Mortgage Loans,
payments on Mortgage Loans held pending distribution on the REMIC Securities and
property acquired by foreclosure held pending sale, and may include amounts in
reserve accounts. It is unclear whether property acquired by foreclosure held
pending sale and amounts in reserve accounts would be considered to be part of
the Mortgage Loans, or whether such assets (to the extent not invested in assets
described in the foregoing sections) otherwise would receive the same
117
treatment as the Mortgage Loans for purposes of all of the foregoing sections.
The REMIC Regulations do provide, however, that payments on Mortgage Loans held
pending distribution are considered part of the Mortgage Loans for purposes of
Section 856(c)(4)(A) of the Code. Furthermore, foreclosure property generally
will qualify as "real estate assets" under Section 856(c)(4)(A) of the Code.
Tiered REMIC Structures
For certain Series of REMIC Securities, two or more separate elections may
be made to treat designated portions of the related Trust Fund as REMICs
("Tiered REMICs") for federal income tax purposes. Upon the issuance of any such
Series of REMIC Securities, Cadwalader, Wickersham & Taft LLP or Orrick,
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Herrington & Sutcliffe LLP will deliver its opinion generally to the effect
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that, assuming compliance with all provisions of the related Pooling and
Servicing Agreement, the Tiered REMICs will each qualify as a REMIC and the
REMIC Securities issued by the Tiered REMICs will be considered to evidence
ownership of Regular Securities or Residual Securities in the related REMIC
within the meaning of the REMIC Provisions.
Solely for purposes of determining whether the REMIC Securities will be
"real estate assets" within the meaning of Section 856(c)(4)(A) of the Code and
"loans secured by an interest in real property" under Section 7701(a)(19)(C) of
the Code, and whether the income on such Securities is interest described in
Section 856(c)(3)(B) of the Code, the Tiered REMICs will be treated as one
REMIC.
Taxation of Owners of Regular Securities
General
In general, interest, original issue discount, and market discount on a
Regular Security will be treated as ordinary income to a holder of the Regular
Security (the "Regular Securityholder"), and principal payments on a Regular
Security will be treated as a return of capital to the extent of the Regular
Securityholder's basis in the Regular Security allocable thereto. Regular
Securityholders must use the accrual method of accounting with regard to Regular
Securities, regardless of the method of accounting otherwise used by such
Regular Securityholder.
Original Issue Discount
Accrual Securities will be, and other Classes of Regular Securities may be,
issued with "original issue discount" within the meaning of Code Section
1273(a). Holders of any Class or subclass of Regular Securities having original
issue discount generally must include original issue discount in ordinary income
for federal income tax purposes as it accrues, in accordance with a constant
yield method that takes into account the compounding of interest, in advance of
the receipt of the cash attributable to such income. The following discussion is
based in part on temporary and final Treasury regulations issued on February 2,
1994, as amended on June 14, 1996, (the "OID Regulations") under Code Section
1271 through 1273 and 1275OID Regulations and in part on the provisions of the
================
1986 Act. Regular Securityholders should be aware, however, that the OID
Regulations do not adequately address certain issues relevant to prepayable
securities, such as the Regular Securities. To the extent such issues are not
addressed
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in such regulations, the Depositor intends to apply the methodology described in
the Conference Committee Report to the 1986 Act. No assurance can be provided
that the IRS will not take a different position as to those matters not
currently addressed by the OID Regulations. Moreover, the OID Regulations
include an anti-abuse rule allowing the IRS to apply or depart from the OID
Regulations where necessary or appropriate to ensure a reasonable tax result in
light of the applicable statutory provisions. A tax result will not be
considered unreasonable under the anti-abuse rule in the absence of a
substantial effect on the present value of a taxpayer's tax liability. Investors
are advised to consult their own tax advisors as to the discussion therein and
the appropriate method for reporting interest and original issue discount with
respect to the Regular Securities.
Each Regular Security (except to the extent described below with respect to
a Regular Security on which principal is distributed in a single installment or
by lots of specified principal amounts upon the request of a Securityholder or
by random lot (a "Non-Pro Rata Security")) will be treated as a single
installment obligation for purposes of determining the original issue discount
includable in a Regular Securityholder's income. The total amount of original
issue discount on a Regular Security is the excess of the "stated redemption
price at maturity" of the Regular Security over its "issue price." The issue
price of a Class of Regular Securities offered pursuant to this prospectus
generally is the first price at which a substantial amount of such Class is sold
to the public (excluding bond houses, brokers and underwriters). Although
unclear under the OID Regulations, it is anticipated that the Trustee will treat
the issue price of a Class as to which there is no substantial sale as of the
issue date or that is retained by the Depositor as the fair market value of the
Class as of the issue date. The issue price of a Regular Security also includes
any amount paid by an initial Regular Securityholder for accrued interest that
relates to a period prior to the issue date of the Regular Security, unless the
Regular Securityholder elects on its federal income tax return to exclude such
amount from the issue price and to recover it on the first Distribution Date.
The stated redemption price at maturity of a Regular Security always includes
the original principal amount of the Regular Security, but generally will not
include distributions of interest if such distributions constitute "qualified
stated interest." Under the OID Regulations, qualified stated interest generally
means interest payable at a single fixed rate or a qualified variable rate (as
described below), provided that such interest payments are unconditionally
payable at intervals of one year or less during the entire term of the Regular
Security. Because there is no penalty or default remedy in the case of
nonpayment of interest with respect to a Regular Security, it is possible that
no interest on any Class of Regular Securities will be treated as qualified
stated interest. However, except as provided in the following three sentences or
in the applicable prospectus supplement, because the underlying Mortgage Loans
provide for remedies in the event of default, it is anticipated that the Trustee
will treat interest with respect to the Regular Securities as qualified stated
interest. Distributions of interest on an Accrual Security, or on other Regular
Securities with respect to which deferred interest will accrue, will not
constitute qualified stated interest, in which case the stated redemption price
at maturity of such Regular Securities includes all distributions of interest as
well as principal thereon. Likewise, it is anticipated that the Trustee will
treat an interest-only Class or a Class on which interest is substantially
disproportionate to its principal amount (a so-called "super-premium" Class) as
having no qualified stated interest. Where the interval between the issue date
and the first Distribution Date on a Regular Security is shorter than the
interval between subsequent Distribution Dates, the interest attributable to the
additional days will be included in the stated redemption price at maturity.
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Under a de minimis rule, original issue discount on a Regular Security will
be considered to be zero if such original issue discount is less than 0.25% of
the stated redemption price at maturity of the Regular Security multiplied by
the weighted average maturity of the Regular Security. For this purpose, the
weighted average maturity of the Regular Security is computed as the sum of the
amounts determined by multiplying the number of full years (i.e., rounding down
partial years) from the issue date until each distribution in reduction of
stated redemption price at maturity is scheduled to be made by a fraction, the
numerator of which is the amount of each distribution included in the stated
redemption price at maturity of the Regular Security and the denominator of
which is the stated redemption price at maturity of the Regular Security. The
Conference Committee Report to the 1986 Act provides that the schedule of such
distributions should be determined in accordance with the assumed rate of
prepayment of the Mortgage Loans (the "Prepayment Assumption") and the
anticipated reinvestment rate, if any, relating to the Regular Securities. The
Prepayment Assumption with respect to a Series of Regular Securities will be set
forth in the applicable prospectus supplement. Holders generally must report de
minimis original issue discount pro rata as principal payments are received, and
such income will be capital gain if the Regular Security is held as a capital
asset. Under the OID Regulations, however, Regular Securityholders may elect to
accrue all de minimis original issue discount as well as market discount and
market premium, under the constant yield method. See "--Election to Treat All
Interest Under the Constant Yield Method."
A Regular Securityholder generally must include in gross income for any
taxable year the sum of the "daily portions," as defined below, of the original
issue discount on the Regular Security accrued during an accrual period for each
day on which it holds the Regular Security, including the date of purchase but
excluding the date of disposition. The Trustee will treat the monthly period
ending on the day before each Distribution Date as the accrual period. With
respect to each Regular Security, a calculation will be made of the original
issue discount that accrues during each successive full accrual period (or
shorter period from the date of original issue) that ends on the day before the
related Distribution Date on the Regular Security. The Conference Committee
Report to the 1986 Act states that the rate of accrual of original issue
discount is intended to be based on the Prepayment Assumption. The original
issue discount accruing in a full accrual period would be the excess, if any, of
(i) the sum of (a) the present value of all of the remaining distributions to be
made on the Regular Security as of the end of that accrual period, and (b) the
distributions made on the Regular Security during the accrual period that are
included in the Regular Security's stated redemption price at maturity, over
(ii) the adjusted issue price of the Regular Security at the beginning of the
accrual period. The present value of the remaining distributions referred to in
the preceding sentence is calculated based on (i) the yield to maturity of the
Regular Security at the issue date, (ii) events (including actual prepayments)
that have occurred prior to the end of the accrual period, and (iii) the
Prepayment Assumption. For these purposes, the adjusted issue price of a Regular
Security at the beginning of any accrual period equals the issue price of the
Regular Security, increased by the aggregate amount of original issue discount
with respect to the Regular Security that accrued in all prior accrual periods
and reduced by the amount of distributions included in the Regular Security's
stated redemption price at maturity that were made on the Regular Security in
such prior periods. The original issue discount accruing during any accrual
period (as determined in this paragraph) will then be divided by the number of
days in the period to determine the daily portion of original issue discount for
each day in the period. With respect to an initial accrual
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period shorter than a full accrual period, the daily portions of original issue
discount must be determined according to an appropriate allocation under any
reasonable method.
Under the method described above, the daily portions of original issue
discount required to be included in income by a Regular Securityholder generally
will increase to take into account prepayments on the Regular Securities as a
result of prepayments on the Mortgage Loans that exceed the Prepayment
Assumption, and generally will decrease (but not below zero for any period) if
the prepayments are slower than the Prepayment Assumption. An increase in
prepayments on the Mortgage Loans with respect to a Series of Regular Securities
can result in both a change in the priority of principal payments with respect
to certain Classes of Regular Securities and either an increase or decrease in
the daily portions of original issue discount with respect to such Regular
Securities.
In the case of a Non-Pro Rata Security, it is anticipated that the Trustee
will determine the yield to maturity of such Security based upon the anticipated
payment characteristics of the Class as a whole under the Prepayment Assumption.
In general, the original issue discount accruing on each Non-Pro Rata Security
in a full accrual period would be its allocable share of the original issue
discount with respect to the entire Class, as determined in accordance with the
preceding paragraph. However, in the case of a distribution in retirement of the
entire unpaid principal balance of any Non-Pro Rata Security (or portion of such
unpaid principal balance), (a) the remaining unaccrued original issue discount
allocable to such Security (or to such portion) will accrue at the time of such
distribution, and (b) the accrual of original issue discount allocable to each
remaining Security of such Class will be adjusted by reducing the present value
of the remaining payments on such Class and the adjusted issue price of such
Class to the extent attributable to the portion of the unpaid principal balance
thereof that was distributed. The Depositor believes that the foregoing
treatment is consistent with the "pro rata prepayment" rules of the OID
Regulations, but with the rate of accrual of original issue discount determined
based on the Prepayment Assumption for the Class as a whole. Investors are
advised to consult their tax advisors as to this treatment.
Acquisition Premium
A purchaser of a Regular Security having original issue discount at a price
greater than its adjusted issue price but less than its stated redemption price
at maturity will be required to include in gross income the daily portions of
the original issue discount on the Regular Security reduced pro rata by a
fraction, the numerator of which is the excess of its purchase price over such
adjusted issue price and the denominator of which is the excess of the remaining
stated redemption price at maturity over the adjusted issue price.
Alternatively, such a subsequent purchaser may elect to treat all such
acquisition premium under the constant yield method, as described below under
the heading "--Election to Treat All Interest Under the Constant Yield Method."
Variable Rate Regular Securities
Regular Securities may provide for interest based on a variable rate. Under
the OID Regulations, interest is treated as payable at a variable rate if,
generally, (i) the issue price does not exceed the original principal balance by
more than a specified amount and (ii) the interest compounds or is payable at
least annually at current values of (a) one or more "qualified floating
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rates," (b) a single fixed rate and one or more qualified floating rates, (c) a
single "objective rate," or (d) a single fixed rate and a single objective rate
that is a "qualified inverse floating rate." A floating rate is a qualified
floating rate if variations can reasonably be expected to measure
contemporaneous variations in the cost of newly borrowed funds. A multiple of a
qualified floating rate is considered a qualified floating rate only if the rate
is equal to either (a) the product of a qualified floating rate and a fixed
multiple that is greater than 0.65 but not more than 1.35 or (b) the product of
a qualified floating rate and a fixed multiple that is greater that 0.65 but not
more than 1.35, increased or decreased by a fixed rate. Such rate may also be
subject to a fixed cap or floor, or a cap or floor that is not reasonably
expected as of the issue date to affect the yield of the instrument
significantly. An objective rate is any rate (other than a qualified floating
rate) that is determined using a single fixed formula and that is based on
objective financial or economic information, provided that such information is
not (i) within the control of the issuer or a related party or (ii) unique to
the circumstances of the issuer or a related party. A qualified inverse floating
rate is a rate equal to a fixed rate minus a qualified floating rate that
inversely reflects contemporaneous variations in the cost of newly borrowed
funds; an inverse floating rate that is not a qualified inverse floating rate
may nevertheless be an objective rate. A Class of Regular Securities may be
issued under this prospectus that does not have a variable rate under the
foregoing rules, for example, a Class that bears different rates at different
times during the period it is outstanding such that it is considered
significantly "front-loaded" or "back-loaded" within the meaning of the OID
Regulations. It is possible that such a Class may be considered to bear
"contingent interest" within the meaning of the OID Regulations. The OID
Regulations, as they relate to the treatment of contingent interest, are by
their terms not applicable to Regular Securities. However, if final regulations
dealing with contingent interest with respect to Regular Securities apply the
same principles as the OID Regulations, such regulations may lead to different
timing of income inclusion that would be the case under the OID Regulations.
Furthermore, application of such principles could lead to the characterization
of gain on the sale of contingent interest Regular Securities as ordinary
income. Investors should consult their tax advisors regarding the appropriate
treatment of any Regular Security that does not pay interest at a fixed rate or
variable rate as described in this paragraph.
Under the REMIC Regulations, a Regular Security (i) bearing interest at a
rate that qualifies as a variable rate under the OID Regulations that is tied to
current values of a variable rate (or the highest, lowest or average of two or
more variable rates, including a rate based on the average cost of funds of one
or more financial institutions), or a positive or negative multiple of such a
rate (plus or minus a specified number of basis points), or that represents a
weighted average of rates on some or all of the Mortgage Loans, including such a
rate that is subject to one or more caps or floors, or (ii) bearing one or more
such variable rates for one or more periods, or one or more fixed rates for one
or more periods, and a different variable rate or fixed rate for other periods,
qualifies as a regular interest in a REMIC. Accordingly, unless otherwise
indicated in the applicable prospectus supplement, it is anticipated that the
Trustee will treat Regular Securities that qualify as regular interests under
this rule in the same manner as obligations bearing a variable rate for original
issue discount reporting purposes.
The amount of original issue discount with respect to a Regular Security
bearing a variable rate of interest will accrue in the manner described above
under "Original Issue Discount," with the yield to maturity and future payments
on such Regular Security generally to be determined by assuming that interest
will be payable for the life of the Regular Security based on the initial
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rate (or, if different, the value of the applicable variable rate as of the
pricing date) for the relevant Class. Unless required otherwise by applicable
final regulations, it is anticipated that the Trustee will treat such variable
interest as qualified stated interest, other than variable interest on an
interest-only or super-premium Class, which will be treated as non-qualified
stated interest includable in the stated redemption price at maturity. Ordinary
income reportable for any period will be adjusted based on subsequent changes in
the applicable interest rate index.
Although unclear under the OID Regulations, unless required otherwise by
applicable final regulations, the Seller intends to treat Regular Securities
bearing an interest rate that is a weighted average of the net interest rates on
Mortgage Loans as having qualified stated interest, except to the extent that
initial "teaser" rates cause sufficiently "back-loaded" interest to create more
than de minimis original issue discount. The yield on such Regular Securities
for purposes of accruing original issue discount will be a hypothetical fixed
rate based on the fixed rates, in the case of fixed-rate Mortgage Loans, and
initial "teaser rates" followed by fully indexed rates, in the case of
adjustable-rate Mortgage Loans. In the case of adjustable-rate Mortgage Loans,
the applicable index used to compute interest on the Mortgage Loans in effect on
the pricing date (or possibly the issue date) will be deemed to be in effect
beginning with the period in which the first weighted average adjustment date
occurring after the issue date occurs. Adjustments will be made in each accrual
period either increasing or decreasing the amount of ordinary income reportable
to reflect the actual Pass-Through Rate on the Regular Securities.
Market Discount
A subsequent purchaser of a Regular Security also may be subject to the
market discount rules of Code Sections 1276 through 1278. Under these sections
and the principles applied by the OID Regulations in the context of original
issue discount, "market discount" is the amount by which the purchaser's
original basis in the Regular Security (i) is exceeded by the remaining
outstanding principal payments and interest payments other than qualified stated
interest payments due on a Regular Security, or (ii) in the case of a Regular
Security having original issue discount, is exceeded by the adjusted issue price
of such Regular Security at the time of purchase. Such purchaser generally will
be required to recognize ordinary income to the extent of accrued market
discount on such Regular Security as distributions includable in the stated
redemption price at maturity thereof are received, in an amount not exceeding
any such distribution. Such market discount would accrue in a manner to be
provided in Treasury regulations and should take into account the Prepayment
Assumption. The Conference Committee Report to the 1986 Act provides that until
such regulations are issued, such market discount would accrue either (i) on the
basis of a constant interest rate, or (ii) in the ratio of stated interest
allocable to the relevant period to the sum of the interest for such period plus
the remaining interest as of the end of such period, or in the case of a Regular
Security issued with original issue discount, in the ratio of original issue
discount accrued for the relevant period to the sum of the original issue
discount accrued for such period plus the remaining original issue discount as
of the end of such period. Such purchaser also generally will be required to
treat a portion of any gain on a sale or exchange of the Regular Security as
ordinary income to the extent of the market discount accrued to the date of
disposition under one of the foregoing methods, less any accrued market discount
previously reported as ordinary income as partial distributions in reduction of
the stated redemption price at maturity were received. Such purchaser will be
required to defer deduction of a portion of the excess of the interest paid or
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accrued on indebtedness incurred to purchase or carry a Regular Security over
the interest distributable thereon. The deferred portion of such interest
expense in any taxable year generally will not exceed the accrued market
discount on the Regular Security for such year. Any such deferred interest
expense is, in general, allowed as a deduction not later than the year in which
the related market discount income is recognized or the Regular Security is
disposed of. As an alternative to the inclusion of market discount in income on
the foregoing basis, the Regular Securityholder may elect to include market
discount in income currently as it accrues on all market discount instruments
acquired by such Regular Securityholder in that taxable year or thereafter, in
which case the interest deferral rule will not apply. See "--Election to Treat
All Interest Under the Constant Yield Method" below regarding an alternative
manner in which such election may be deemed to be made. A person who purchases a
Regular Security at a price lower than the remaining amounts includable in the
stated redemption price at maturity of the security, but higher than its
adjusted issue price, does not acquire the Regular Security with market
discount, but will be required to report original issue discount, appropriately
adjusted to reflect the excess of the price paid over the adjusted issue price.
Market discount with respect to a Regular Security will be considered to be
zero if such market discount is less than 0.25% of the remaining stated
redemption price at maturity of such Regular Security (or, in the case of a
Regular Security having original issue discount, the adjusted issue price of
such Regular Security) multiplied by the weighted average maturity of the
Regular Security (determined as described above in the third paragraph under
"--Original Issue Discount") remaining after the date of purchase. It appears
that de minimis market discount would be reported in a manner similar to de
minimis original issue discount. See "--Original Issue Discount" above.
Under provisions of the OID Regulations relating to contingent payment
obligations, a secondary purchaser of a Regular Security that has "contingent
interest" at a discount generally would continue to accrue interest and
determine adjustments on the Regular Security based on the original projected
payment schedule devised by the issuer of the Security. The holder of such a
Regular Security would be required, however, to allocate the difference between
the adjusted issue price of the Regular Security and its basis in the Regular
Security as positive adjustments to the accruals or projected payments on the
Regular Security over the remaining term of the Regular Security in a manner
that is reasonable (e.g., based on a constant yield to maturity).
Treasury regulations implementing the market discount rules have not yet
been issued, and uncertainty exists with respect to many aspects of those rules.
Due to the substantial lack of regulatory guidance with respect to the market
discount rules, it is unclear how those rules will affect any secondary market
that develops for a given Class of Regular Securities. Prospective investors in
Regular Securities should consult their own tax advisors regarding the
application of the market discount rules to the Regular Securities. Investors
should also consult Revenue Procedure 92-67 concerning the elections to include
market discount in income currently and to accrue market discount on the basis
of the constant yield method.
Amortizable Premium
A Regular Security purchased at a cost greater than its remaining stated
redemption price at maturity generally is considered to be purchased at a
premium. If the Regular Securityholder
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holds such Regular Security as a "capital asset" within the meaning of Code
Section 1221, the Regular Securityholder may elect under Code Section 171 to
amortize such premium under a constant yield method that reflects compounding
based on the interval between payments on the Regular Security. Such election
will apply to all taxable debt obligations (including REMIC regular interests)
acquired by the Regular Securityholder at a premium held in that taxable year or
thereafter, unless revoked with the permission of the IRS. Final Treasury
regulations have been issued with respect to amortizable bond premiums which do
not by their terms apply to prepayable debt instruments such as the Regular
Securities. However, the Conference Committee Report to the 1986 Act indicates a
Congressional intent that the same rules that apply to the accrual of market
discount on installment obligations will also apply to amortizing bond premium
under Code Section 171 on installment obligations such as the Regular
Securities, although it is unclear whether the alternatives to the constant
interest method described above under "--Market Discount" are available.
Amortizable bond premium generally will be treated as an offset to interest
income on a Regular Security, rather than as a separate deduction. See
"--Election to Treat All Interest Under the Constant Yield Method" below
regarding an alternative manner in which the Code Section 171 election may be
deemed to be made.
Amortizable premium on a Regular Security that is subject to redemption at
the option of the issuer generally must be amortized as if the optional
redemption price and date were the Security's principal amount and maturity date
if doing so would result in a smaller amount of premium amortization during the
period ending with the optional redemption date. Thus, a holder of a Regular
Security would not be able to amortize any premium on a Regular Security that is
subject to optional redemption at a price equal to or greater than the
Securityholder's acquisition price unless and until the redemption option
expires. A Regular Security subject to redemption at the option of the issuer
described in the preceding sentence will be treated as having matured on the
redemption date for the redemption price and then as having been reissued on
that date for that price. Any premium remaining on the Regular Security at the
time of the deemed reissuance will be amortized on the basis of (i) the original
principal amount and maturity date or (ii) the price and date of any succeeding
optional redemption, under the principles described above.
Election to Treat All Interest Under the Constant Yield Method
A holder of a debt instrument such as a Regular Security may elect to treat
all interest that accrues on the instrument using the constant yield method,
with none of the interest being treated as qualified stated interest. For
purposes of applying the constant yield method to a debt instrument subject to
such an election, (i) "interest" includes stated interest, original issue
discount, de minimis original issue discount, market discount and de minimis
market discount, as adjusted by any amortizable bond premium or acquisition
premium and (ii) the debt instrument is treated as if the instrument were issued
on the holder's acquisition date in the amount of the holder's adjusted basis
immediately after acquisition. It is unclear whether, for this purpose, the
initial Prepayment Assumption would continue to apply or if a new prepayment
assumption as of the date of the holder's acquisition would apply. A holder
generally may make such an election on an instrument by instrument basis or for
a Class or group of debt instruments. However, if the holder makes such an
election with respect to a debt instrument with amortizable bond premium or with
market discount, the holder is deemed to have made elections to amortize bond
premium or to report market discount income currently as it accrues under the
constant yield method,
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respectively, for all premium bonds held or market discount bonds acquired by
the holder in the same taxable year or thereafter. The election is made on the
holder's federal income tax return for the year in which the debt instrument is
acquired and is irrevocable except with the approval of the IRS. Investors
should consult their own tax advisors regarding the advisability of making such
an election.
Treatment of Losses
Regular Securityholders will be required to report income with respect to
Regular Securities on the accrual method of accounting, without giving effect to
delays or reductions in distributions attributable to defaults or delinquencies
on the Mortgage Loans, except to the extent it can be established that such
losses are uncollectable. Accordingly, the holder of a Regular Security,
particularly a Subordinate Security, may have income, or may incur a diminution
in cash flow as a result of a default or delinquency, but may not be able to
take a deduction (subject to the discussion below) for the corresponding loss
until a subsequent taxable year. In this regard, investors are cautioned that
while they may generally cease to accrue interest income if it reasonably
appears that the interest will be uncollectable, the IRS may take the position
that original issue discount must continue to be accrued in spite of its
uncollectibility until the debt instrument is disposed of in a taxable
transaction or becomes worthless in accordance with the rules of Code Section
166. Under Code Section 166, it appears that Regular Securityholders that are
corporations or that otherwise hold the Regular Securities in connection with a
trade or business should in general be allowed to deduct as an ordinary loss
such loss with respect to principal sustained during the taxable year on account
of any such Regular Securities becoming wholly or partially worthless, and that,
in general, Regular Securityholders that are not corporations and do not hold
the Regular Securities in connection with a trade or business should be allowed
to deduct as a short-term capital loss any loss sustained during the taxable
year on account of a portion of any such Regular Securities becoming wholly
worthless. Although the matter is not free from doubt, such non-corporate
Regular Securityholders should be allowed a bad debt deduction at such time as
the principal balance of such Regular Securities is reduced to reflect losses
resulting from any liquidated Mortgage Loans. The IRS, however, could take the
position that non-corporate holders will be allowed a bad debt deduction to
reflect such losses only after all the Mortgage Loans remaining in the Trust
Fund have been liquidated or the applicable Class of Regular Securities has been
otherwise retired. The IRS could also assert that losses on the Regular
Securities are deductible based on some other method that may defer such
deductions for all holders, such as reducing future cashflow for purposes of
computing original issue discount. This may have the effect of creating
"negative" original issue discount which would be deductible only against future
positive original issue discount or otherwise upon termination of the Class.
Regular Securityholders are urged to consult their own tax advisors regarding
the appropriate timing, amount and character of any loss sustained with respect
to such Regular Securities. While losses attributable to interest previously
reported as income should be deductible as ordinary losses by both corporate and
non-corporate holders, the IRS may take the position that losses attributable to
accrued original issue discount may only be deducted as capital losses in the
case of non-corporate holders who do not hold the Regular Securities in
connection with a trade or business. Special loss rules are applicable to banks
and thrift institutions, including rules regarding reserves for bad debts. Such
taxpayers are advised to consult their tax advisors regarding the treatment of
losses on Regular Securities.
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Sale or Exchange of Regular Securities
If a Regular Securityholder sells or exchanges a Regular Security, the
Regular Securityholder will recognize gain or loss equal to the difference, if
any, between the amount received and its adjusted basis in the Regular Security.
The adjusted basis of a Regular Security generally will equal the original cost
of the Regular Security to the seller, increased by any original issue discount
or market discount previously included in the seller's gross income with respect
to the Regular Security and reduced by amounts included in the stated redemption
price at maturity of the Regular Security that were previously received by the
seller, by any amortized premium, and by any recognized losses.
Except as described above with respect to market discount, and except as
provided in this paragraph, any gain or loss on the sale or exchange of a
Regular Security realized by an investor who holds the Regular Security as a
capital asset will be capital gain or loss and will be long-term or short-term
depending on whether the Regular Security has been held for the long-term
capital gain holding period (currently, more than one year). Such gain will be
treated as ordinary income (i) if a Regular Security is held as part of a
"conversion transaction" as defined in Code Section 1258(c), up to the amount of
interest that would have accrued on the Regular Securityholder's net investment
in the conversion transaction at 120% of the appropriate applicable Federal rate
in effect at the time the taxpayer entered into the transaction minus any amount
previously treated as ordinary income with respect to any prior disposition of
property that was held as part of such transaction, (ii) in the case of a
non-corporate taxpayer, to the extent such taxpayer has made an election under
Code Section 163(d)(4) to have net capital gains taxed as investment income at
ordinary income rates, or (iii) to the extent that such gain does not exceed the
excess, if any, of (a) the amount that would have been includable in the gross
income of the holder if its yield on such Regular Security were 110% of the
applicable Federal rate as of the date of purchase, over (b) the amount of
income actually includable in the gross income of such holder with respect to
such Regular Security. In addition, gain or loss recognized from the sale of a
Regular Security by certain banks or thrift institutions will be treated as
ordinary income or loss pursuant to Code Section 582(c). Long-term capital gains
of certain noncorporate taxpayers generally are subject to a lower maximum tax
rate than ordinary income or short-term capital gains of such taxpayers for
property held for more than one year. Currently, the maximum tax rate for
corporations is the same with respect to both ordinary income and capital gains.
Regular Securityholders that recognize a loss on a sale or exchange of a
Regular Security for federal income tax purposes in excess of certain threshold
amounts should consult their tax advisors as to the need to file IRS Form 8886
(disclosing certain potential tax shelters) on their federal income tax returns.
Taxation of Owners of Residual Securities
Taxation of REMIC Income
Generally, the "daily portions" of REMIC taxable income or net loss will be
includable as ordinary income or loss in determining the federal taxable income
of holders of Residual Securities ("Residual Holders"), and will not be taxed
separately to the REMIC Pool. The daily portions of REMIC taxable income or net
loss of a Residual Holder are determined by allocating
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the REMIC Pool's taxable income or net loss for each calendar quarter ratably to
each day in such quarter and by allocating such daily portion among the Residual
Holders in proportion to their respective holdings of Residual Securities in the
REMIC Pool on such day. REMIC taxable income is generally determined in the same
manner as the taxable income of an individual using the accrual method of
accounting, except that (i) the limitations on deductibility of investment
interest expense and expenses for the production of income do not apply, (ii)
all bad loans will be deductible as business bad debts, and (iii) the limitation
on the deductibility of interest and expenses related to tax-exempt income will
apply. The REMIC Pool's gross income includes interest, original issue discount
income and market discount income, if any, on the Mortgage Loans, reduced by
amortization of any premium on the Mortgage Loans, plus income from amortization
of issue premium, if any, on the Regular Securities, plus income on reinvestment
of cash flows and reserve assets, plus any cancellation of indebtedness income
upon allocation of realized losses to the Regular Securities. The REMIC Pool's
deductions include interest and original issue discount expense on the Regular
Securities, servicing fees on the Mortgage Loans, other administrative expenses
of the REMIC Pool and realized losses on the Mortgage Loans. The requirement
that Residual Holders report their pro rata share of taxable income or net loss
of the REMIC Pool will continue until there are no Securities of any Class of
the related Series outstanding.
The taxable income recognized by a Residual Holder in any taxable year will
be affected by, among other factors, the relationship between the timing of
recognition of interest, original issue discount or market discount income or
amortization of premium with respect to the Mortgage Loans, on the one hand, and
the timing of deductions for interest (including original issue discount) or
income from amortization of issue premium on the Regular Securities, on the
other hand. In the event that an interest in the Mortgage Loans is acquired by
the REMIC Pool at a discount, and one or more of such Mortgage Loans is prepaid,
the prepayment may be used in whole or in part to make distributions in
reduction of principal on the Regular Securities, and (ii) the discount on the
Mortgage Loans which is includable in income may exceed the deduction allowed
upon such distributions on those Regular Securities on account of any unaccrued
original issue discount relating to those Regular Securities. When there is more
than one Class of Regular Securities that distribute principal sequentially,
this mismatching of income and deductions is particularly likely to occur in the
early years following issuance of the Regular Securities when distributions in
reduction of principal are being made in respect of earlier Classes of Regular
Securities to the extent that such Classes are not issued with substantial
discount or are issued at a premium. If taxable income attributable to such a
mismatching is realized, in general, losses would be allowed in later years as
distributions on the later maturing Classes of Regular Securities are made.
Taxable income may also be greater in earlier years than in later years as a
result of the fact that interest expense deductions, expressed as a percentage
of the outstanding principal amount of such a Series of Regular Securities, may
increase over time as distributions in reduction of principal are made on the
lower yielding Classes of Regular Securities, whereas, to the extent the REMIC
Pool consists of fixed rate Mortgage Loans, interest income with respect to any
given Mortgage Loan will remain constant over time as a percentage of the
outstanding principal amount of that loan. Consequently, Residual Holders must
have sufficient other sources of cash to pay any federal, state, or local income
taxes due as a result of such mismatching or unrelated deductions against which
to offset such income, subject to the discussion of "excess inclusions" below
under "--Limitations on Offset or Exemption of REMIC Income." The timing of such
mismatching of income and deductions described in this paragraph,
128
if present with respect to a Series of Securities, may have a significant
adverse effect upon a Residual Holder's after-tax rate of return.
A portion of the income of a Residual Securityholder may be treated
unfavorably in three contexts:
o it may not be offset by current or net operating loss deductions;
o it will be considered unrelated business taxable income to tax-exempt
entities; and
o it is ineligible for any statutory or treaty reduction in the 30%
withholding tax otherwise available to a foreign Residual
Securityholder.
See "--Limitations on Offset or Exemption of REMIC Income" below. In addition, a
Residual Holder's taxable income during certain periods may exceed the income
reflected by such Residual Holders for such periods in accordance with generally
accepted accounting principles. Investors should consult their own accountants
concerning the accounting treatment of their investment in Residual Securities.
Basis and Losses
The amount of any net loss of the REMIC Pool that may be taken into account
by the Residual Holder is limited to the adjusted basis of the Residual Security
as of the close of the quarter (or time of disposition of the Residual Security
if earlier), determined without taking into account the net loss for the
quarter. The initial adjusted basis of a purchaser of a Residual Security is the
amount paid for such Residual Security. Such adjusted basis will be increased by
the amount of taxable income of the REMIC Pool reportable by the Residual Holder
and will be decreased (but not below zero), first, by a cash distribution from
the REMIC Pool and, second, by the amount of loss of the REMIC Pool reportable
by the Residual Holder. Any loss that is disallowed on account of this
limitation may be carried over indefinitely with respect to the Residual Holder
as to whom such loss was disallowed and may be used by such Residual Holder only
to offset any income generated by the same REMIC Pool.
A Residual Holder will not be permitted to amortize directly the cost of
its Residual Security as an offset to its share of the taxable income of the
related REMIC Pool. However, the taxable income will not include cash received
by the REMIC Pool that represents a recovery of the REMIC Pool's basis in its
assets. Although the law is unclear in certain respects, such recovery of basis
by the REMIC Pool will have the effect of amortization of the issue price of the
Residual Securities over their life. However, in view of the possible
acceleration of the income of Residual Holders described above under "--Taxation
of REMIC Income," the period of time over which such issue price is effectively
amortized may be longer than the economic life of the Residual Securities.
A Residual Security may have a negative value if the net present value of
anticipated tax liabilities exceeds the present value of anticipated cash flows.
The REMIC Regulations appear to treat the issue price of such a residual
interest as zero rather than such negative amount for purposes of determining
the REMIC Pool's basis in its assets. The preamble to the REMIC Regulations
states that the IRS may provide future guidance on the proper tax treatment of
payments made by a transferor of such a residual interest to induce the
transferee to acquire the
129
interest, and Residual Holders should consult their own tax advisors in this
regard.Any payments received by a holder of a REMIC Residual Certificate in
=========================================================================
connection with the acquisition of such Certificate will be taken into account
================================================================================
in determining the income of such holder for federal income tax purposes. The
================================================================================
timing of such income is uncertain under current law. The IRS has issued
================================================================================
proposed regulations that, if adopted as final regulations, would require such
================================================================================
payment to be included in income over time according to an amortization schedule
================================================================================
that reasonably reflects the costs and benefits of holding the REMIC Residual
================================================================================
Certificate over its expected life. The proposed regulations also would provide
================================================================================
two more specific methods that would be accepted as meeting the general test set
================================================================================
forth above for determining the timing and amount of income inclusion. One
================================================================================
generally follows the method of inclusion used by the taxpayer for GAAP
================================================================================
purposes, but not over a period shorter than the period over which the REMIC is
================================================================================
expected to generate income. The other calls for ratable inclusion over the
================================================================================
remaining anticipated weighted average life of the REMIC as of the time the
================================================================================
REMIC Residual Certificate is transferred to the taxpayer. Because of the
================================================================================
uncertainty concerning the treatment of such payments, holders of REMIC Residual
================================================================================
Certificates should consult their tax advisors concerning the treatment of such
================================================================================
payments for income tax purposes.
=================================
Further, to the extent that the initial adjusted basis of a Residual Holder
(other than an original holder) in the Residual Security is greater than the
corresponding portion of the REMIC Pool's basis in the Mortgage Loans, the
Residual Holder will not recover a portion of such basis until termination of
the REMIC Pool unless future Treasury regulations provide for periodic
adjustments to the REMIC income otherwise reportable by such holder. The REMIC
Regulations currently in effect do not so provide. See "--Treatment of Certain
Items of REMIC Income and Expense--Market Discount" below regarding the basis of
Mortgage Loans to the REMIC Pool and "--Sale or Exchange of a Residual Security"
below regarding possible treatment of a loss upon termination of the REMIC Pool
as a capital loss.
Treatment of Certain Items of REMIC Income and Expense
Although it is anticipated that the Trustee will compute REMIC income and
expense in accordance with the Code and applicable regulations, the authorities
regarding the determination of specific items of income and expense are subject
to differing interpretations. The Depositor makes no representation as to the
specific method that will be used for reporting income with respect to the
Mortgage Loans and expenses with respect to the Regular Securities, and
different methods could result in different timing or reporting of taxable
income or net loss to Residual Holders or differences in capital gain versus
ordinary income.
Original Issue Discount and Premium. Generally, the REMIC Pool's deductions
for original issue discount and income from amortization of premium will be
determined in the same manner as original issue discount income on Regular
Securities as described above under "--Taxation of Owners of Regular
Securities--Original Issue Discount" and "--Variable Rate Regular Securities,"
without regard to the de minimis rule described therein, and "--Taxation of
Owners of Regular Securities--Amortizable Premium."
Market Discount. The REMIC Pool will have market discount income in respect
of Mortgage Loans if, in general, the basis of the REMIC Pool in such Mortgage
Loans is exceeded by their unpaid principal balances. The REMIC Pool's basis in
such Mortgage Loans is generally the fair market value of the Mortgage Loans
immediately after the transfer thereof to
130
the REMIC Pool. The REMIC Regulations provide that such basis is equal in the
aggregate to the issue prices of all regular and residual interests in the REMIC
Pool. The accrued portion of such market discount would be recognized currently
as an item of ordinary income in a manner similar to original issue discount.
Market discount income generally should accrue in the manner described above
under "--Taxation of Owners of Regular Securities--Market Discount."
Premium. Generally, if the basis of the REMIC Pool in the Mortgage Loans
exceeds the unpaid principal balances thereof, the REMIC Pool will be considered
to have acquired such Mortgage Loans at a premium equal to the amount of such
excess. As stated above, the REMIC Pool's basis in Mortgage Loans is the fair
market value of the Mortgage Loans, based on the aggregate of the issue prices
of the regular and residual interests in the REMIC Pool immediately after the
transfer thereof to the REMIC Pool. In a manner analogous to the discussion
above under "--Taxation of Owners of Regular Securities--Amortizable Premium," a
person that holds a Mortgage Loan as a capital asset under Code Section 1221 may
elect under Code Section 171 to amortize premium on Mortgage Loans originated
after September 27, 1985 under the constant yield method. Amortizable bond
premium will be treated as an offset to interest income on the Mortgage Loans,
rather than as a separate deduction item. Because substantially all of the
mortgagors on the Mortgage Loans are expected to be individuals, Code Section
171 will not be available for premium on Mortgage Loans originated on or prior
to September 27, 1985. Premium with respect to such Mortgage Loans may be
deductible in accordance with a reasonable method regularly employed by the
holder thereof. The allocation of such premium pro rata among principal payments
should be considered a reasonable method; however, the IRS may argue that such
premium should be allocated in a different manner, such as allocating such
premium entirely to the final payment of principal.
Limitations on Offset or Exemption of REMIC Income
A portion (or all) of the REMIC taxable income includable in determining
the federal income tax liability of a Residual Holder will be subject to special
treatment. That portion, referred to as the "excess inclusion," is equal to the
excess of REMIC taxable income for the calendar quarter allocable to a Residual
Security over the daily accruals for such quarterly period of (i) 120% of the
long-term applicable Federal rate that would have applied to the Residual
Security (if it were a debt instrument) on the Startup Day under Code Section
1274(d), multiplied by (ii) the adjusted issue price of such Residual Security
at the beginning of such quarterly period. For this purpose, the adjusted issue
price of a Residual Security at the beginning of a quarter is the issue price of
the Residual Security, plus the amount of such daily accruals of REMIC income
described in this paragraph for all prior quarters, decreased by any
distributions made with respect to such Residual Security prior to the beginning
of such quarterly period. Accordingly, the portion of the REMIC Pool's taxable
income that will be treated as excess inclusions will be a larger portion of
such income as the adjusted issue price of the Residual Securities diminishes.
The portion of a Residual Holder's REMIC taxable income consisting of the
excess inclusions generally may not be offset by other deductions, including net
operating loss carryforwards, on such Residual Holder's return. However, net
operating loss carryovers are determined without regard to excess inclusion
income. Further, if the Residual Holder is an organization subject to the tax on
unrelated business income imposed by Code Section 511, the Residual Holder's
excess inclusions will be treated as unrelated business taxable income of such
131
Residual Holder for purposes of Code Section 511. In addition, REMIC taxable
income is subject to 30% withholding tax with respect to certain persons who are
not U.S. Persons (as defined below under "--Tax-Related Restrictions on Transfer
of Residual Securities--Foreign Investors"), and the portion thereof
attributable to excess inclusions is not eligible for any reduction in the rate
of withholding tax (by treaty or otherwise). See "--Taxation of Certain Foreign
Investors--Residual Securities" below. Finally, if a real estate investment
trust or a regulated investment company owns a Residual Security, a portion
(allocated under Treasury regulations yet to be issued) of dividends paid by the
real estate investment trust or regulated investment company could not be offset
by net operating losses of its shareholders, would constitute unrelated business
taxable income for tax-exempt shareholders, and would be ineligible for
reduction of withholding to certain persons who are not U.S. Persons. The SBJPA
of 1996 has eliminated the special rule permitting Section 593 institutions
("thrift institutions") to use net operating losses and other allowable
deductions to offset their excess inclusion income from Residual Securities that
have "significant value" within the meaning of the REMIC Regulations, effective
for taxable years beginning after December 31, 1995, except with respect to
Residual Securities continuously held by a thrift institution since November 1,
1995.
In addition, the SBJPA of 1996 providesThere are three rules for
determining the effect of excess inclusions on the alternative minimum taxable
income of a Residual Holder. First, alternative minimum taxable income for a
Residual Holder is determined without regard to the special rule, discussed
above, that taxable income cannot be less than excess inclusions. Second, a
Residual Holder's alternative minimum taxable income for a taxable year cannot
be less than the excess inclusions for the year. Third, the amount of any
alternative minimum tax net operating loss deduction must be computed without
regard to any excess inclusions. These rules are effective for taxable years
beginning after December 31, 1986, unless a Residual Holder elects to have such
rules apply only to taxable years beginning after August 20, 1996.
Tax-Related Restrictions on Transfer of Residual Securities
Disqualified Organizations. If any legal or beneficial interest in a
Residual Security is transferred to a Disqualified Organization (as defined
below), a tax would be imposed in an amount equal to the product of (i) the
present value of the total anticipated excess inclusions with respect to such
Residual Security for periods after the transfer and (ii) the highest marginal
federal income tax rate applicable to corporations. The REMIC Regulations
provide that the anticipated excess inclusions are based on actual prepayment
experience to the date of the transfer and projected payments based on the
Prepayment Assumption. The present value rate equals the applicable Federal rate
under Code Section 1274(d) as of the date of the transfer for a term ending with
the last calendar quarter in which excess inclusions are expected to accrue.
Such rate is applied to the anticipated excess inclusions from the end of the
remaining calendar quarters in which they arise to the date of the transfer.
Such a tax generally would be imposed on the transferor of the Residual
Security, except that where such transfer is through an agent (including a
broker, nominee, or other middleman) for a Disqualified Organization, the tax
would instead be imposed on such agent. However, a transferor of a Residual
Security would in no event be liable for such tax with respect to a transfer if
the transferee furnished to the transferor an affidavit stating that the
transferee is not a Disqualified Organization and, as of the time of the
transfer, the transferor does not have actual knowledge that such affidavit is
false. The tax also may be waived by the IRS if the Disqualified Organization
promptly disposes of the
132
Residual Security and the transferor pays income tax at the highest corporate
rate on the excess inclusion for the period the Residual Security is actually
held by the Disqualified Organization.
In addition, if a "Pass-Through Entity" (as defined below) has excess
inclusion income with respect to a Residual Security during a taxable year and a
Disqualified Organization is the record holder of an equity interest in such
entity, then a tax is imposed on such entity equal to the product of (i) the
amount of excess inclusions that are allocable to the interest in the
Pass-Through Entity during the period such interest is held by such Disqualified
Organization, and (ii) the highest marginal federal corporate income tax rate.
Such tax would be deductible from the ordinary gross income of the Pass-Through
Entity for the taxable year. The Pass-Through Entity would not be liable for
such tax if it has received an affidavit from such record holder that it is not
a Disqualified Organization or stating such holder's taxpayer identification
number and, during the period such person is the record holder of the Residual
Security, the Pass-Through Entity does not have actual knowledge that such
affidavit is false.
For taxable years beginning on or after January 1, 1998, ifIf an "electing
large partnership" holds a Residual Security, all interests in the electing
large partnership are treated as held by Disqualified Organizations for purposes
of the tax imposed upon a Pass-Through Entity by section 860E(c) of the Code. An
exception to this tax, otherwise available to a Pass-Through Entity that is
furnished certain affidavits by record holders of interests in the entity and
that does not know such affidavits are false, is not available to an electing
large partnership.
For these purposes, (i) "Disqualified Organization" means the United
States, any state or political subdivision thereof, any foreign government, any
international organization, any agency or instrumentality of any of the
foregoing (provided, that such term does not include an instrumentality if all
of its activities are subject to tax and a majority of its board of directors in
not selected by any such governmental entity), any cooperative organization
furnishing electric energy or providing telephone service or persons in rural
areas as described in Code Section 1381(a)(2)(C), and any organization (other
than a farmers' cooperative described in Code Section 531) that is exempt from
taxation under the Code unless such organization is subject to the tax on
unrelated business income imposed by Code Section 511, (ii) "Pass-Through
Entity" means any regulated investment company, real estate investment trust,
common trust fund, partnership, trust or estate and certain corporations
operating on a cooperative basis. Except as may be provided in Treasury
regulations, any person holding an interest in a Pass-Through Entity as a
nominee for another will, with respect to such interest, be treated as a
Pass-Through Entity, and (iii) an "electing large partnership" means any
partnership having more than 100 members during the preceding tax year (other
than certain service partnerships and commodity pools), which elect to apply
simplified reporting provisions under the Code.
The Pooling and Servicing Agreement with respect to a Series will provide
that no legal or beneficial interest in a Residual Security may be transferred
or registered unless (i) the proposed transferee furnished to the transferor and
the Trustee an affidavit providing its taxpayer identification number and
stating that such transferee is the beneficial owner of the Residual Security
and is not a Disqualified Organization and is not purchasing such Residual
Security on behalf of a Disqualified Organization (i.e., as a broker, nominee or
middleman thereof) and (ii) the transferor provides a statement in writing to
the Trustee that it has no actual knowledge that such affidavit is false.
Moreover, the Pooling and Servicing Agreement will provide that any attempted or
purported transfer in violation of these transfer restrictions will be null and
void
133
and will vest no rights in any purported transferee. Each Residual Security with
respect to a Series will bear a legend referring to such restrictions on
transfer, and each Residual Holder will be deemed to have agreed, as a condition
of ownership thereof, to any amendments to the related Pooling and Servicing
Agreement required under the Code or applicable Treasury regulations to
effectuate the foregoing restrictions. Information necessary to compute an
applicable excise tax must be furnished to the IRS and to the requesting party
within 60 days of the request, and the Depositor or the Trustee may charge a fee
for computing and providing such information.
Noneconomic Residual Interests. The REMIC Regulations would disregard
certain transfers of Residual Securities, in which case the transferor would
continue to be treated as the owner of the Residual Securities and thus would
continue to be subject to tax on its allocable portion of the net income of the
REMIC Pool. Under the REMIC Regulations, a transfer of a "noneconomic residual
interest" (as defined below) to a Residual Holder (other than a Residual Holder
who is not a U.S. Person as defined below under "--Foreign Investors") is
disregarded to all federal income tax purposes if a significant purpose of the
transfer is to impede the assessment or collection of tax. A residual interest
in a REMIC (including a residual interest with a positive value at issuance) is
a "noneconomic residual interest" unless, at the time of the transfer, (i) the
present value of the expected future distributions on the residual interest at
least equals the product of the present value of the anticipated excess
inclusions and the highest corporate income tax rate in effect for the year in
which the transfer occurs, and (ii) the transferor reasonably expects that the
transferee will receive distributions from the REMIC at or after the time at
which taxes accrue on the anticipated excess inclusions in an amount sufficient
to satisfy the accrued taxes on each excess inclusion. The anticipated excess
inclusions and the present value rate are determined in the same manner as set
forth above under "--Disqualified Organizations." The REMIC Regulations explain
that a significant purpose to impede the assessment or collection of tax exists
if the transferor, at the time of the transfer, either knew or should have known
that the transferee would be unwilling or unable to pay taxes due on its share
of the taxable income of the REMIC. Under the REMIC Regulations, as amended on
July 19, 2002, a safe harbor is provided if (i) the transferor conducted, at the
time of the transfer, a reasonable investigation of the financial condition of
the transferee and found that the transferee historically had paid its debts as
they came due and found no significant evidence to indicate that the transferee
would not continue to pay its debts as they came due in the future, (ii) the
transferee represents to the transferor that it understands that, as the holder
of the non-economic residual interest, the transferee may incur liabilities in
excess of any cash flows generated by the interest and that the transferee
intends to pay taxes associated with holding the residual interest as they
become due, and (iii) the transferee represents to the transferor that it will
not cause income from the Residual Security to be attributable to a foreign
permanent establishment or fixed base, (within the meaning of an applicable
income tax treaty, and the Residual Security is, in fact, not transferred to
such a permanent establishment or fixed base) of the transferee or any other
person and (iv). The Pooling and Servicing Agreement with respect to each Series
===============================================================
of Certificates will require the transferee of a Residual Security to certify to
================================================================================
the matters in the preceding sentence as part of the affidavit described above
================================================================================
under the heading "Disqualified Organizations".
==============================================
In addition to the three conditions set forth above for the transferor or a
================================================================================
noneconomic residual interest to be presumed not to have knowledge that the
================================================================================
transferee would be unwilling or unable to pay taxes due on its share of the
================================================================================
taxable income of the REMIC, the REMIC
=======================================
134
Regulations contain a fourth condition for the transferor to be presumed to lack
================================================================================
such knowledge. This fourth condition requires that one of the two following
=======================================================
tests must be satisfied: Either
(a) the present value of the anticipated tax liabilities associated
with holding the noneconomic residual interest not exceed the sum of:
(1) the present value of any consideration given to the
transferee to acquire the interest;
(2) the present value of the expected future distributions on the
interest; and
(3) the present value of the anticipated tax savings associated
with holding the interest as the REMIC generates losses.
For purposes of these computations, the transferee is assumed to pay tax at
the highest corporate rate of tax specified in the Code or, in certain
circumstances, the alternative minimum tax rate. Further, present values
generally are computed using a discount rate equal to the short-term
Federal rate set forth in Section 1274(d) of the Code for the month of the
transfer and the compounding period used by the transferee; or
(b) (1) the transferee must be a domestic "C" corporation (other than a
corporation exempt from taxation or a regulated investment company or real
estate investment trust) that meets certain asset tests; (2) the transferee
must agree in writing that any subsequent transfer of the residual interest
would be to an eligible "C" corporation and would meet the requirements for
a safe harbor transfer; and (3) the facts and circumstances known to the
transferor on or before the date of the transfer must not reasonably
indicate that the taxes associated with ownership of the residual interest
will not be paid by the transferee.
The Pooling and Servicing Agreement with respect to each Series of
Certificates will require the transferee of a Residual Security to certify to
the matters in requirements (i) - (iv) above as part of the affidavit described
above under the heading "Disqualified Organizations." Unless otherwise indicated
in the applicable Prospectus Supplement, the Pooling and Servicing Agreement
will not require that transfers of the Residual Securities meet the requirement
(iv)fourth condition above, and thus meet the safe harbor. Persons considering
the purchase of the Residual Securities should consult their advisors regarding
the advisability of meeting the safe harbor in any transfer of the Residual
Securities.
Foreign Investors. The REMIC Regulations provide that the transfer of a
Residual Security that has "tax avoidance potential" to a "foreign person" will
be disregarded for all federal tax purposes. This rule appears intended to apply
to a transferee who is not a "U.S. Person" (as defined below), unless such
transferee's income is effectively connected with the conduct of a trade or
business within the United States. A Residual Security is deemed to have tax
avoidance potential unless, at the time of the transfer, (i) the future value of
expected distributions equals at least 30% of the anticipated excess inclusions
after the transfer, and (ii) the transferor reasonably expects that the
transferee will receive sufficient distributions from the REMIC Pool at or after
the time at which the excess inclusions accrue and prior to the end of the next
succeeding taxable year for the accumulated withholding tax liability to be
paid. If the non-U.S. Person transfers the Residual Security back to a U.S.
Person, the transfer will be disregarded and the foreign transferor will
continue to be treated as the owner unless arrangements are made so that the
135
transfer does not have the effect of allowing the transferor to avoid tax on
accrued excess inclusions.
The prospectus supplement relating to the Certificates of a Series may
provide that a Residual Security may not be purchased by or transferred to any
person that is not a U.S. Person or may describe the circumstances and
restrictions pursuant to which such a transfer may be made. The term "U.S.
Person" means a citizens or resident of the United States, a corporation or
partnership (unless, in the case of a partnership, Treasury regulations are
adopted that provide otherwise) created or organized in or under the laws of the
United States, any state thereof or the District of Columbia, including an
entity treated as a corporation or partnership for federal income tax purposes,
an estate that is subject to U.S. federal income tax regardless of the source of
its income, or a trust if a court within the United States is able to exercise
primary supervision over the administration of such trust and one or more such
U.S. Persons have the authority to control all substantial decisions of such
trust (or, to the extent provided in applicable Treasury regulations, certain
trusts in existence on August 20, 1996 which are eligible to elect to be treated
as U.S. Persons).
Sale or Exchange of a Residual Security
Upon the sale or exchange of a Residual Security, the Residual Holder will
recognize gain or loss equal to the excess, if any, of the amount realized over
the adjusted basis (as described above under "--Taxation of Owners of Residual
Securities--Basis and Losses") of such Residual Holder in such Residual Security
at the time of the sale or exchange. In addition to reporting the taxable income
of the REMIC Pool, a Residual Holder will have taxable income to the extent that
any cash distribution to it from the REMIC Pool exceeds such adjusted basis on
that Distribution Date. Such income will be treated as gain from the sale or
exchange of the Residual Holder's Residual Security, in which case, if the
Residual Holder has an adjusted basis in its Residual Security remaining when
its interest in the REMIC Pool terminates, and if it holds such Residual
Security as a capital asset under Code Section 1221, then it will recognize a
capital loss at that time in the amount of such remaining adjusted basis.
Any gain on the sale of a Residual Security will be treated as ordinary
income (i) if a Residual Security is held as part of a "conversion transaction"
as defined in Code Section 1258(c), up to the amount of interest that would have
accrued on the Residual Holder's net investment in the conversion transaction at
120% of the appropriate applicable Federal rate in effect at the time the
taxpayer entered into the transaction minus any amount previously treated as
ordinary income with respect to any prior disposition of property that was held
as a part of such transaction or (ii) in the case of a non-corporate taxpayer,
to the extent such taxpayer has made an election under Code Section 163(d)(4) to
have net capital gains taxed as investment income at ordinary income rates. In
addition, gain or loss recognized from the sale of a Residual Security by
certain banks or thrift institutions will be treated as ordinary income or loss
pursuant to Code Section 582(c).
The Conference Committee Report to the 1986 Act provides that, except as
provided in Treasury regulations yet to be issued, the wash sale rules of Code
Section 1091 will apply to dispositions of Residual Securities where the seller
of the Residual Security, during the period beginning six months before the sale
or disposition of the Residual Security and ending six months after such sale or
disposition, acquires (or enters into any other transaction that results in
136
the
application of Code Section 1091) any residual interest in any REMIC or any
interest in a "taxable mortgage pool" (such as a non-REMIC owner trust) that is
economically comparable to a Residual Security.
The Residual Holder that recognizes a loss on a sale or exchange of a
Residual Security for federal income tax purposes in excess of certain threshold
amounts should consult their tax advisors as to the need to file IRS Form 8886
(disclosing certain potential tax shelters) on their federal income tax returns.
Mark to Market Regulations
On December 24, 1996, theThe IRS has issued final regulations (the "Mark to
Market Regulations") under Code Section 475 relating to the requirement that a
securities dealer mark to market securities held for sale to customers. This
mark-to-market requirement applies to all securities of a dealer, except to the
extent that the dealer has specifically identified a security as held for
investment. The Mark to Market Regulations provide that, for purposes of this
mark to market requirement, a Residual Security is not treated as a security and
thus may not be marked to market. The Mark to Market Regulations apply to all
Residual Securities acquired on or after January 4, 1995.
Taxes That May Be Imposed on the REMIC Pool
Prohibited Transactions
Income from certain transaction by the REMIC Pool, called prohibited
transactions, will not be part of the calculation of income or loss includable
in the federal income tax returns of Residual Holders, but rather will be taxed
directly to the REMIC Pool at a 100% rate. Prohibited transactions generally
include:
o the disposition of a qualified mortgages other than for (a)
substitution within two years of the Startup Day for a defective
(including a defaulted) obligation (or repurchase in lieu of
substitution of a defective (including a defaulted) obligation at any
time) or for any qualified mortgage within three months of the Startup
Day, (b) foreclosure, default, or imminent default of a qualified
mortgage, (c) bankruptcy or insolvency of the REMIC Pool, or (d) a
qualified (complete) liquidation,
o the receipt of income from assets that are not the type of mortgages
or investments that the REMIC Pool is permitted to hold,
o the receipt of compensation for services, or
o the receipt of gain from disposition of cash flow investments other
than pursuant to a qualified liquidation.
Notwithstanding the first and fourth bullet points above, it is not a prohibited
transaction to sell a qualified mortgage or cash flow investment held by a REMIC
Pool to prevent a default on Regular Securities as a result of a default on
qualified mortgages or to facilitate a clean-up call (generally, an optional
termination to save administrative costs when no more than a small percentage of
the Securities is outstanding). The REMIC Regulations indicate that the
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modification of a Mortgage Loan generally will not be treated as a disposition
if it is occasioned by a default or reasonably foreseeable default, an
assumption of the Mortgage Loan, the waiver of a due-on-sale or
due-on-encumbrance clause, or the conversion of an interest rate by a mortgagor
pursuant to the terms of a convertible adjustable rate Mortgage Loan.
Contributions to the REMIC Pool After the Startup Day
In general, the REMIC Pool will be subject to a tax at a 100% rate on the
value of any property contributed to the REMIC Pool after the Startup Day.
Exceptions are provided for cash contributions to the REMIC Pool
o during the three months following the Startup Day,
o made to a qualified reserve fund by a Residual Holder, o in the nature
of a guarantee,
o made to facilitate a qualified liquidation or clean-up call, and
o as otherwise permitted in Treasury regulations yet to be issued.
It is not anticipated that there will be any contributions to the REMIC Pool
after the Startup Day.
Net Income from Foreclosure Property
The REMIC Pool will be subject of federal income tax at the highest
corporate rate on "net income from foreclosure property," determined by
reference to the rules applicable to real estate investment trusts. Generally,
property acquired by deed in lieu of foreclosure would be treated as
"foreclosure property" for a period ending with the close of the third calendar
year beginning after the year in which the REMIC Pool acquires such property,
with a possible extension. Net income from foreclosure property generally means
gain from the sale of a foreclosure property that is inventory property and
gross income from foreclosure property other than qualifying rents and other
qualifying income for a real estate investment trust. It is not anticipated that
the REMIC Pool will have any taxable net income from foreclosure property.
Liquidation of the REMIC Pool
If a REMIC Pool adopts a plan of complete liquidation, within the meaning
of Code Section 860F(a)(4)(A)(i), which may be accomplished by designating in
the REMIC Pool's final tax return a date on which such adoption is deemed to
occur, and sells all of its assets (other than cash) within a 90-day period
beginning on such date, the REMIC Pool will not be subject to the prohibited
transaction rules on the sale of its assets, provided that the REMIC Pool
credits or distributes in liquidation all of the sale proceeds plus its cash
(other than amounts retained to meet claims) to holders of Regular Securities
and Residual Holders within the 90-day period.
Administrative Matters
The REMIC Pool will be required to maintain its books on a calendar year
basis and to file federal income tax returns for federal income tax purposes in
a manner similar to a partnership. The form for such income tax return is Form
1066, U.S. Real Estate Mortgage Investment
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Conduit Income Tax Return. The Trustee will be required to sign the REMIC Pool's
returns. Treasury regulations provide that, except where there is a single
Residual Holder for an entire taxable year, the REMIC Pool will be subject to
the procedural and administrative rules of the Code applicable to partnerships,
including the determination by the IRS of any adjustments to, among other
things, items of REMIC income, gain, loss, deduction, or credit in a unified
administrative proceeding. The Master Servicer will be obligated to act as "tax
matters person," as defined in applicable Treasury regulations, with respect to
the REMIC Pool as agent of the Residual Holders holding the largest percentage
interest in the Residual Securities. If the Code or applicable Treasury
regulations do not permit the Master Servicer to act as tax matters person in
its capacity as agent of such Residual Holder, such Residual Holder or such
other person specified pursuant to Treasury regulations will be required to act
as tax matters person. The tax matters person generally has responsibility for
overseeing and providing notice to the other Residual Holders of certain
administrative and judicial proceedings regarding the REMIC Pool's tax affairs,
although other holders of the Residual Securities of the same Series would be
able to participate in such proceedings in appropriate circumstances.
Limitations on Deduction of Certain Expenses
An investor who is an individual, estate, or trust will be subject to
limitation with respect to certain itemized deductions described in Code Section
67, to the extent that such itemized deductions, in the aggregate, do not exceed
2% of the investor's adjusted gross income. In addition, Code Section 68
provides that itemized deductions otherwise allowable for a taxable year of an
individual taxpayer will be reduced by the lesser orof (i) 3% of the excess, if
any, of adjusted gross income over $137,300 for 2002 ($68,650 in the case of a
married individual filing a separate return) (subject to annual adjustments for
inflation each year thereafter)a statutory threshold amount, or (ii) 80% of the
amount of itemized deductions otherwise allowable for such year. These
limitations will be phased out and eliminated by 2010. In the case of a REMIC
Pool, such deductions may include deductions under Code Section 212 for the
Servicing Fee and all administrative and other expenses relating to the REMIC
Pool, or any similar expenses allocated to the REMIC Pool with respect to a
regular interest it holds in another REMIC. Such investors who hold REMIC
Securities either directly or indirectly through certain pass-through entities
may have their pro rata share of such expenses allocated to them as additional
gross income, but may be subject to such limitation on deductions. In addition,
such expenses are not deductible at all for purposes of computing the
alternative minimum tax, and may cause such investors to be subject to
significant additional tax liability. Temporary Treasury regulations provide
that the additional gross income and corresponding amount of expenses generally
are to be allocated entirely to the holders of Residual Securities in the case
of a REMIC Pool that would not qualify as a fixed investment trust in the
absence of a REMIC election. With respect to a REMIC Pool that would be
classified as an investment trust in the absence of a REMIC election or that is
substantially similar to an investment trust, any holder of a Regular Security
that is an individual, trust, estate, or pass-through entity also will be
allocated its pro rata share of such expenses and a corresponding amount of
income and will be subject to the limitations or deductions imposed by Code
Sections 67 and 68, as described above. Unless indicated otherwise in the
applicable prospectus supplement, all such expenses will be allocable to the
Residual Securities. In general, such allocable portion will be determined based
on the ratio that a REMIC Securityholder's income, determined on a daily basis,
bears to the income of all holders of Regular Securities and Residual Securities
with respect to a REMIC Pool. As a result,
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individuals, estates or trusts holding REMIC Securities (either directly or
indirectly through a grantor trust, partnership, S corporation, REMIC, or
certain other pass-through entities described in the foregoing temporary
Treasury regulations) may have taxable income in excess of the interest income
at the pass-through rate on Regular Securities that are issued in a single Class
or otherwise consistently with fixed investment trust status or in excess of
cash distributions for the related period on Residual Securities.
Taxation of Certain Foreign Investors
Regular Securities
Interest, including original issue discount, distributable to Regular
Securityholders who are non-resident aliens, foreign corporations, or other
Non-U.S. Persons (as defined below), generally will be considered "portfolio
interest" and, therefore, generally will not be subject to 30% United States
withholding tax, provided that (i) such interest is not effectively connected
with the conduct of a trade or business in the United States of the
Securityholder, (ii) such Non-U.S. Person is not a "10-percent shareholder"
within the meaning of Code Section 871(h)(3)(B) or a controlled foreign
corporation described in Code Section 881(c)(3)(C) and (iii) such Non-U.S.
Person provides the Trustee, or the person who would otherwise be required to
withhold tax from such distributions under Code Section 1441 or 1442, with an
appropriate statement, signed under penalties of perjury, identifying the
beneficial owner and stating, among other things, that the beneficial owner of
the Regular Security is a Non-U.S. Person. If such statement, or any other
required statement, is not provided, 30% withholding will apply unless reduced
or eliminated pursuant to an applicable tax treaty or unless the interest on the
Regular Security is effectively connected with the conduct of a trade or
business within the United States by such Non-U.S. Person. In the latter case,
such Non-U.S. Person will be subject to United States federal income tax at
regular rates. Investors who are Non-U.S. Persons should consult their own tax
advisors regarding the specific tax consequences to them of owning a Regular
Security. The term "Non-U.S. Person" means any person who is not a U.S. Person.
The IRS has recently issued final regulations (the "NewWithholding
Regulations") which would provide alternative methods of satisfying the
beneficial ownership certification requirement described above effective January
1, 2001. The NewWithholding Regulations provide for a new series of withholding
certificates that must be used for all payments after December 31, 2000. The
NewWithholding Regulations require, in the case of Regular Securities held by a
foreign partnership, that (x) the certification described above be provided by
the partners rather than by the foreign partnership and (y) the partnership
provide certain information, including a United States taxpayer identification
number in certain circumstances. A look-through rule applies in the case of
tiered partnerships. Non-U.S. Persons should consult their own tax advisors
concerning the application of the certification requirements in the
NewWithholding Regulations.
Residual Securities
The Conference Committee Report to the 1986 Act indicates that amounts paid
to Residual Holders who are Non-U.S. Persons generally should be treated as
interest for purposes of the 30% (or lower treaty rate) United States
withholding tax. Treasury regulations provide that amount distributed to
Residual Holders may qualify as "portfolio interest," subject to the
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conditions described in "--Regular Securities" above, but only to the extent
that (i) the Mortgage Loans were issued after July 18, 1984 and (ii) the Trust
Fund or segregated pool of assets therein (as to which a separate REMIC election
will be made), to which the Residual Security relates, consists of obligations
issued in "registered form" within the meaning of Code Section 163(f)(1).
Generally, Mortgage Loans will not be, but regular interests in another REMIC
Pool will be, considered obligations issued in registered form. Furthermore,
Residual Holders will not be entitled to any exemption from the 30% withholding
tax (or lower treaty rate) to the extent of that portion of REMIC taxable income
that constitutes an "excess inclusion." See "--Taxation of Owners of Residual
Securities--Limitations on Offset or Exemption of REMIC Income." If the amounts
paid to Residual Holders who are Non-U.S. Persons are effectively connected with
the conduct of a trade or business within the United States by such Non-U.S.
Persons, 30% (or lower treaty rate) withholding will not apply. Instead, the
amounts paid to such Non-U.S. Persons will be subject to United States federal
income tax at regular rates. If 30% (or lower treaty rate) withholding is
applicable, such amounts generally will be taken into account for purposes of
withholding only when paid or otherwise distributed (or when the Residual
Security is disposed of) under rules similar to withholding upon disposition of
debt instruments that have original issue discount. See "--Taxation of Owners of
Residual Securities--Tax-Related Restrictions on Transfer of Residual
Securities--Foreign Investors" above concerning the disregard of certain
transfers having "tax avoidance potential." Investors who are Non-U.S. Persons
should consult their own tax advisors regarding the specific tax consequences to
them of owning Residual Securities.
Backup Withholding
Distributions made on the Regular Securities, and proceeds from the sale of
the Regular Securities to or through certain brokers, may be subject to a
"backup" withholding tax under Code Section 3406 of 30% (29% in 2004-2005, and
28% beginning in 200628% (increasing to 31% after 2010) on "reportable payments"
(including interest distributions, original issue discount, and, under certain
circumstances, principal distributions) unless the Regular Holder complies with
certain reporting and/or certification procedures, including the provision of
its taxpayer identification number to the Trustee, its agent or the broker who
effected the sale of the Regular Security, or such Holder is otherwise an exempt
recipient under applicable provisions of the Code. Any amounts to be withheld
from distribution on the Regular Securities would be refunded by the IRS or
allowed as a credit against the Regular Holder's federal income tax liability.
The NewWithholding Regulations change certain of the rules relating to certain
presumptions relating to information reporting and backup withholding. Non-U.S.
Persons are urged to contact their own tax advisors regarding the application to
them of backup withholding and information reporting.
Reporting Requirements
Reports of accrued interest, original issue discount and information
necessary to compute the accrual of market discount will be made annually to the
IRS and to individuals, estates, non-exempt and non-charitable trusts, and
partnerships who are either holders of record of Regular Securities or
beneficial owners who own Regular Securities through a broker or middleman as
nominee. All brokers, nominees and all other non-exempt holders of record of
Regular Securities (including corporations, non-calendar year taxpayers,
securities or commodities dealers, real estate investment trusts, investment
companies, common trust funds, thrift
141
institutions and charitable trusts) may request such information for any
calendar quarter by telephone or in writing by contacting the person designated
in Internal Revenue Service Publication 938 with respect to a particular Series
of Regular Securities. Holders through nominees must request such information
from the nominee.
The IRS's Form 1066 has an accompanying Schedule Q, Quarterly Notice to
Residual Interest Holders of REMIC Taxable Income or Net Loss Allocation.
Treasury regulations require that Schedule Q be furnished by the REMIC Pool to
each Residual Holder by the end of the month following the close of each
calendar quarter (41 days after the end of a quarter under proposed Treasury
regulations) in which the REMIC Pool is in existence). Treasury regulations
require that, in addition to the foregoing requirements, information must be
furnished quarterly to Residual Holders, furnished annually, if applicable, to
holders of Regular Securities, and filed annually with the IRS concerning Code
Section 67 expenses (see "--Taxes That May Be Imposed on the REMIC
Pool--Limitations on Deduction of Certain Expenses" above) allocable to such
holders. Furthermore, under such regulations, information must be furnished
quarterly to Residual Holders, furnished annually to holders of Regular
Securities, and filed annually with the IRS concerning the percentage of the
REMIC Pool's assets meeting the qualified asset tests described above under
"Characterization of Investments in REMIC Securities."
Residual Holders should be aware that their responsibilities as holders of
the residual interest in a REMIC Pool, including the duty to account for their
shares of the REMIC Pool's income or loss on their returns, continue for the
life of the REMIC Pool, even after the principal and interest on their Residual
Securities have been paid in full.
Treasury regulations provide that a Residual Holder is not required to
treat items on its return consistently with their treatment on the REMIC Pool's
return if the Holder owns 100% of the Residual Securities for the entire
calendar year. Otherwise, each Residual Holder is required to treat items on its
returns consistently with their treatment on the REMIC Pool's return, unless the
Holder either files a statement identifying the inconsistency or establishes
that the inconsistency resulted from incorrect information received from the
REMIC Pool. The IRS may assess a deficiency resulting from a failure to comply
with the consistency requirement without instituting an administrative
proceeding at the REMIC Pool level. A REMIC Pool typically will not register as
a tax shelter pursuant to Code Section 6111 because it generally will not have a
net loss for any of the first five taxable years of its existence. Any person
that holds a Residual Security as a nominee for another person may be required
to furnish the related REMIC Pool, in a manner to be provided in Treasury
regulations, with the name and address of such person and other specified
information.
Grantor Trust Funds
Classification of Grantor Trust Funds
With respect to each Series of Grantor Trust Securities, assuming
compliance with all provisions of the applicable Agreement, the related Grantor
Trust Fund will be classified as a grantor trust under subpart E, part I of
subchapter J of the Code and not as a partnership, an association taxable as a
corporation, or a "taxable mortgage pool" within the meaning of Code Section
7701(i). Accordingly, each holder of a Grantor Trust Security generally will be
treated
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as the beneficial owner of an undivided interest in the Mortgage Loans included
in the Grantor Trust Fund.
Standard Securities
General
Where there is no Retained Interest or "excess" servicing with respect to
the Mortgage Loans underlying the Securities of a Series, and where such
Securities are not designated as "Stripped Securities," the holder of each such
Security in such Series (referred to herein as "Standard Securities") will be
treated as the owner of a pro rata undivided interest in the ordinary income and
corpus portions of the Grantor Trust Fund represented by its Standard Security
and will be considered the beneficial owner of a pro rata undivided interest in
each of the Mortgage Loans, subject to the discussion below under
"--Recharacterization of Servicing Fees." Accordingly, the holder of a Standard
Security of a particular Series will be required to report on its federal income
tax return its pro rata share of the entire income from the Mortgage Loans
represented by its Standard Security, including interest at the coupon rate on
such Mortgage Loans, original issue discount (if any), prepayment fees,
assumption fees, and late payment charges received by the Servicer, in
accordance with such Securityholder's method of accounting. A Securityholder
generally will be able to deduct its share of the Servicing Fee and all
administrative and other expenses of the Trust Fund in accordance with its
method of accounting, provided that such amounts are reasonable compensation for
services rendered to that Grantor Trust Fund. However, investors who are
individuals, estates or trusts who own Securities, either directly or indirectly
through certain pass-through entities, will be subject to limitations with
respect to certain itemized deductions described in Code Section 67, including
deductions under Code Section 212 for the Servicing Fee and all such
administrative and other expenses of the Grantor Trust Fund, to the extent that
such deductions, in the aggregate, do not exceed two percent of an investor's
adjusted gross income. In addition, Code Section 68 provides that itemized
deductions otherwise allowable for a taxable year of an individual taxpayer will
be reduced by the lesser of (i) 3% of the excess, if any, of adjusted gross
income over $137,300 in 2002 ($68,650 in the case of a married individual filing
a separate return) (in each case, as adjusted annually for each year thereafter)
(in each case, as adjusted annually for post-1991 inflation),a statutory
threshold amount or (ii) 80% of the amount of itemized deductions otherwise
allowable for such year. These limitations will be phased out and eliminated by
2010. As a result, such investors holding Standard Securities, directly or
indirectly through a pass-through entity, may have aggregate taxable income in
excess of the aggregate amount of cash received on such Standard Securities with
respect to interest at the pass-through rate or as discount income on such
Standard Securities. In addition, such expenses are not deductible at all for
purposes of computing the alternative minimum tax, and may cause such investors
to be subject to significant additional tax liability. Moreover, where there is
Retained Interest with respect to the Mortgage Loans underlying a Series of
Securities or where the servicing fees are in excess of reasonable servicing
compensation, the transaction will be subject to the application of the
"stripped bond" and "stripped coupon" rules of the Code, as described below
under "--Stripped Securities" and "--Recharacterization of Servicing Fees,"
respectively.
Holders of Standard Securities, particularly any Class of a Series which is
a Subordinate Security, may incur losses of interest or principal with respect
to the Mortgage Loans. Such
143
losses would be deductible generally only as described above under
"--REMICs--Taxation of Owners of Regular Securities--Treatment of Losses,"
except that Securityholders on the cash method of accounting would not be
required to report qualified stated interest as income until actual receipt.
Tax Status
With respect to a Series, Cadwalader, Wickersham & Taft LLP or Orrick,
==============
Herrington & Sutcliffe LLP has advised the Depositor that, except with respect
==========================
to a Trust Fund consisting of Unsecured Home Improvement Loans:
o A Standard Security owned by a "domestic building and loan
association" within the meaning of Code Section 7701(a)(19) will be
considered to represent "loans . . . secured by an interest in real
property which is . . . residential real property" within the meaning
of Code Section 7701(a)(19)(C)(v), provided that the real property
securing the Mortgage Loans represented by that Standard Security is
of the type described in such section of the Code.
o A Standard Security owned by a real estate investment trust will be
considered to represent "real estate assets" within the meaning of
Code Section 856(c)(4)(A) to the extent that the assets of the related
Grantor Trust Fund consist of qualified assets, and interest income on
such assets will be considered "interest on obligations secured by
mortgages on real property" to such extent within the meaning of Code
Section 856(c)(3)(B).
o A Standard Security owned by a REMIC will be considered to represent
an "obligation (including any participation or certificate of
beneficial ownership therein) which is principally secured by an
interest in real property" within the meaning of Code Section
860G(a)(3)(A) to the extent that the assets of the related Grantor
Trust Fund consist of "qualified mortgages" within the meaning of Code
Section 860G(a)(3).
An issue arises as to whether Buydown Mortgage Loans may be characterized
in their entirety under the Code provisions cited in clauses 1 and 2 of the
immediately preceding paragraphthe first two bullet pointed paragraphs above or
=============================================
whether the amount qualifying for such treatment must be reduced by the amount
of the Buydown Funds. There is indirect authority supporting treatment of an
investment in a Buydown Mortgage Loan as entirely secured by real property if
the fair market value of the real property securing the loan exceeds the
principal amount of the loan at the time of issuance or acquisition, as the case
may be. There is no assurance that the treatment described above is proper.
Accordingly, Securityholders are urged to consult their own tax advisors
concerning the effects of such arrangements on the characterization of such
Securityholder's investment for federal income tax purposes.
Premium and Discount
Securityholders are advised to consult with their tax advisors as to the
federal income tax treatment of premium and discount arising either upon initial
acquisition of Standard Securities or thereafter.
144
Premium. The treatment of premium incurred upon the purchase of a Standard
Security will be determined generally as described above under
"--REMICs--Taxation of Owners of Residual Securities--Premium." The rules
allowing for the amortization of premium are available with respect to Mortgage
Loans originated after September 27, 1985.
Original Issue Discount. The original issue discount rules of Code Section
1271 through 1275 will be applicable to a Securityholder's interest in those
Mortgage Loans as to which the conditions for the application of those sections
are met. Rules regarding periodic inclusion of original issue discount income
generally are applicable to mortgages originated after March 2, 1984. Under the
OID Regulations, original issue discount could arise by the charging of points
by the originator of the mortgages in an amount greater than the statutory de
minimis exception, including a payment of points that is currently deductible by
the borrower under applicable Code provisions or, under certain circumstances,
by the presence of "teaser" rates on the Mortgage Loans. See "--Stripped
Securities" below regarding original issue discount on Stripped Securities.
Original issue discount generally must be reported as ordinary gross income
as it accrues under a constant interest method that takes into account the
compounding of interest, in advance of the cash attributable to such income.
Unless indicated otherwise in the applicable prospectus supplement, no
prepayment assumption will be assumed for purposes of such accrual. However,
Code Section 1272 provides for a reduction in the amount of original issue
discount includable in the income of a holder of an obligation that acquires the
obligation after its initial issuance at a price greater than the sum of the
original issue price and the previously accrued original issue discount, less
prior payments of principal. Accordingly, if such Mortgage Loans acquired by a
Securityholder are purchased at a price equal to the then unpaid principal
amount of such Mortgage Loans, no original issue discount attributable to the
difference between the issue price and the original principal amount of such
Mortgage Loans (i.e., points) will be includable by such holder.
Market Discount. Securityholders also will be subject to the market
discount rules to the extent that the conditions for application of those
sections are met. Market discount on the Mortgage Loans will be determined and
will be reported as ordinary income generally in the manner described above
under "--REMICs--Taxation of Owners of Regular Securities--Market Discount,"
except that the ratable accrual methods described therein will not apply.
Rather, the holder will accrue market discount pro rata over the life of the
Mortgage Loans, unless the constant yield method is elected. Unless indicated
otherwise in the applicable prospectus supplement, no prepayment assumption will
be assumed for purposes of such accrual.
Recharacterization of Servicing Fees
If the servicing fees paid to a Servicer were deemed to exceed reasonable
servicing compensation, the amount of such excess would represent neither income
nor a deduction to Securityholders. In this regard, there are no authoritative
guidelines for federal income tax purposes as to either the maximum amount of
servicing compensation that may be considered reasonable in the context of this
or similar transactions or whether, in the case of Standard Securities, the
reasonableness of servicing compensation should be determined on a weighted
average or loan-by-loan basis. If a loan-by-loan basis is appropriate, the
likelihood that such amount would exceed reasonable servicing compensation as to
some of the Mortgage Loans
145
would be increased. IRS guidance indicates that a servicing fee in excess of
reasonable compensation ("excess servicing") will cause the Mortgage Loans to be
treated under the "stripped bond" rules. Such guidance provides safe harbors for
servicing deemed to be reasonable and requires taxpayers to demonstrate that the
value of servicing fees in excess of such amounts is not greater than the value
of the services provided.
Accordingly, if the IRS's approach is upheld, a Servicer who receives a
servicing fee in excess of such amounts would be viewed as retaining an
ownership interest in a portion of the interest payments on the Mortgage Loans.
Under the rules of Code Section 1286, the separation of ownership of the right
to receive some or all of the interest payments on an obligation from the right
to receive some or all of the principal payments on the obligation would result
in treatment of such Mortgage Loans as "stripped coupons" and "stripped bonds."
Subject to the de minimis rule discussed below under "--Stripped Securities,"
each stripped bond or stripped coupon could be considered for this purpose as a
non-interest bearing obligation issued on the date of issue of the Standard
Securities, and the original issue discount rules of the Code would apply to the
holder thereof. While Securityholders would still be treated as owners of
beneficial interests in a grantor trust for federal income tax purposes, the
corpus of such trust could be viewed as excluding the portion of the Mortgage
Loans the ownership of which is attributed to the Servicer, or as including such
portion as a second Class of equitable interest. Applicable Treasury regulations
treat such an arrangement as a fixed investment trust, since the multiple
Classes of trust interests should be treated as merely facilitating direct
investments in the trust assets and the existence of multiple Classes of
ownership interests is incidental to that purpose. In general, such a
recharacterization should not have any significant effect upon the timing or
amount of income reported by a Securityholder, except that the income reported
by a cash method holder may be slightly accelerated. See "--Stripped Securities"
below for a further description of the federal income tax treatment of stripped
bonds and stripped coupons.
Sale or Exchange of Standard Securities
Upon sale or exchange of a Standard Securities, a Securityholder will
recognize gain or loss equal to the difference between the amount realized on
the sale and its aggregate adjusted basis in the Mortgage Loans and other assets
represented by the Security. In general, the aggregate adjusted basis will equal
the Securityholder's cost for the Standard Security, exclusive of accrued
interest, increased by the amount of any income previously reported with respect
to the Standard Security and decreased by the amount of any losses previously
reported with respect to the Standard Security and the amount of any
distributions (other than accrued interest) received thereon. Except as provided
above with respect to market discount on any Mortgage Loans, and except for
certain financial institutions subject to the provisions of Code Section 582(c),
any such gain or loss generally would be capital gain or loss if the Standard
Security was held as a capital asset. However, gain on the sale of a Standard
Security will be treated as ordinary income (i) if a Standard Security is held
as part of a "conversion transaction" as defined in Code Section 1258(c), up to
the amount of interest that would have accrued on the Securityholder's net
investment in the conversion transaction at 120% of the appropriate applicable
Federal rate in effect at the time the taxpayer entered into the transaction
minus any amount previously treated as ordinary income with respect to any prior
disposition of property that was held as part of such transaction or (ii) in the
case of a non-corporate taxpayer, to the extent such taxpayer has made an
election under Code Section 163(d)(4) to have net capital gains taxed as
investment income at
146
ordinary income rates. Long-term capital gains of certain noncorporate taxpayers
generally are subject to a lower maximum tax rate than ordinary income or
short-term capital gains of such taxpayers for property held for more than one
year. The maximum tax rate for corporations currently is the same with respect
to both ordinary income and capital gains.
A Securityholder that recognized a loss on a sale or exchange of a Standard
Security for federal income tax purposes in excess of certain threshold amounts
should consult their tax advisors as to the need to file IRS Form 8886
(disclosing certain potential tax shelters) on their federal income tax returns.
Stripped Securities
General
Pursuant to Code Section 1286, the separation of ownership of the right to
receive some or all of the principal payments on an obligation from ownership of
the right to receive some or all of the interest payments results in the
creation of "stripped bonds" with respect to principal payments and "stripped
coupons" with respect to interest payments. For purposes of this discussion,
Securities that are subject to those rules will be referred to as "Stripped
Securities." The Securities will be subject to those rules if (i) the Depositor
or any of its affiliates retains (for its own account or for purposes of
resale), in the form of Retained Interest or otherwise, an ownership interest in
a portion of the payments on the Mortgage Loans, (ii) the Depositor or any of
its affiliates is treated as having an ownership interest in the Mortgage Loans
to the extent it is paid (or retains) servicing compensation in an amount
greater than reasonable consideration for servicing the Mortgage Loans (see
"--Standard Securities--Recharacterization of Servicing Fees" above), and (iii)
a Class of Securities are issued in two or more Classes or subclasses
representing the right to non-pro-rata percentages of the interest and principal
payments on the Mortgage Loans.
In general, a holder of a Stripped Security will be considered to own
"stripped bonds" with respect to its pro rata share of all or a portion of the
principal payments on each Mortgage Loan and/or "stripped coupons" with respect
to its pro rata share of all or a portion of the interest payments on each
Mortgage Loan, including the Stripped Security's allocable share of the
servicing fees paid to a Servicer, to the extent that such fees represent
reasonable compensation for services rendered. See the discussion above under
"--Standard Securities--Recharacterization of Servicing Fees." Although not free
from doubt, for purposes of reporting to Stripped Securityholders, the servicing
fees will be allocated to the Classes of Stripped Securities in proportion to
the distributions to such Classes for the related period or periods. The holder
of a Stripped Security generally will be entitled to a deduction each year in
respect of the servicing fees, as described above under "--Standard
Securities--General," subject to the limitation described therein.
Code Section 1286 treats a stripped bond or a stripped coupon generally as
an obligation issued at an original issue discount on the date that such
stripped interest is purchased. Although the treatment of Stripped Securities
for federal income tax purposes is not clear in certain respects, particularly
where such Stripped Securities are issued with respect to a Mortgage Pool
containing variable-rate Mortgage Loans, the Depositor has been advised by
counsel that (i) the Grantor Trust Fund will be treated as a grantor trust under
subpart E, part I of subchapter J of the
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Code and not as an association taxable as a corporation or a "taxable mortgage
pool" within the meaning of Code Section 7701(i), and (ii) each Stripped
Security should be treated as a single installment obligation for purposes of
calculating original issue discount and gain or loss on disposition. This
treatment is based on the interrelationship of Code Section 1286, Code Sections
1272 through 1275, and the OID Regulations. Although it is possible that
computations with respect to Stripped Securities could be made in one of the
ways described below under "--Possible Alternative Characterizations," the OID
Regulations state, in general, that two or more debt instruments issued by a
single issuer to a single investor in a single transaction should be treated as
a single debt instrument. Accordingly, for original issue discount purposes, all
payments on any Stripped Securities should be aggregated and treated as though
they were made on a single debt instrument. The Pooling and Servicing Agreement
will require that the Trustee make and report all computations described below
using this aggregate approach, unless substantial legal authority requires
otherwise.
Furthermore, Treasury regulations provide for treatment of a Stripped
Security as a single debt instrument issued on the date it is purchased for
purposes of calculating any original issue discount. In addition, under such
regulations, a Stripped Security that represents a right to payments of both
interest and principal may be viewed either as issued with original issue
discount or market discount (as described below), at a de minimis original issue
discount, or, presumably, at a premium. This treatment indicates that the
interest component of such a Stripped Security would be treated as qualified
stated interest under the OID Regulations, assuming it is not an interest-only
or super-premium Stripped Security. Further, these regulations provide that the
purchaser of such a Stripped Security will be required to account for any
discount as market discount rather than original issue discount if either (i)
the initial discount with respect to the Stripped Security was treated as zero
under the de minimis rule, or (ii) no more than 100 basis points in excess of
reasonable servicing is stripped off the related Mortgage Loans. Any such market
discount would be reportable as described above under "--REMICs--Taxation of
Owners of Regular Securities--Market Discount," without regard to the de minimis
rule therein, assuming that a prepayment assumption is employed in such
computation.
The holder of a Stripped Security will be treated as owning an interest in
each of the Mortgage Loans held by the Grantor Trust Fund and will recognize an
appropriate share of the income and expenses associated with the Mortgage Loans.
Accordingly, an individual, trust or estate that holds a Stripped Security
directly or through a pass-through entity will be subject to the limitations on
deductions imposed by Code Sections 67 and 68.
A holder of a Stripped Security, particularly any Class of a Series which
is a Subordinate Security, may deduct losses incurred with respect to the
Stripped Security as described above under "--Standard Securities--General."
Status of Stripped Securities
No specific legal authority exists as to whether the character of the
Stripped Securities, for federal income tax purposes, will be the same as that
of the Mortgage Loans. Although the issue is not free from doubt, counsel has
advised the Depositor that, except with respect to a Trust Fund consisting of
Unsecured Home Improvement Loans, Stripped Securities owned by applicable
holders should be considered to represent "real estate assets" within the
meaning of Code Section 856(c)(4)(A), "obligation[s] . . . principally secured
by an interest in real
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property which is . . . residential real estate" within the meaning of Code
Section 860G(a)(3)(A), and "loans . . . secured by an interest in real property"
within the meaning of Code Section 7701(a)(19)(C)(v), and interest (including
original issue discount) income attributable to Stripped Securities should be
considered to represent "interest on obligations secured by mortgages on real
property" within the meaning of Code Section 856(c)(3)(B), provided that in each
case the Mortgage Loans and interest on such Mortgage Loans qualify for such
treatment. The application of such Code provisions to Buydown Mortgage Loans is
uncertain. See "--Standard Securities--Tax Status" above.
Taxation of Stripped Securities
Original Issue Discount. Except as described above under "--General," each
Stripped Security will be considered to have been issued at an original issue
discount for federal income tax purposes. Original issue discount with respect
to a Stripped Security must be included in ordinary income as it accrues, in
accordance with a constant yield method that takes into account the compounding
of interest, which may be prior to the receipt of the cash attributable to such
income. Based in part on the issue discount required to be included in the
income of a holder of a Stripped Security (referred to in this discussion as a
"Stripped Securityholder") in any taxable year likely will be computed generally
as described above under "--REMICs--Taxation of Owner of Regular
Securities--Original Issue Discount" and "--Variable Rate Regular Securities."
However, with the apparent exception of a Stripped Security qualifying as a
market discount obligation as described above under "--General," the issue price
of a Stripped Security will be the purchase price paid by each holder thereof,
and the stated redemption price at maturity will include the aggregate amount of
the payments, other than qualified stated interest, to be made on the Stripped
Security to such Securityholder, presumably under the Prepayment Assumption.
If the Mortgage Loans prepay at a rate either faster or slower than that
under the Prepayment Assumption, a Securityholder's recognition of original
issue discount will be either accelerated or decelerated and the amount of such
original issue discount will be either increased or decreased depending on the
relative interests in principal and interest on each Mortgage Loan represented
by such Securityholder's Stripped Security. While the matter is not free from
doubt, the holder of a Stripped Security should be entitled in the year that it
becomes certain (assuming no further prepayments) that the holder will not
recover a portion of its adjusted basis in such Stripped Security to recognize a
loss (which may be a capital loss) equal to such portion of unrecoverable basis.
As an alternative to the method described above, the fact that some or all
of the interest payments with respect to the Stripped Securities will not be
made if the Mortgage Loans are prepaid could lead to the interpretation that
such interest payments are "contingent" within the meaning of the OID
Regulations. The OID Regulations, as they relate to the treatment of contingent
interest, are by their terms not applicable to prepayable securities such as the
Stripped Securities. However, if final regulations dealing with contingent
interest with respect to the Stripped Securities apply the same principles as
the OID Regulations, such regulations may lead to different timing of income
inclusion that would be the case under the OID Regulations. Furthermore,
application of such principles could lead to the characterization of gain on the
sale
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of contingent interest Stripped Securities as ordinary income. Investors should
consult their tax advisors regarding the appropriate tax treatment of Stripped
Securities.
Sale or Exchange of Stripped Securities. Sale or exchange of a Stripped
Security prior to its maturity will result in gain or loss equal to the
difference, if any, between the amount received and the Securityholder's
adjusted basis in such Stripped Security, as described above under
"--REMICs--Taxation of Owners of Regular Securities--Sale or Exchange of Regular
Securities." Gain or loss from the sale or exchange of a Stripped Security
generally will be capital gain or loss to the Securityholder if the Stripped
Security is held as a "capital asset" within the meaning of Code section 1221,
and will be long-term or short-term depending on whether the Stripped Security
has been held for the long-term capital gain holding period (currently, more
than one year). To the extent that a subsequent purchaser's purchase price is
exceeded by the remaining payments on the Stripped Securities, such subsequent
purchaser will be required for federal income tax purposes to accrue and report
such excess as if it were original issue discount in the manner described above.
It is not clear for this purpose whether the assumed prepayment rate that is to
be used in the case of a Securityholder other than an original Securityholder
should be the Prepayment Assumption or a new rate based on the circumstances at
the date of subsequent purchase.
Purchase of More Than One Class of Stripped Securities. When an investor
purchases more than one Class of Stripped Securities, it is currently unclear
whether for federal income tax purposes such Classes of Stripped Securities
should be treated separately or aggregated for purposes of the rules described
above.
Possible Alternative Characterization. The characterizations of the
Stripped Securities discussed above are not the only possible interpretations of
the applicable Code provisions. For example, the Securityholder may be treated
as the owner of (i) one installment obligation consisting of such Stripped
Security's pro rata share of the payments attributable to principal on each
Mortgage Loan and a second installment obligation consisting of such Stripped
Security's pro rata share of the payments attributable to interest on each
Mortgage Loan, (ii) as many stripped bonds or stripped coupons as there are
scheduled payments of principal and/or interest on each Mortgage Loan, or (iii)
a separate installment obligation for each Mortgage Loan, representing the
Stripped Security's pro rata share of payments of principal and/or interest to
be made with respect thereto. Alternatively, the holder of one or more Classes
of Stripped Securities may be treated as the owner of a pro rata fractional
undivided interest in each Mortgage Loan to the extent that such Stripped
Security, or Classes of Stripped Securities in the aggregate, represent the same
pro rata portion of principal and interest on each such Mortgage Loan, and a
stripped bond or stripped coupon (as the case may be), treated as an installment
obligation or contingent payment obligation, as to the remainder. Treasury
regulations regarding original issue discount on stripped obligations make the
foregoing interpretations less likely to be applicable. The preamble to such
regulations states that they are premised on the assumption that an aggregation
approach is appropriate for determining whether original issue discount on a
stripped bond or stripped coupon is de minimis, and solicits comments on
appropriate rules for aggregating stripped bonds and stripped coupons under Code
Section 1286.
Because of these possible varying characterizations of Stripped Securities
and the resultant differing treatment of income recognition, Securityholders are
urged to consult their own tax advisors regarding the proper treatment of
Stripped Securities for federal income tax purposes.
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Reporting Requirements and Backup Withholding
The Trustee will furnish, within a reasonable time after the end of each
calendar year, to each Securityholder at any time during such year, such
information (prepared on the basis described above) as is necessary to enable
such Securityholder to prepare its federal income tax returns. Such information
will include the amount of original issue discount accrued on Securities held by
persons other than Securityholders exempted from the reporting requirements.
However, the amount required to be reported by the Trustee may not be equal to
the proper amount of original issue discount required to be reported as taxable
income by a Securityholder, other than an original Securityholder that purchased
at the issue price. In particular, in the case of Stripped Securities, unless
provided otherwise in the applicable prospectus supplement, such reporting will
be based upon a representative initial offering price of each Class of Stripped
Securities. The Trustee will also file such original issue discount information
with the IRS. If a Securityholder fails to supply an accurate taxpayer
identification number or if the Secretary of the Treasury determines that a
Securityholder has not reported all interest and dividend income required to be
shown on his federal income tax return, backup withholding may be required in
respect of any reportable payments, as described above under "--REMICs--Taxation
of Certain Foreign Investors--Backup Withholding."
Taxation of Certain Foreign Investors
To the extent that a Security evidences ownership in Mortgage Loans that
are issued on or before July 18, 1984, interest or original issue discount paid
by the person required to withhold tax under Code Section 1441 or 1442 to
nonresident aliens, foreign corporations, or other Non-U.S. Persons generally
will be subject to 30% United States withholding tax, or such lower rate as may
be provided for interest by an applicable tax treaty. Accrued original issue
discount recognized by the Securityholder on the sale or exchange of such a
Security also will be subject to federal income tax at the same rate.
Treasury regulations provide that interest or original issue discount paid
by the Trustee or other withholding agent to a Non-U.S. Person evidencing
ownership interest in Mortgage Loans issued after July 18, 1984 will be
"portfolio interest" and will be treated in the manner, and such persons will be
subject to the same certification requirements, described above under
"--REMICs--Taxation of Certain Foreign Investors--Regular Securities."
Partnership Trust Funds
Classification of Partnership Trust Funds
With respect to each Series of Partnership Securities or Debt Securities,
Cadwalader, Wickersham & Taft LLP or Orrick, Herrington & Sutcliffe LLP will
deliver its opinion that the Trust Fund will not be a taxable mortgage pool or
an association (or publicly traded partnership) taxable as a corporation for
federal income tax purposes. This opinion will be based on the assumption that
the terms of the applicable Agreement and related documents will be complied
with, and on counsel's conclusion that the nature of the income of the Trust
Fund will exempt it from the rule that certain publicly traded partnerships are
taxable as corporations.
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Characterization of Investments in Partnership Securities and Debt Securities
For federal income tax purposes, (i) Partnership Securities and Debt
Securities held by a thrift institution taxed as a domestic building and loan
association will not constitute "loans . . . secured by an interest in real
property which is . . . residential real property" within the meaning of Code
Section 7701(a)(19)(C)(v) and (ii) interest on Debt Securities held by a real
estate investment trust will not be treated as "interest on obligations secured
by mortgages on real property or on interests in real property" within the
meaning of Code Section 856(c)(3)(B), and Debt Securities held by a real estate
investment trust will not constitute "real estate assets" within the meaning of
Code Section 856(c)(4)(A), but Partnership Securities held by a real estate
investment trust will qualify under those sections based on the real estate
investments trust's proportionate interest in the assets of the Partnership
Trust Fund qualifying for such treatments based on capital accounts.
Taxation of Debt Securityholders
Treatment of the Debt Securities as Indebtedness
The Depositor will agree, and the Securityholders will agree by their
purchase of Debt Securities, to treat the Debt Securities as debt for federal
income tax purposes. No regulations, published rulings, or judicial decisions
exist that discuss the characterization for federal income tax purposes of
securities with terms substantially the same as the Debt Securities. However,
with respect to each Series of Debt Securities, Cadwalader, Wickersham & Taft
LLP or Orrick, Herrington & Sutcliffe LLP will deliver its opinion that the Debt
Securities will be classified as indebtedness for federal income tax purposes.
The discussion below assumes this characterization of the Debt Securities is
correct.
If, contrary to the opinion of counsel, the IRS successfully asserted that
the Debt Securities were not debt for federal income tax purposes, the Debt
Securities might be treated as equity interests in the Partnership Trust, and
the timing and amount of income allocable to holders of such Debt Securities may
be different than as described in the following paragraph.
Debt Securities generally will be subject to the same rules of taxation as
Regular Securities issued by a REMIC, as described above, except that (i) income
reportable on Debt Securities is not required to be reported under the accrual
method unless the holder otherwise uses the accrual method and (ii) the special
rule treating a portion of the gain on sale or exchange of a Regular Security as
ordinary income is inapplicable to Debt Securities. See "--REMICs--Taxation of
Owners of Regular Securities."" and "Sale or Exchange of Regular Securities".
Taxation of Owners of Partnership Securities
Treatment of the Partnership Trust Fund as a Partnership
If so specified in the applicable prospectus supplement, the Depositor will
agree, and the Securityholders will agree by their purchase of Securities, to
treat the Partnership Trust Fund as a partnership for purposes of federal and
state income tax, franchise tax and any other tax measured in whole or in part
by income, with the assets of the partnership being the assets held by the
Partnership Trust Fund, the partners of the partnership being the
Securityholders (including the Depositor), and the Debt Securities (if any)
being debt of the partnership.
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However, the proper characterization of the arrangement involving the
Partnership Trust Fund, the Partnership Securities, the Debt Securities, and the
Depositor is not clear, because there is no authority on transactions closely
comparable to that contemplated herein.
A variety of alternative characterizations are possible. For example,
because one or more of the Classes of Partnership Securities have certain
features characteristic of debt, the Partnership Securities might be considered
debt of the Depositor or the Partnership Trust Fund. Any such characterization
would not result in materially adverse tax consequences to Securityholders as
compared to the consequences from treatment of the Partnership Securities as
equity in a partnership, described below. The following discussion assumes that
the Partnership Securities represent equity interests in a partnership.
Partnership Taxation
As a partnership, the Partnership Trust Fund will not be subject to federal
income tax. Rather, each Securityholder will be required to separately take into
account such holder's allocated share of income, gains, losses, deductions and
credits of the Partnership Trust Fund. It is anticipated that the Partnership
Trust Fund's income will consist primarily of interest earned on the Mortgage
Loans (including appropriate adjustments for market discount, original issue
discount and bond premium) as described above under "--"Grantor Trust
Funds--Standard Securities--General" and "--Premium and Discount") and any gain
upon collection or disposition of Mortgage Loans. The Partnership Trust Fund's
deductions will consist primarily of interest accruing with respect to the Debt
Securities, servicing and other fees, and losses or deductions upon collection
or disposition of Debt Securities.
The tax items of a partnership are allocable to the partners in accordance
with the Code, Treasury regulations and the partnership agreement (here, the
Agreements and related documents). The applicable Agreement will provide, in
general, that the Securityholders will be allocated taxable income of the
Partnership Trust Fund for each Due Period equal to the sum of (i) the interest
that accrues on the Partnership Securities in accordance with their terms for
such Due Period, including interest accruing at the applicable pass-through rate
for such Due Period and interest on amounts previously due on the Partnership
Securities but not yet distributed; (ii) any Partnership Trust Fund income
attributable to discount on the Mortgage Loans that corresponds to any excess of
the principal amount of the Partnership Securities over their initial issue
price; and (iii) any other amounts of income payable to the Securityholders for
such Due Period. Such allocation will be reduced by any amortization by the
Partnership Trust Fund of premium on Mortgage Loans that corresponds to any
excess of the issue price of Partnership Securities over their principal amount.
All remaining taxable income of the Partnership Trust Fund will be allocated to
the Depositor. Based on the economic arrangement of the parties, this approach
for allocating Partnership Trust Fund income should be permissible under
applicable Treasury regulations, although no assurance can be given that the IRS
would not require a greater amount of income to be allocated to Securityholders.
Moreover, even under the foregoing method of allocation, Securityholders may be
allocated income equal to the entire pass-through rate plus the other items
described above even though the Trust Fund might not have sufficient cash to
make current cash distributions of such amount. Thus, cash basis holders will in
effect be required to report income from the Partnership Securities on the
accrual basis and Securityholders may become liable for taxes on Partnership
Trust Fund income even if they have not received cash from the Partnership Trust
Fund to pay such taxes.
153
Part or all of the taxable income allocated to a Securityholder that is a
pension, profit sharing or employee benefit plan or other tax-exempt entity
(including an individual retirement account) may constitute "unrelated business
taxable income" generally taxable to such a holder under the Code.
A share of expenses of the Partnership Trust Fund (including fees of the
Master Servicer but not interest expense) allocable to an individual, estate or
trust Securityholder would be miscellaneous itemized deductions subject to the
limitations described above under "--"Grantor Trust Funds--Standard
Securities--General". Accordingly, such deductions might be disallowed to the
individual in whole or in part and might result in such holder being taxed on an
amount of income that exceeds the amount of cash actually distributed to such
holder over the life of the Partnership Trust Fund.
Discount income or premium amortization with respect to each Mortgage Loan
would be calculated in a manner similar to the description above under
"--"Grantor Trust Funds--Standard Securities--General" and "--Premium and
Discount." Notwithstanding such description, it is intended that the Partnership
Trust Fund will make all tax calculations relating to income and allocations to
Securityholders on an aggregate basis with respect to all Mortgage Loans held by
the Partnership Trust Fund rather than on a Mortgage Loan-by-Mortgage Loan
basis. If the IRS were to require that such calculations be made separately for
each Mortgage Loan, the Partnership Trust Fund might be required to incur
additional expense, but it is believed that there would not be a material
adverse effect on Securityholders.
Discount and Premium
Unless indicated otherwise in the applicable prospectus supplement, it is
not anticipated that the Mortgage Loans will have been issued with original
issue discount and, therefore, the Partnership Trust Fund should not have
original issue discount income. However, the purchase price paid by the
Partnership Trust Fund for the Mortgage Loans may be greater or less than the
remaining principal balance of the Mortgage Loans at the time of purchase. If
so, the Mortgage Loans will have been acquired at a premium or discount, as the
case may be. See "--Standard Securities--Premium and Discount." (As indicated
above, the Partnership Trust Fund will make this calculation on an aggregate
basis, but might be required to recompute it on a Mortgage Loan-by-Mortgage Loan
basis).
If the Partnership Trust Fund acquires the Mortgage Loans at a market
discount or premium, the Partnership Trust Fund will elect to include any such
discount in income currently as it accrues over the life of the Mortgage Loans
or to offset any such premium against interest income on the Mortgage Loans. As
indicated above, a portion of such market discount income or premium deduction
may be allocated to Securityholders.
Section 708 Termination
Under Section 708 of the Code, the Partnership Trust Fund will be deemed to
terminate for federal income tax purposes if 50% or more of the capital and
profits interests in the Partnership Trust Fund are sold or exchanged within a
12-month period. If such a termination occurs, it would cause a deemed
contribution of the assets of a Partnership Trust Fund (the "old partnership")
to a new Partnership Trust Fund (the "new partnership") in exchange for
154
interests in the new partnership. Such interests would be deemed distributed to
the partners of the old partnership in liquidation thereof, which would not
constitute a sale or exchange. The Partnership Trust Fund will not comply with
certain technical requirements that might apply when such a constructive
termination occurs. As a result, the Partnership Trust Fund may be subject to
certain tax penalties and may incur additional expenses if it is required to
comply with those requirements. Furthermore, the Partnership Trust Fund might
not be able to comply due to lack of data.
Disposition of Securities
Generally, capital gain or loss will be recognized on a sale of Partnership
Securities in an amount equal to the difference between the amount realized and
the seller's tax basis in the Partnership Securities sold. A Securityholder's
tax basis in an Partnership Security will generally equal the holder's cost
increased by the holder's share of Partnership Trust Fund income (includable in
income) and decreased by any distributions received with respect to such
Partnership Security. In addition, both the tax basis in the Partnership
Securities and the amount realized on a sale of an Partnership Security would
include the holder's share of the Debt Securities and other liabilities of the
Partnership Trust Fund. A holder acquiring Partnership Securities at different
prices may be required to maintain a single aggregate adjusted tax basis in such
Partnership Securities, and, upon sale or other disposition of some of the
Partnership Securities, allocate a portion of such aggregate tax basis to the
Partnership Securities sold (rather than maintaining a separate tax basis in
each Partnership Security for purposes of computing gain or loss on a sale of
that Partnership Security).
Any gain on the sale of ana Partnership Security attributable to the
holder's share of unrecognized accrued market discount on the Mortgage Loans
would generally be treated as ordinary income to the holder and would give rise
to special tax reporting requirements. The Partnership Trust Fund does not
expect to have any other assets that would give rise to such special reporting
considerations. Thus, to avoid those special reporting requirements, the
Partnership Trust Fund will elect to include market discount in income as it
accrues.
If a Securityholder is required to recognize an aggregate amount of income
(not including income attributable to disallowed itemized deductions described
above) over the life of the Partnership Securities that exceeds the aggregate
cash distributions with respect thereto, such excess will generally give rise to
a capital loss upon the retirement of the Partnership Securities.
Allocations Between Transferors and Transferees
In general, the Partnership Trust Fund's taxable income and losses will be
determined each Due Period and the tax items for a particular Due Period will be
apportioned among the Securityholders in proportion to the principal amount of
Partnership Securities owned by them as of the close of the last day of such Due
Period. As a result, a holder purchasing Partnership Securities may be allocated
tax items (which will affect its tax liability and tax basis) attributable to
periods before the actual transaction.
The use of such a Due Period convention may not be permitted by existing
regulations. If a Due Period convention is not allowed (or only applies to
transfers of less than all of the partner's interest), taxable income or losses
of the Partnership Trust Fund might be reallocated among the
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Securityholders. The Depositor will be authorized to revise the Partnership
Trust Fund's method of allocation between transferors and transferees to conform
to a method permitted by future regulations.
Section 731 Distributions
In the case of any distribution to a Securityholder, no gain will be
recognized to that Securityholder to the extent thatas long as the amount of any
money distributed with respect to such Security exceedsdoes not exceed the
adjusted basis of such Securityholder's interest in the Security. To the extent
that the amount of money distributed exceeds such Securityholder's adjusted
basis, gain will be currently recognized. In the case of any distribution to a
Securityholder, no loss will be recognized except upon a distribution in
liquidation of a Securityholder's interest. Any gain or loss recognized by a
Securityholder will be capital gain or loss.
Section 754 Election
In the event that a Securityholder sells its Partnership Securities at a
profit (loss), the purchasing Securityholder will have a higher (lower) basis in
the Partnership Securities than the selling Securityholder had. The tax basis of
the Partnership Trust Fund's assets would not be adjusted to reflect that higher
(or lower) basis unless the Partnership Trust Fund were to file an election
under Section 754 of the Code. In order to avoid the administrative complexities
that would be involved in keeping accurate accounting records, as well as
potentially onerous information reporting requirements, the Partnership Trust
Fund will not make such an election. As a result, a Securityholder might be
allocated a greater or lesser amount of Partnership Trust Fund income than would
be appropriate based on theirits own purchase price for Partnership Securities.
Administrative Matters
The Trustee is required to keep or have kept complete and accurate books of
the Partnership Trust Fund. Such books will be maintained for financial
reporting and tax purposes on an accrual basis and the fiscal year of the
Partnership Trust Fund will be the calendar year. The Trustee will file a
partnership information return (IRS Form 1065) with the IRS for each taxable
year of the Partnership Trust Fund and will report each Securityholder's
allocable share of items of Partnership Trust Fund income and expense to holders
and the IRS on Schedule K-1. The Trustee will provide the Schedule K-1
information to nominees that fail to provide the Partnership Trust Fund with the
information statement described below and such nominees will be required to
forward such information to the beneficial owners of the Partnership Securities.
Generally, holders must file tax returns that are consistent with the
information return filed by the Partnership Trust Fund or be subject to
penalties unless the holder notifies the IRS of all such inconsistencies.
Under Section 6031 of the Code, any person that holds Partnership
Securities as a nominee at any time during a calendar year is required to
furnish the Partnership Trust Fund with a statement containing certain
information on the nominee, the beneficial owners and the Partnership Securities
so held. Such information includes (i) the name, address and taxpayer
identification number of the nominee and (ii) as to each beneficial owner (x)
the name, address and
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identification number of such person, (y) whether such person is a United States
person, a tax-exempt entity or a foreign government, an international
organization, or any wholly-owned agency or instrumentality of either of the
foregoing, and (z) certain information on Partnership Securities that were held,
bought or sold on behalf of such person throughout the year. In addition,
brokers and financial institutions that hold Partnership Securities through a
nominee are required to furnish directly to the Trustee information as to
themselves and their ownership of Partnership Securities. A clearing agency
registered under Section 17A of the Exchange Act is not required to furnish any
such information statement to the Partnership Trust Fund. The information
referred to above for any calendar year must be furnished to the Partnership
Trust Fund on or before the following January 31. Nominees, brokers and
financial institutions that fail to provide the Partnership Trust Fund with the
information described above may be subject to penalties.
The Depositor will be designated as the tax matters partner in the Pooling
and Servicing Agreement and, as such, will be responsible for representing the
Securityholders in any dispute with the IRS. The Code provides for
administrative examination of a partnership as if the partnership were a
separate and distinct taxpayer. Generally, the statute of limitations for
partnership items does not expire until three years after the date on which the
partnership information return is filed. Any adverse determination following an
audit of the return of the Partnership Trust Fund by the appropriate taxing
authorities could result in an adjustment of the returns of the Securityholders,
and, under certain circumstances, a Securityholder may be precluded from
separately litigating a proposed adjustment to the items of the Partnership
Trust Fund. An adjustment could also result in an audit of a Securityholder's
returns and adjustments of items not related to the income and losses of the
Partnership Trust Fund.
Tax Consequences to Foreign Securityholders
It is not clear whether the Partnership Trust Fund would be considered to
be engaged in a trade or business in the United States for purposes of federal
withholding taxes with respect to Non-U.S. Persons, because there is no clear
authority dealing with that issue under facts substantially similar to those
described herein. Although it is not expected that the Partnership Trust Fund
would be engaged in a trade or business in the United States for such purposes,
if so specified in the applicable prospectus supplement, the Partnership Trust
Fund may withhold as if it were so engaged in order to protect the Partnership
Trust Fund from possible adverse consequences of a failure to withhold. The
Partnership Trust Fund may withhold on the portion of its taxable income that is
allocable to Securityholders who are Non-U.S. Persons pursuant to Section 1446
of the Code, as if such income were effectively connected to a U.S. trade or
business, at the maximum tax rate for corporations or individuals, as
applicable. Amounts withheld will be deemed distributed to the Non-U.S. Person
Securityholders. Subsequent adoption of Treasury regulations or the issuance of
other administrative pronouncements may require the Partnership Trust Fund to
change its withholding procedures. In determining a holder's withholding status,
the Partnership Trust Fund may rely on IRS Form W-8BEN, IRS Form W-9 or the
holder's certification of nonforeign status signed under penalties of perjury.
To the extent specified in the applicable prospectus supplement,
157
o each Non-U.S. Person holder might be required to file a U.S.
individual or corporate income tax return (including, in the case of a
corporation, the branch profits tax) on its share of the Partnership
Trust Fund's income;
o each Non-U.S. Person holder must obtain a taxpayer identification
number from the IRS and submit that number to the Partnership Trust
Fund on Form W-8BEN in order to assure appropriate crediting of the
taxes withheld; and
o a Non-U.S. Person holder generally would be entitled to file with the
IRS a claim for refund with respect to taxes withheld by the
Partnership Trust Fund, taking the position that no taxes were due
because the Partnership Trust Fund was not engaged in a U.S. trade or
business.
Notwithstanding the foregoing, interest payments made (or accrued) to a
Securityholder who is a Non-U.S. Person may be considered guaranteed payments to
the extent such payments are determined without regard to the income of the
Partnership Trust Fund. If these interest payments are properly characterized as
guaranteed payments, then the interest may not be considered "portfolio
interest." As a result, Securityholders who are Non-U.S. Persons may be subject
to United States federal income tax and withholding tax at a rate of 30 percent,
unless reduced or eliminated pursuant to an applicable treaty. In such case, a
Non-U.S. Person holder would only be entitled to claim a refund for that portion
of the taxes in excess of the taxes that should be withheld with respect to the
guaranteed payments.
Backup Withholding
Distributions made on the Partnership Securities and proceeds from the sale
of the Partnership Securities will be subject to a "backup" withholding tax of
3028% (decreasingincreasing to 28% by 200631% after 2010) if, in general, the
========== ==============
Securityholder fails to comply with certain identification procedures, unless
the holder is an exempt recipient under applicable provisions of the Code.
THE FEDERAL TAX DISCUSSIONS SET FORTH ABOVE ARE INCLUDED FOR GENERAL
INFORMATION ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON A SECURITYHOLDER'S
PARTICULAR TAX SITUATION. PROSPECTIVE PURCHASERS SHOULD CONSULT THEIR TAX
ADVISORS WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP
AND DISPOSITION OF REMIC SECURITIES, GRANTOR TRUST SECURITIES, PARTNERSHIP
SECURITIES AND DEBT SECURITIES, INCLUDING THE TAX CONSEQUENCES UNDER STATE,
LOCAL, FOREIGN AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN FEDERAL
OR OTHER TAX LAWS.
Recent Tax Law Changes
Under the Economic Growth and Tax Relief Reconciliation Act of 2001, among
other changes:
o the maximum tax rate on ordinary income and short-term capital gains
will be reduced to 35% over the period 2001 to 2006,
158
o the limitation on itemized deductions of individuals imposed by Code
Section 68 will be phased out starting in 2006 and will be eliminated
after 2009, and
o the rate of backup withholding tax under Code Section 3406 will be
reduced from 30.5% to 28% over the period 2001 to 2006.
STATE AND OTHER TAX CONSEQUENCES
In addition to the federal income tax consequences described in "Federal
Income Tax Consequences," potential investors should consider the state and
local tax consequences of the acquisition, ownership, and disposition of the
Securities offered hereunder. State tax law may differ substantially from the
corresponding federal tax law, and the discussion above does not purport to
describe any aspect of the tax laws of any state or other jurisdiction.
Therefore, prospective investors should consult their own tax advisors with
respect to the various tax consequences of investments in the Securities offered
hereunder.
ERISA CONSIDERATIONS
ERISA and the Code impose certain requirements on employee benefit plans
and on certain other retirement plans and arrangements, including individual
retirement accounts and annuities, Keogh plans and collective investment funds
and separate accounts in which such plans, accounts or arrangements are
invested, that are subject to Title I of ERISA and Section 4975 of the Code
("Plans") and on persons who are fiduciaries with respect to such Plans in
connection with the investment of Plan assets. Certain employee benefit plans,
such as governmental plans (as defined in ERISA Section 3(32)), and, if no
election has been made under Section 410(d) of the Code, church plans (as
defined in Section 3(33) of ERISA) are not subject to ERISA requirements.
Accordingly, assets of such plans may be invested in Securities without regard
to the ERISA considerations described below, subject to the provisions of other
applicable federal, state and local law. Any such plan which is qualified and
exempt from taxation under Sections 401(a) and 501(a) of the Code, however, is
subject to the prohibited transaction rules set forth in Section 503 of the
Code.
ERISA generally imposes on Plan fiduciaries certain general fiduciary
requirements, including those of investment prudence and diversification and the
requirement that a Plan's investments be made in accordance with the documents
governing the Plan. In addition, ERISA and Section 4975 of the Code prohibit a
broad range of transactions involving assets of a Plan and persons ("Parties in
Interest") who have certain specified relationships to the Plan unless a
statutory or administrative exemption is available. Certain Parties in Interest
that participate in a prohibited transaction may be subject to an excise tax
imposed pursuant to Section 4975 of the Code, unless a statutory or
administrative exemption is available. These prohibited transactions generally
are set forth in Sections 406 and 407 of ERISA and Section 4975 of the Code.
A Plan's investment in Securities may cause the Mortgage Loans, Contracts,
Unsecured Home Improvement Loans and other assets included in a related Trust
Fund to be deemed Plan assets. Section 2510.3-101 of the regulations of the
United States Department of Labor ("DOL") provides that when a Plan acquires an
equity interest in an entity, the Plan's assets include both such equity
interest and an undivided interest in each of the underlying assets of the
entity,
159
unless certain exceptions not applicable here apply, or unless the equity
participation in the entity by "benefit plan investors" (i.e., Plans and certain
employee benefit plans not subject to ERISA) is not "significant", both as
defined therein. For this purpose, in general, equity participation by benefit
plan investors will be "significant" on any date if 25% or more of the value of
any Class of equity interests in the entity is held by benefit plan investors.
To the extent the Securities are treated as equity interests for purposes of DOL
regulations section 2510.3-101, equity participation in a Trust Fund will be
significant on any date if immediately after the most recent acquisition of any
Security, 25% or more of any Class of Securities is held by benefit plan
investors.
Any person who has discretionary authority or control respecting the
management or disposition of Plan assets, and any person who provides investment
advice with respect to such assets for a fee, is a fiduciary of the investing
Plan. If the Mortgage Loans, Contracts, Unsecured Home Improvement Loans and
other assets included in a Trust Fund constitute Plan assets, then any party
exercising management or discretionary control regarding those assets, such as
the Servicer or Master Servicer, may be deemed to be a Plan "fiduciary" and thus
subject to the fiduciary responsibility provisions and prohibited transaction
provisions of ERISA and Section 4975 of the Code with respect to the investing
Plan. In addition, if the Mortgage Loans, Contracts, Unsecured Home Improvement
Loans and other assets included in a Trust Fund constitute Plan assets, the
purchase of Securities by a Plan, as well as the operation of the Trust Fund,
may constitute or involve a prohibited transaction under ERISA and the Code.
On April 3, 1996, theThe DOL has granted to Wachovia SecuritiesCapital
Markets (formerly First Union Securities, Inc.), an individual administrative
exemption, Prohibited Transaction Exemption 96-22; Exemption Application No.
D-10165("PTE") 96-22, 61 Fed. Reg. 14828 (April 3, 1996), as most recently
amended and restated by PTE 2002-41, 67 Fed. Reg. 54487 (August 22, 2002) (the
"Exemption"), which generally exempts from the application of the prohibited
transaction provisions of Sections 406(a) and 407 of ERISA, and the excise taxes
imposed on such prohibited transactions pursuant to Section 4975(a) and (b) of
the Code, certain transactions, among others, relating to the servicing and
operation of mortgage pools and the purchase, sale and holding of Securities
underwritten by an Underwriter (as hereinafter defined), that (a) represent a
beneficial ownership interest in the assets of a Trust Fund and entitle the
holder the pass-through payments of principal, interest and/or other payments
made with respect to the assets of the Trust Fund or (b) are denominated as a
debt instrument and represent an interest in a REMIC, provided that certain
conditions set forth in the Exemption are satisfied. For purposes of this
Section "ERISA Considerations," Section, the term "Underwriter" shall
includeincludes (a) Wachovia Corporation, (b) any person directly or indirectly,
through one or more intermediaries, controlling, controlled by or under common
control with Wachovia Corporation, including Wachovia Securities, Inc.Capital
Markets, LLC, and (c) any member of the underwriting syndicate or selling group
of which a person described in (a) or (b) is a manager or co-manager with
respect to a Class of Securities.
The Exemption sets forth five general conditions which must be satisfied
for a transaction involving the purchase, sale and holding of Securities to be
eligible for exemptive relief thereunder.
1. The acquisition of Securities by a Plan must be on terms that are at
least as favorable to the Plan as they would be in an arm's-length
transaction with an unrelated party.
160
2. The Securities at the time of acquisition by the Plan must be rated in
one of the four highest generic rating categories by Standard &
Poor's, a division of the McGraw-Hill Companies, Inc. ("S&P"), Moody's
Investors Service, Inc. ("Moody's") or Fitch Ratings ("Fitch").
3. The Trustee cannot be an affiliate of any member of the "Restricted
Group" whichother than an Underwriter. The Restricted Group consists
of the UnderwriterUnderwriters, the Depositor, the Trustee, the Master
Servicer, any Servicer, any insurer and any obligor with respect to
Assets constituting more than 5% of the aggregate unamortized
principal balance of the Assets in the related Trust Fund as of the
date of initial issuance of the Securities.
4. The sum of all payments made to and retained by the Underwriter(s)
must represent not more than reasonable compensation for underwriting
the Securities; the sum of all payments made to and retained by the
Depositor pursuant to the assignment of the Assets to the related
Trust Fund must represent not more than the fair market value of such
obligations; and the sum of all payments made to and retained by the
Servicer must represent not more than reasonable compensation for such
person's services under the applicable Agreement and reimbursement of
such person's reasonable expenses in connection therewith.
5. The investing Plan must be an accredited investor as defined in Rule
501(a)(1) of Regulation D of the SEC under the Securities Act of 1933,
as amended (the "Securities Act").
In addition, the Trust Fund must meet the following requirements:
o the assets of the Trust Fund must consist solely of assets of the type
that have been included in other investment pools;
o securities evidencing interests in such other investment pools must
have been rated in one of the four highest generic rating categories
by S&P, Moody's or Fitch for at least one year prior to the Plan's
acquisition of the securities; and
o securities evidencing interests in such other investment pools must
have been purchased by investors other than Plans for at least one
year prior to any Plan's acquisition of the Securities.
A fiduciary of a Plan contemplating purchasing a Security must make its own
determination that the general conditions set forth above will be satisfied with
respect to such Security. In addition, any Securities representing a beneficial
ownership interest in Unsecured Home Improvement Loans or Revolving Credit Line
Loans will not satisfy the general conditions of the Exemption.
If the general conditions of the Exemption are satisfied, the Exemption may
provide an exemption from the restrictions imposed byprohibited transaction
provisions of Sections 406(a) and 407 of ERISA (as well as the excise taxes
imposed by Sections 4975(a) and (b) of the Code by reason ofand 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
161
secondary market of Securities by Plans. However, no exemption is provided from
the restrictions of Sections 406(a)(1)(E), 406(a)(2) and 407 of ERISA for the
acquisition or holding of a Security on behalf of an "Excluded Plan" by any
person who has discretionary authority or renders investment advice with respect
to the assets of such Excluded Plan. For purposes of the Securities, an Excluded
Plan is a Plan sponsored by any member of the Restricted Group.
If certain specific conditions of the Exemption are also satisfied, the
Exemption may provide an exemption from the restrictions imposed byprohibited
==========
transaction provisions of Sections 406(b)(1) and (b)(2) of ERISA and the taxes
=======================
imposed by Sections 4975(a) and (b) of the Code by reason of Section
4975(c)(1)(E) of the Code, for transactions in connection with (1) the direct or
indirect sale, exchange or transfer of Securities in the initial issuance of
Securities between the Depositor or an Underwriter and a Plan when the person
who has discretionary authority or renders investment advice with respect to the
investment of Plan assets in the Securities is (a) an obligor with respect to 5%
or less of the fair market value of the Assets or (b) an affiliate of such a
person, (2) the direct or indirect acquisition or disposition in the secondary
market of Securities by a Plan and (3) the holding of Securities by a Plan.
Further, if certain specific conditions of the Exemption are satisfied, the
Exemption may provide an exemption from the restrictions imposed byprohibited
==========
transaction provisions of Sections 406(a), 406(b) and 407 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
with respect to the Securities so that the Exemption would provide an exemption
from the restrictions imposed by Sections 406(a) and (b) of ERISA (as well as
the excise taxes imposed by Sections 4975(a) and (b) of the Code by reason of
Section 4975(c) of the Code) for transactions in connection with the servicing,
management and operation of the Assets, provided that the general conditions of
the Exemption are satisfied.
The Exemption also may provide an exemption from the restrictions imposed
byprohibited transaction provisions of 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 such restrictions are deemed to, for
===
transactions that would otherwise applybe prohibited merely because a person is
======================= ==============
deemed to be a "partyParty in interestInterest" (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
such a person) solely as a result of the Plan's ownership of Securities.
The Exemption was amended by Prohibited Transaction Exemption 97-34, 62
Fed. Reg. 39021 (July 21, 1997), which, among other changes,also permits the
inclusion of a pre-funding accountPre-Funding Account in a trust fundTrust Fund,
=================== ==========
provided that the following conditions are met:
o the pre-funding accountPre-Funding Account may not exceed 25% of the
====================
total amount of certificatesSecurities being offered;
==========
162
o additional obligations purchased generally must meet the same terms
and conditions as those of the original obligations used to create the
trust fund; Trust Fund;
==========
o the transfer of additional obligations to the trustTrust Fund during
=====
the pre-funding periodPre-Funding Period must not result in the
===================
certificatesSecurities receiving a lower rating at the termination of
==========
the pre-funding periodPre-Funding Period than the rating that was
===================
obtained at the time of the initial issuance of the
certificatesSecurities;
==========
o the weighted average interest rate for all of the obligations in the
trustTrust Fund at the end of the pre-funding periodPre-Funding Period
========== ==================
must not be more than 100 basis points less than the weighted average
interest rate for the obligations which were transferred to the
trustTrust Fund on the closing date;
==========
o the characteristics of the additional obligations must be monitored to
confirm that they are substantially similar to those which were
acquired as of the closing date either by a credit support provider or
insurance provider independent of the sponsorDepositor or by an
=========
independent accountant retained by the sponsorDepositor that confirms
=========
such conformance in writing;
o the pre-funding periodPre-Funding Period must be described in the
==================
prospectus or private placement memorandum provided to investing
plansPlans; and
=====
o the trustee of the trustTrust Fund must be a substantial financial
===========
institution or trust company experienced in trust activities and
familiar with its duties, responsibilities and liabilities as a
fiduciary under ERISA.
Further, the pre-funding periodPre-Funding Period must be a period
===================
beginning on the closing date and ending no later than the earliest to occur of
(x) the date the amount on deposit in the pre-funding accountPre-Funding Account
===================
is less than the minimum dollar amount specified in the pooling and servicing
agreementapplicable Agreement; (y) the date on which an event of default occurs
=====================
under the pooling and servicing agreementapplicable Agreement; or (z) the date
=====================
which is the later of three months or 90 days after the closing date. It is
expected that the Pre-Funding Account will meet all of these requirements.
To the extent the Securities are not treated as equity interests for
purposes of DOL regulations section 2510.3-101, a Plan's investment in such
Securities ("Non-Equity Securities") would not cause the assets included in a
related Trust Fund to be deemed Plan assets. However, the Depositor, the
Servicer, the Trustee or Underwriter may be the sponsor of or investment advisor
with respect to one or more Plans. Because such parties may receive certain
benefits in connection with the sale of Non-Equity Securities, the purchase of
Non-Equity Securities using Plan assets over which any such partiesparty has
=====
investment authority might be deemed to beconstitute or result in a violation of
=======================
the prohibited transaction rules of ERISA and Section 4975 of the Code for which
============
no exemption may be available. Accordingly, Non-Equity Securities may not be
purchased using the assets of any Plan if any of the Depositor, the Servicer,
the Trustee or UnderwriterUnderwriters has investment authority with respect to
============
such assets.
163
In addition, certain affiliates of the Depositor might be considered or
might become Parties in Interest with respect to a Plan. Also, any holder of
Securities, because of its activities or the activities of its respective
affiliates, may be deemed to be a Party in Interest (within the meaning of
========================
Section 3(14) of ERISA) with respect to certain Plans, including but not limited
=======================
to Plans sponsored by such holder. In either case, the acquisition or holding of
Non-Equity Securities by or on behalf of such a Plan could be considered to give
rise to an indirect prohibited transaction within the meaning ofunder ERISA and
=====
Section 4975 of the Code, unless it is subject to one or more statutory or
=============
administrative exemptions such as Prohibited Transaction Class Exemption
("PTCE") 84-14, which exempts certain transactions effected on behalf of a Plan
by a "qualified professional asset manager", PTCE 90-1, which exempts certain
transactions involving insurance company pooled separate accounts, PTCE 91-38,
which exempts certain transactions involving bank collective investment funds,
PTCE 95-60, which exempts certain transactions involving insurance company
general accounts, or PTCE 96-23, which exempts certain transactions effected on
behalf of a Plan by certain "in-house" asset managers. It should be noted,
however, that even if the conditions specified in one or more of these
exemptions are met, the scope of relief provided by these exemptions may not
necessarily cover all acts that might be construed as prohibited transactions.
Any Plan fiduciary which proposes to cause a Plan to purchase Securities
should consult with its counsel with respect to the potential applicability of
ERISA and the Code to such investment, the availability of the exemptive relief
provided in the Exemption and the potential applicability of any other
prohibited transaction exemption in connection therewith. In particular, a Plan
fiduciary which proposes to cause a Plan to purchase Securities representing a
beneficial ownership interest in a pool of single-family residential first
mortgage loans, a Plan fiduciary should consider the applicability of PTCE 83-1,
which provides exemptive relief for certain transactions involving mortgage pool
investment trusts. The prospectus supplement with respect to a Series of
Securities may contain additional information regarding the application of the
Exemption, PTCE 83-1 or any other exemption, with respect to the Securities
offered thereby. In addition, any Plan fiduciary that proposes to cause a Plan
to purchase Strip Securities should consider the federal income tax consequences
of such investment. Fiduciaries of plans not subject to ERISA or Section 4975 of
============
the Code, such as government plans, should consider the application of any
applicable federal, state or local law materially similar to the provisions of
ERISA or Section 4975 of the Code, as well as the need for and the availability
============
of exemptive relief under such applicable law.
Any Plan fiduciary considering whether to purchase a Security on behalf of
a Plan should consult with its counsel regarding the applicability of the
fiduciary responsibility and prohibited transaction provisions of ERISA and the
Code to such investment.
The sale of Securities to a Plan is in no respect a representation by the
Depositor or the Underwriter that this investment meets all relevant legal
requirements with respect to investments by Plans generally or any particular
Plan, or that this investment is appropriate for Plans generally or any
particular Plan.
164
LEGAL INVESTMENT
As will be specified in the applicable prospectus supplement, certain
Classes of the Securities may constitute "mortgage related securities " for
purposes of the Secondary Mortgage Market Enhancement Act of 1984, as amended
("SMMEA"), so long as (i) they are rated in one of the two highest rating
categories by at least one Rating Agency and (ii) are part of a Series
representing interests in a Trust Fund consisting of Mortgage Loans originated
by certain types of originators specified in SMMEA and secured by first liens on
real estate. As "mortgage related securities," such Classes will constitute
legal investments for persons, trusts, corporations, partnerships, associations,
business trusts and business entities (including but not limited to depository
institutions, insurance companies and pension funds) created pursuant to or
existing under the laws of the United States or of any state (including the
District of Columbia and Puerto Rico) whose authorized investments are subject
to state regulation, to the same extent that, under applicable law, obligations
issued by or guaranteed as to principal and interest by the United States or any
agency or instrumentality thereof constitute legal investments for such
entities. Pursuant to SMMEA, a number of states enacted legislation, on or
before the October 3, 1991 cut-off for such enactments, limiting to varying
extents the ability of certain entities (in particular, insurance companies) to
invest in "mortgage related securities," in most cases by requiring the affected
investors to rely solely upon existing state law, and not SMMEA. Accordingly,
the investors affected by such legislation will be authorized to invest in the
Offered Securities only to the extent provided in such legislation.
SMMEA also amended the legal investment authority of
federally-chartered depository institutions as follows: federal savings and loan
associations and federal savings banks may invest in, sell or otherwise deal in
mortgage related securities without limitation as to the percentage of their
assets represented thereby, federal credit unions may invest in such securities,
and national banks may purchase mortgage related securities for their own
account without regard to the limitations generally applicable to investment
securities set forth in 12 U. S. C. ss.24 (Seventh), subject in each case to
such regulations as the applicable federal regulatory authority may prescribe.
In this connection, the Office of the Comptroller of the Currency (the "OCC")
has amended 12 C. F. R. Part 1 to authorize national banks to purchase and sell
for their own account, without limitation as to a percentage of the bank's
capital and surplus (but subject to compliance with certain general standards in
12 C. F. R. ss.1.5 concerning "safety and soundness" and retention of credit
information), certain "Type IV securities," defined in 12 C. F. R. ss.1.2(m) to
include certain "residential mortgage-related securities." As so defined,
"residential mortgage-related security" means, in relevant part, "mortgage
related security" within the meaning of SMMEA. The National Credit Union
Administration ("NCUA") has adopted rules, codified at 12 C.F.R. Part 703, which
permit federal credit unions to invest in "mortgage related securities" under
certain limited circumstances, other than stripped mortgage related securities,
residual interests in mortgage related securities and commercial mortgage
related securities, unless the credit union has obtained written approval from
the NCUA to participate in the "investment pilot program" described in 12 C.F.R.
ss.703.140. The OTS has issued Thrift Bulletin 13a (December 1, 1998), "
Management of Interest Rate Risk, Investment Securities, and Derivative
Activities," which thrift institutions subject to the jurisdiction of the OTS
should consider before investing in any of the Offered Securities.
165
All depository institutions considering an investment in the Offered
Securities should review the "Supervisory Policy Statement on Investment
Securities and End-User Derivatives Activities "(the "1998 Policy Statement") of
the Federal Financial Institutions Examination Council ("FFIEC"), which has been
adopted by the Board of Governors of the Federal Reserve System, the Federal
Deposit Insurance Corporation, the OCC and the OTS, effective May 26, 1998, and
by the NCUA, effective October 1, 1998. The 1998 Policy Statement sets forth
general guidelines which depository institutions must follow in managing risks
(including market, credit, liquidity, operational (transaction), and legal
risks) applicable to all securities (including mortgage pass-through securities
and mortgage-derivative products) used for investment purposes.
Institutions whose investment activities are subject to regulation by
federal or state authorities should review rules, policies, and guidelines
adopted from time to time by those authorities before purchasing any Class of
the Offered Securities, as certain Classes may be deemed unsuitable investments,
or may otherwise be restricted, under those rules, policies, or guidelines (in
certain instances irrespective of SMMEA).
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines, or agreements generally
governing investments made by a particular investor, including, but not limited
to, "prudent investor" provisions, percentage-of-assets limits, provisions which
may restrict or prohibit investment in securities which are not
"interest-bearing" or "income-paying," and, with regard to any Class of Offered
Securities issued in book-entry form, provisions which may restrict or prohibit
investments in securities which are issued in book-entry form.
Except as to the status of certain Classes of Offered Securities as
"mortgage related securities," no representations are made as to the proper
characterization of the Offered Securities for legal investment purposes,
financial institution regulatory purposes, or other purposes, or as to the
ability of particular investors to purchase any Offered Securities under
applicable legal investment restrictions. The uncertainties described above (and
any unfavorable future determinations concerning legal investment or financial
institution regulatory characteristics of the Offered Securities) may adversely
affect the liquidity of the Offered Securities.
Accordingly, all investors whose investment activities are subject to
legal investment laws and regulations, regulatory capital requirements or review
by regulatory authorities should consult with their legal advisors in
determining whether and to what extent the Offered Securities of any Class
constitute legal investments or are subject to investment, capital or other
restrictions and, if applicable, whether SMMEA has been overridden in any
jurisdiction relevant to such investor.
METHODS OF DISTRIBUTION
The Securities offered hereby and by the applicable prospectus supplement
to this prospectus will be offered in Series. The distribution of the Securities
may be effected from time to time in one or more transactions, including
negotiated transactions, at a fixed public offering price or at varying prices
to be determined at the time of sale or at the time of commitment therefor. If
so specified in the related prospectus supplement, the Securities will be
distributed in a firm
166
commitment underwriting, subject to the terms and conditions of the underwriting
agreement, by Wachovia Securities, Inc.Capital Markets, LLC ("Wachovia
======================
SecuritiesCapital Markets") acting as underwriter with other underwriters, if
any, named therein. In such event, the prospectus supplement may also specify
that the underwriters will not be obligated to pay for any Securities agreed to
be purchased by purchasers pursuant to purchase agreements acceptable to the
Depositor. In connection with the sale of the Securities, underwriters may
receive compensation from the Depositor or from purchasers of the Securities in
the form of discounts, concessions or commissions. The prospectus supplement
will describe any such compensation paid by the Depositor.
Alternatively, the prospectus supplement may specify that the Securities
will be distributed by Wachovia SecuritiesCapital Markets acting as agent or in
===============
some cases as principal with respect to Securities which it has previously
purchased or agreed to purchase. If Wachovia SecuritiesCapital Markets acts as
================
agent in the sale of Securities, Wachovia SecuritiesCapital Markets will receive
===============
a selling commission with respect to each Series of Securities, depending on
market conditions, expressed as a percentage of the aggregate principal balance
of the related Mortgage Loans as of the Cut-off Date. The exact percentage for
each Series of Securities will be disclosed in the related prospectus
supplement. To the extent that Wachovia SecuritiesCapital Markets elects to
================
purchase Securities as principal, Wachovia SecuritiesCapital Markets may realize
===============
losses or profits based upon the difference between its purchase price and the
sales price. The prospectus supplement with respect to any Series offered other
than through underwriters will contain information regarding the nature of such
offering and any agreements to be entered into between the Depositor and
purchasers of Securities of such Series.
[Wachovia SecuritiesCapital Markets is an affiliate of the Depositor. This
===============
prospectus may be used by Wachovia SecuritiesCapital Markets, to the extent
================
required, in connection with market making transactions in the Securities.
Wachovia SecuritiesCapital Markets may act as principal or agent in such
================
transactions.]
The Depositor will indemnify Wachovia SecuritiesCapital Markets and any
================
underwriters against certain civil liabilities, including liabilities under the
Securities Act, or will contribute to payments Wachovia SecuritiesCapital
=======
Markets and any underwriters may be required to make in respect thereof.
=======
In the ordinary course of business, Wachovia SecuritiesCapital Markets and
===============
the Depositor may engage in various securities and financing transactions,
including repurchase agreements to provide interim financing of the Depositor's
mortgage loans pending the sale of such mortgage loans or interests therein,
including the Securities.
The Depositor anticipates that the Securities will be sold primarily to
institutional investors. Purchasers of Securities, including dealers, may,
depending on the facts and circumstances of such purchases, be deemed to be
"underwriters" within the meaning of the Securities Act in connection with
reoffers and sales by them of Securities. Securityholders should consult with
their legal advisors in this regard prior to any such reoffer or sale.
As to each Series of Securities, only those Classes rated in one of the
four highest rating categories by any Rating Agency will be offered hereby. Any
unrated Class may be initially
167
retained by the Depositor, and may be sold by the Depositor at any time to one
or more institutional investors.
LEGAL MATTERS
Certain legal matters, including the federal income tax consequences to
Securityholders of an investment in the Securities of a Series, will be passed
upon for the Depositor by Cadwalader, Wickersham & Taft LLP, New York, New York
=======================
or Orrick, Herrington & Sutcliffe LLP, New York, New York.
=====================================
FINANCIAL INFORMATION
A new Trust Fund will be formed with respect to each Series of Securities
and no Trust Fund will engage in any business activities or have any assets or
obligations prior to the issuance of the related Series of Securities.
Accordingly, no financial statements with respect to any Trust Fund will be
included in this prospectus or in the related prospectus supplement.
RATINGS
It is a condition to the issuance of any Class of Offered Securities that
they shall have been rated not lower than investment grade, that is, in one of
the four highest rating categories, by at least one nationally recognized
statistical rating agencyorganization ("Rating Agency").
Ratings on mortgage pass-through certificates address the likelihood of
receipt by Securityholders of all distributions on the underlying mortgage
loans. These ratings address the structural, legal and issuer-related aspects
associated with such certificates, the nature of the underlying assets and the
credit quality of the guarantor, if any. Ratings on mortgage pass-through
certificates and other asset backed securities do not represent any assessment
of the likelihood of principal prepayments by borrowers or of the degree by
which such prepayments might differ from those originally anticipated. As a
result, securityholders might suffer a lower than anticipated yield, and, in
addition, holders of stripped interest certificates in extreme cases might fail
to recoup their initial investments.
A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning rating
organization. Each security rating should be evaluated independently of any
other security rating.
WHERE YOU CAN FIND MORE INFORMATION
The Depositor filed a registration statement (the "Registration Statement")
relating to the Securities with the SEC. This prospectus is part of the
Registration Statement, but the Registration Statement includes additional
information.
Copies of the Registration Statement may be obtained from the Public
Reference Section of the SEC, Washington, D.C. 20549 upon payment of the
prescribed charges, or may be examined free of charge at the SEC's offices,and
===
any other materials filed with the SEC may be read and copied at the SEC's
================================================================================
Public Reference Room at 450 Fifth Street N.W., Washington, D.C. 20549
========================
168
or at the regional offices of the SEC located at 233 Broadway, New York, New
York 10279 and Suite 1400, Citicorp Center, 500 West Madison Street, Chicago,
Illinois 60661-2511.20549. Information concerning the operation of the SEC's
===================================================
Public Reference Room may be obtained by calling the SEC at (800) SEC-0330. The
==========================================================================
SEC also maintains a site on the World Wide Web at "http://www.sec.gov" at which
you can view and download copies of reports, proxy and information statements
and other information filed electronically through the Electronic Data
Gathering, Analysis and Retrieval ("EDGAR") system. The Depositor has filed the
Registration Statement, including all exhibits, through the EDGAR system and
therefore such materials should be available by logging onto the SEC's Web site.
The SEC maintains computer terminals providing access to the EDGAR system at
each of the offices referred to above. Copies of any documents incorporated to
this prospectus by reference will be provided at no cost to each person,
===========
including any beneficial owner, to whom a prospectus is delivered upon written
or oral request directed to Wachovia Asset Securitization Issuance, Inc.LLC, One
======== ===
Wachovia Center, 301 South College Street, Charlotte, North Carolina 28288,
telephone number (704) 374-2702. 383-4634.
========
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The SEC allows the Depositor to "incorporate by reference" information it
files with the SEC, which means that the Depositor can disclose important
information to you by referring you to those documents. The information
incorporated by reference is considered to be part of this prospectus.
Information that the Depositor files later with the SEC will automatically
update the information in this prospectus. In all cases, you should rely on the
later information rather than on any different information included in this
prospectus or the accompanying prospectus supplement. The Depositor incorporates
by reference any future annual, monthly and special SEC reports filed by or on
behalf of the Trust until the termination of the offering of the related Series
of Securities offered hereby (including market making transactions by Wachovia
SecuritiesCapital Markets, to the extent required, with respect to such Series
================
of Securities, unless such transactions are exempt from the registration
provisions of the Securities Act).
As a recipient of this prospectus, you may request a copy of any document
the Depositor incorporates by reference, except exhibits to the documents
(unless the exhibits are specifically incorporated by reference) at no cost, by
writing or calling the Treasurer at Wachovia Asset Securitization Issuance,
========
Inc.LLC, One Wachovia Center, 301 South College Street, Charlotte, North
===
Carolina 28288, telephone number (704) 374-2702.383-4634.
========
169
INDEX OF SIGNIFICANT DEFINITIONS
Terms Page
- ----- ----
1998 Policy Statement.............................164
Accrual Period.....................................31
Accrual Securities.................................39
Accrued Security Interest..........................42
Additional Collateral Assets.......................22
Adjustable Rate Assets.............................21
Agreement..........................................59
ARM Contracts......................................28
ARM Loans..........................................24
ARM Unsecured Home Improvement Loans...............27
Asset Conservation Act............................101
Asset Group........................................39
Asset Seller.......................................21
Assets.............................................21
Available Distribution Amount......................40
Balloon Payment Assets.............................22
Bankruptcy Code....................................96
Bi-weekly Assets...................................22
Book-Entry Securities..............................40
Buy Down Assets....................................22
Buydown Funds.....................................116
Buydown Mortgage Loans.............................35
Buydown Period.....................................35
Capitalized Interest Account.......................29
Cash Flow Agreement................................30
Cede...............................................55
CERCLA............................................100
Certificates.......................................39
Class..............................................39
Cleanup Costs.....................................100
Clearstream........................................56
Clearstream Participants...........................56
Closing Date........................................7
Code..............................................112
Collection Account.................................64
Component..........................................44
Contract Borrower..................................90
Contract Lender....................................90
Contract Rate......................................29
Contracts..........................................21
Convertible Assets.................................22
Cooperative....................................57, 89
Cooperative Loans..................................89
Cooperatives.......................................23
Covered Trust......................................84
CPR................................................34
Credit Support.....................................30
Cut-off Date.......................................24
Cut-off Date........................................7
Debt Securities...................................112
Definitive Securities..........................40, 53
170
Deposit Trust Agreement............................59
Depositor.......................................7, 38
Depositories.......................................57
Determination Date.................................40
Disqualified Organization.........................131
Distribution Date...............................7, 31
DOL...............................................157
Due Period.........................................40
EDGAR.............................................166
electing large partnership........................132
Euroclear..........................................56
Euroclear Operator.................................57
Euroclear Participants.............................56
Excess Servicing..................................144
Exchange Act.......................................55
Excluded Plan.....................................160
Exemption.........................................158
FASIT Securities..................................113
FDIC...............................................64
FFIEC.............................................164
First Lien Mortgage Loans..........................23
Fitch.............................................159
Garn-St. Germain Act..............................102
GEM Assets.........................................22
GPM Assets.........................................22
Grantor Trust Fund................................112
Grantor Trust Securities..........................112
Home Equity Loans..................................23
Home Improvement Contracts.........................23
HOPA..............................................105
Increasing Payment Asset...........................22
Indenture..........................................59
Issuer..........................................7, 59
=====================================================
Indenture Servicing Agreement......................59
Indenture Trustee...............................7, 60
Indirect Participants..............................55
Insurance Proceeds.................................41
Interest Reduction Assets..........................22
Interest-Only Assets...............................22
IRS................................................70
Issuer..............................................7
Land Sale Contracts................................23
Legal Investment...................................11
Level Payment Assets...............................21
Liquidation Proceeds...............................41
Loan-to-Value Ratio................................24
Lock-out Date......................................26
Lock-out Period....................................26
Manufactured Home..................................28
Mark to Market Regulations........................135
Master Servicer.................................7, 60
MERS...............................................61
Moody's...........................................159
Mortgage Loans.....................................21
Mortgage Notes.....................................24
Mortgage Rate......................................25
171
Mortgaged Properties...............................23
Mortgages..........................................24
Multifamily Mortgage Loan..........................23
Multifamily Property...............................23
National Housing Act...............................25
NCUA..............................................163
new partnership...................................153
New Regulations...................................138
Non-Equity Securities.............................161
Non-Pro Rata Security.............................118
Nonrecoverable Advance.............................50
Non-U.S. Person...................................138
Notes..............................................39
OCC...............................................163
Offered Securities.................................39
OID Regulations...................................113
old partnership...................................153
Originator.........................................24
OTS...............................................102
PAC................................................45
PAC I..............................................45
PAC II.............................................45
PAC Notes..........................................45
Participants.......................................55
Parties in Interest...............................157
Partnership Securities............................112
Partnership Trust Fund............................112
Pass-Through Entity...............................132
Pass-Through Rate..................................41
PCBs..............................................100
Permitted Investments..............................64
Plans.............................................157
PMI...............................................105
Pooling and Servicing Agreement....................59
Pre-Funded Amount..................................29
Pre-Funding Account................................29
Pre-Funding Period.................................29
Prepayment Assumption.............................119
Prepayment Premium.................................26
PTCE..............................................161
Purchase Price.....................................61
Rating Agency.....................................166
RCRA..............................................101
Record Date........................................40
Refinance Loans....................................24
Registration Statement............................166
Regular Securities................................113
Regular Securityholder............................117
Related Proceeds...................................50
Relief Act........................................105
REMIC Pool........................................112
REMIC Provisions..................................112
REMIC Regulations.................................113
REMIC Securities..................................112
REO Property.......................................51
Residual Holders..................................126
172
Residual Securities...............................113
Restricted Group..................................159
Retained Interest..................................73
Revolving Credit Line Loans........................26
S&P...............................................159
SBJPA of 1996.....................................116
Scheduled Certificates.............................45
Scheduled Notes....................................45
SEC................................................25
Secured-creditor exemption........................100
Securities.........................................39
Securities Act....................................159
Security...........................................59
Security Balance...................................33
Security Owners....................................55
Securityholder.....................................31
Senior Certificates................................39
Senior Notes.......................................39
Senior Securities..................................39
Series.............................................39
Servicer............................................7
Servicers..........................................60
Servicing Standard.................................68
Single Family Mortgage Loan........................23
Single Family Property.............................23
SMMEA.............................................163
SPA................................................34
Special Servicer...................................76
Standard Securities...............................141
Startup Day.......................................113
Statistical Calculation Date........................7
Step-up Rate Assets................................22
Strip Securities...................................39
Stripped Securities...............................145
Stripped Securityholder...........................147
Subordinate Certificates...........................39
Subordinate Notes..................................39
Subordinate Securities.............................39
Subsequent Assets..................................29
Superliens........................................100
Support Certificates...............................43
Support Notes......................................43
TAC................................................47
TAC Notes..........................................47
Taxable Mortgage Pools............................113
Terms and Conditions...............................57
Texas Home Equity Laws............................105
Thrift Institutions...............................130
Tiered REMICs.....................................117
TILA Amendment.....................................98
Title V...........................................103
Title VIII........................................104
Trust..............................................39
Trust Fund.........................................39
Trustee............................................60
U.S. Person.......................................134
173
UCC................................................55
Underlying Servicing Agreement.....................59
Underwriter.......................................158
Unsecured Home Improvement Loans...................21
UST...............................................101
Value..............................................24
Voting Rights......................................77
Wachovia SecuritiesCapital Markets................165
===============
Warranting Party...................................62
Withholding Regulations...........................140
=====================================================
174
SUBJECT TO COMPLETION, DATED NOVEMBER [ ], 2003
PROSPECTUS SUPPLEMENT
(to accompanying prospectus dated , 200 )
$ (Approximate)
Trust 200 -
Issuer
Asset-Backed Notes, Series 200 -
WACHOVIA ASSET SECURITIZATION ISSUANCE, INC.LLC
======== ====
Depositor
[ ]
Seller and Servicer
200 - will issue the following asset-backed notes backed solely by a
pledge of the assets of the trust:
Class Initial Note Balance Note Interest Rate
- ------------------------- -------------------- -------------------
A......................... $ %
The Notes--
The trust will issue one class of notes offered for sale by this prospectus
supplement.
Interest and principal on the notes is scheduled to be paid monthly on the th
day of the month or, if such day is not a business day, the immediately
following business day. The first scheduled payment date is .
Credit enhancement--
The assets of the trust may exceed the principal balance of the notes and, if
so, will result in overcollateralization which will be available to absorb
losses.
The notes will be unconditionally and irrevocably guaranteed as to the timely
payment of scheduled interest and the ultimate payment of principal pursuant to
the terms of a financial guaranty insurance policy to be issued by
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus supplement or the prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
The underwriters will purchase and offer the notes to investors at varying
prices to be determined at the time of sale. The Depositor expects that the
notes will be available for delivery to investors in book-entry form through The
Depository Trust Company, Clearstream Banking or the Euroclear System on , 200 .
Total proceeds to the Depositor for the notes, before deducting expenses payable
by the Depositor, will be approximately % of the initial principal balance of
the notes.
- --------------------------------------------------------------------------------
Consider carefully the "Risk Factors" beginning on page S- of this prospectus
supplement and page 10 of the prospectus
The notes are not insured or guaranteed by an governmental agency or
instrumentality.
The notes represent interest in the trust only and will not be obligations of or
represent interests in any other agency. This prospectus supplement may be used
to offer and sell the notes only if accompanied by the prospectus.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The information in this prospectus supplement is not complete and may be
changed. The Depositor may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is effective. This
prospectus supplement is not an offer to sell these securities and is not
soliciting an offer to buy these securities in any state where the offer or sale
is not permitted.
- --------------------------------------------------------------------------------
Wachovia SecuritiesCapital Markets [Other Underwriter]
===============
, 200
TABLE OF CONTENTS
SUMMARY OF PROSPECTUS SUPPLEMENT...............................................................................S-56
=
RISK FACTORS.................................................................................................S-1011
==
Risks of the Mortgage Loans.............................................................................S-1011
==
Prepayment of the Mortgage Loans May Adversely Affect the Yield to Maturity of the Notes................S-1213
==
Insurance Policy Does Not Cover Certain Risks...........................................................S-1314
==
Credit Enhancement May Be Inadequate for the Notes......................................................S-1314
==
Payments of Excess Cash May Affect the Yield to Maturity on the Notes...................................S-1314
==
Notes are Non-Recourse Obligations......................................................................S-1314
==
The lack of a secondary market may limit your ability to sell your notes................................S-1415
==
Violations of federal and state laws may cause losses on your notes.....................................S-1415
==
Book-Entry Registration.................................................................................S-1516
==
Recent Developments May Increase Risk of Loss on the Mortgage Loans.....................................S-1516
==
FORWARD LOOKING STATEMENTS...................................................................................S-1617
==
DESCRIPTION OF THE NOTES.....................................................................................S-1718
==
General.................................................................................................S-1718
==
Book-Entry Registration and Definitive Notes............................................................S-1819
==
Assignment of Mortgage Loans............................................................................S-2324
==
Payments on the Notes...................................................................................S-2526
==
Note Account............................................................................................S-2931
==
Overcollateralization Feature...........................................................................S-3133
==
Reports to Noteholders..................................................................................S-3435
==
Redemption of the Notes.................................................................................S-3537
==
Payments to the Holder(s) of the Residual Interest......................................................S-3637
==
The Indenture Trustee...................................................................................S-3637
==
Voting..................................................................................................S-3638
==
Note Events of Default..................................................................................S-3738
==
The PMI Policy..........................................................................................S-3739
==
DESCRIPTION OF THE MORTGAGE POOL.............................................................................S-3940
==
General.................................................................................................S-3940
==
The Mortgage Pool Statistics............................................................................S-3941
==
THE ISSUER...................................................................................................S-5051
==
THE SELLER...................................................................................................S-5051
==
THE SERVICER.................................................................................................S-5051
==
General.................................................................................................S-5051
==
Delinquency and Loss Experience of the Servicer.........................................................S-5051
==
UNDERWRITING STANDARDS.......................................................................................S-5354
==
PREPAYMENT AND YIELD CONSIDERATIONS..........................................................................S-5455
==
General.................................................................................................S-5455
==
Weighted Average Life...................................................................................S-5758
==
THE SERVICING AGREEMENT......................................................................................S-6364
==
General.................................................................................................S-6364
==
S-3
Payments on Mortgage Loans and Establishment of Collection Account......................................S-6364
==
Investment of Collection Account........................................................................S-6465
==
Monthly Advances........................................................................................S-6465
==
Compensating Interest Payments..........................................................................S-6566
==
Realization upon Defaulted Mortgage Loans...............................................................S-6667
==
Evidence as to Compliance...............................................................................S-6667
==
Resignation of Servicer; Certain Matters Regarding Servicer's Servicing Obligations.....................S-6768
==
Servicer Events of Default..............................................................................S-6869
==
Rights Upon Servicer Events of Default..................................................................S-6869
==
Amendments..............................................................................................S-6970
==
Servicing and Other Compensation; Payment of Expenses...................................................S-7071
==
THE NOTE INSURANCE...........................................................................................S-7172
==
The Insurance Policy....................................................................................S-7172
==
The Note Insurer........................................................................................S-7475
==
ERISA CONSIDERATIONS.........................................................................................S-7677
==
USE OF PROCEEDS..............................................................................................S-7779
==
LEGAL INVESTMENT.............................................................................................S-7779
==
METHOD OF DISTRIBUTION.......................................................................................S-7879
==
EXPERTS......................................................................................................S-7880
==
MATERIAL FEDERAL INCOME TAX CONSEQUENCES.....................................................................S-7980
==
STATE TAX CONSIDERATIONS.....................................................................................S-8283
==
LEGAL MATTERS................................................................................................S-8283
==
RATING OF THE NOTES..........................................................................................S-8283
==
INDEX OF PRINCIPAL TERMS.....................................................................................S-8485
==
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENT PROCEDURES.................................................1
S-4
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS
The Depositor describes the notes in two separate documents that
progressively provide more detail: o the accompanying prospectus, which provides
general information, some of which may not apply to your notes, and o this
prospectus supplement, which describes the specific terms of your notes.
If the description of the terms of your notes varies between this
prospectus supplement and the accompanying prospectus, you should rely on the
information in this prospectus supplement.
Cross-references are included in this prospectus supplement and the
accompanying prospectus to captions in these materials where you can find
further related discussions. The following table of contents and the table of
contents included in the accompanying prospectus provide the pages on which
these captions are located.
You can find a listing of the pages where capitalized terms used in
this prospectus supplement and the accompanying prospectus are defined under the
caption "Index of Principal Definitions" beginning on page S- in this document
and under the caption "Index of Significant Definitions" beginning on page in
the accompanying prospectus. Any capitalized terms used but not defined in this
prospectus supplement have the meanings assigned in the accompanying prospectus.
-----------------
S-5
- --------------------------------------------------------------------------------
SUMMARY OF PROSPECTUS SUPPLEMENT
Because this is a summary, it does not contain all the information that
may be important to you. You should read the entire accompanying prospectus and
this prospectus supplement carefully before you decide to purchase a note.
PARTIES
The Issuer
Trust 200 - is a Delaware business trust, formed pursuant to a
deposit trust agreement among Wachovia Asset Securitization Issuance, Inc.LLC,
and
.
Title of Series
Asset-Backed Notes, Series 200 - .
The Depositor
Wachovia Asset Securitization Issuance, Inc.LLC will convey the mortgage
loans to the trust after acquiring them from . The depositor is a
North Carolina corporation and a wholly-owned, indirect
subsidiary of Wachovia
Corporation. and was converted to a limited liability company in the State of
North Carolina on October 30, 2003. The Depositor was formerly Wachovia Asset
Securitization, Inc., a North Carolina corporation formed on February 27, 1996.
The depositor is an affiliate of Wachovia Securities, Inc.Capital Markets, LLC,
an underwriter.
Mortgage Loan Seller
On the closing date, the mortgage loans will be sold to the depositor by . The
mortgage loans were originated or acquired generally in accordance with the
underwriting standards described in "Underwriting Standards" in this prospectus
supplement.
The Servicer
will act as servicer of the mortgage loans held by the trust.
The Note Insurer
, a financial guaranty insurance company, will act as
note insurer.
The Indenture Trustee
, a national banking association, will act as indenture trustee.
If is terminated as servicer, will take over the servicer's obligations or
appoint a successor servicer.
The Owner Trustee
, a , will act as owner trustee.
DESCRIPTION OF THE NOTES
The Notes
The trust will issue its asset-backed notes, designated as the "
Trust 200 - Asset-Backed Notes, Series 200 - ,
Class A." There will be only one class of notes.
The initial principal amount of the notes is indicated on the front cover of
this prospectus supplement.
The Assets of the Trust
The notes will be backed solely by a pledge of the assets of the trust. The
assets of the trust will consist primarily of
- --------------------------------------------------------------------------------
S-6
- --------------------------------------------------------------------------------
o a pool of fixed rate and adjustable rate, residential one- to
four-family, first and second lien mortgage loans;
o principal and interest payments on the mortgage loans (including
prepayment premiums); and
o the trust's rights under a mortgage loan sale agreement and a servicing
agreement.
The Stated Maturity of the Notes
The stated maturity date for the notes, on which the final payment of principal
must ultimately be made, is , , which is the payment date that occurs in the
thirteenth month following the month in which the last maturity date of
any mortgage loan conveyed to the trust is scheduled to occur. The depositor
anticipates, however, that actual final payment of principal on the notes will
occur significantly earlier.
Book-Entry Format
The notes will initially be issued in book-entry form only, through the
facilities of The Depository Trust Company. The notes will be issued in minimum
denominations of $ and multiples of $ in excess thereof.
PAYMENTS ON THE NOTES
Payment Dates
Principal and interest is scheduled to be paid to the noteholders on the th day
of each month, or, if such day is not a business day, on the following business
day, commencing on , .
Record Dates
The indenture trustee will make payments to the noteholders of record determined
as of the last business day of the month preceding the month in which the
payment date occurs.
Due Periods and Collection Periods
Generally, payments made to noteholders on each payment date will relate to the
collections of principal and interest on the mortgage loans in the due period,
with respect to all scheduled collections of principal and interest, or the
collection period, with respect to all unscheduled collections. The due period
commences on the second day of the calendar month immediately before the month
in which the related payment date occurs and ends on the first day of the
calendar month in which the related payment date occurs. The collection period
is the calendar month before the calendar month in which the related payment
date occurs.
Funds Available for Payment of Interest and Principal
The following funds will generally be available for the payment of interest and
principal on the notes:
o collections on the mortgage loans, net of fees and
expenses but including all prepayment premiums collected;
o any advances made by
the servicer in respect of delinquent payments of principal and interest on
mortgage loans;
o proceeds from any insurance policy covering a mortgaged property;
o any other proceeds, net of expenses, the servicer receives from the sale,
foreclosure, condemnation or other disposition of a mortgaged property;
o interest payments made by the servicer to compensate in part for any shortfall
in interest payments on the notes caused by a mortgagor prepaying all or part of
a mortgage loan;
o any amounts resulting from the repurchase, release, removal or substitution of
a mortgage loan; and
- --------------------------------------------------------------------------------
S-7
- --------------------------------------------------------------------------------
o in the event the notes are redeemed in the manner described herein, amounts
deposited in connection with such redemption.
Interest
Interest on the notes will accrue at the note interest rate during each interest
period. The note interest rate will initially be % per annum and will increase
to % per annum after the first payment date upon which the aggregate principal
balance of the mortgage loans is less than 10% of the aggregate principal
balance of the mortgage loans as of , 200 . Generally, the interest period will
be the calendar month preceding a payment date. In the case of the payment date,
interest begins to accrue on , 200 .
Interest on the notes will be calculated on the basis of a year of 360 days and
twelve 30 day months.
Principal
On each payment date, the noteholders are scheduled to receive an amount of
principal generally equal to the sum of all scheduled payments of principal made
or advanced on the mortgage loans and all other amounts collected or received or
otherwise recovered in respect of principal on the mortgage loans.
Servicer Advances
The servicer will make advances to pay all reasonable out-of-pocket costs, such
as the cost of pursuing judicial proceedings relating to the mortgages and the
costs of managing and liquidating mortgaged properties. The servicer is also
required to make advances with respect to delinquent payments of principal and
interest on the mortgage loans. The servicer, however, is only required to make
such advances if it believes that it can recover the advance from later proceeds
or collections on the related mortgage loan. The servicer may recover servicing
advances out of other amounts the servicer may collect with respect to the
mortgage loans.
Compensating Interest Payments
The servicer will also make interest payments to compensate in part for any
shortfall in interest payments on the notes which result from a mortgagor
prepaying all or part of a mortgage loan. The amount of such payments will not
exceed the servicing fee payable for the related period. The insurance policy
does not cover shortfalls in interest arising from prepayments. The servicer is
not entitled to recover compensating interest payments from the trust.
Application of Excess Cash
Generally, because the payments of interest and principal on the mortgage loans
exceed the sum of the amounts payable to the note insurer, the payment of
indenture trustee and servicing fees and payments of monthly interest and
principal to the noteholders, in the absence of delinquencies and losses on the
mortgage loans there will be excess cash each month above that required to pay
principal and interest on the notes. Excess cash will be used to pay down the
note balance in order to reach the required level of overcollateralization.
After reaching the required level of overcollateralization, any excess cash
remaining after payments on the notes and payments to the note insurer in
respect of the notes will be released to the holder of the residual interest and
will not be available for any subsequent payments to the noteholders or the note
insurer.
- --------------------------------------------------------------------------------
S-8
- --------------------------------------------------------------------------------
TRUST CERTIFICATES
The trust will also issue a trust certificate or residual interest which
represents the ownership interest in the mortgage loans and is subordinate in
priority of payment to the notes. , a , will hold the trust certificate. The
trust certificate is not offered by this prospectus supplement and the
accompanying prospectus.
CREDIT ENHANCEMENT
Credit enhancement reduces the harm caused to noteholders by shortfalls in
collections received and losses incurred on the mortgage loans. The credit
enhancement available to the noteholders will consist of the insurance policy
issued by
, the note insurer, and the overcollateralization provisions of
the trust.
Insurance Policy
will issue its financial guaranty insurance policy to the
indenture trustee for the benefit of the noteholders. The effect of the
insurance policy is to guaranty the timely payment of interest on, and the
ultimate payment of the principal amount of, the notes. If the note insurer were
unable to pay under the financial guaranty insurance policy, the notes could be
subject to losses.
We refer you to "The Note Insurance" in this prospectus supplement for
additional information.
Overcollateralization
The cash flow provisions of the trust may result in a limited acceleration of
the notes relative to the amortization of the mortgage loans. This acceleration
feature creates overcollateralization which equals the excess of the total
principal balance of the trust's assets over the total principal balance of the
notes. The purpose of overcollateralization is to ensure that there are excess
funds available to pay interest and principal on the notes so that the
noteholders will have some protection against payment shortfalls and so that the
note balances will be reduced to zero no later than the date the notes are
scheduled to mature.
As of the closing date, the level of overcollateralization will be zero; on each
payment date, the indenture trustee will apply excess cash to pay down the note
balance until the required level of overcollateralization is reached.
The required level of overcollateralization may increase or decrease over time.
Any increase may result in an accelerated amortization of the notes until the
required level is reached. Any decrease will result in slower amortization of
the notes until the required level is reached.
MORTGAGE LOAN POOL
Statistical Information
The statistical information on the mortgage loans presented in this prospectus
supplement is based on the pool of mortgage loans as of , .
Mortgage Loan Data
As of , , there were mortgage loans secured by mortgages on residential
properties, exclusively, and having the following characteristics:
Number of Mortgage
Loans.......................
Principal Balance:
Aggregate Principal Balance.
$
Average Principal Balance... $
Range of Principal Balances. $ to
$
Remaining Term to Maturity:
Weighted Average Remaining
Term to Maturity......... months
Range of Remaining Term to
Maturity................. to months Original Combined
Loan-to-Value Ratio:
Weighted Average Combined
Loan-to-Value Ratio...... %
Range of Combined % to
Loan-to-Value Ratios..... %
Interest Rate (per annum):
Weighted Average Interest Rate %
Range of Interest Rates..... % to
%
Percentage of Fixed Rate Loans %
Percentage of Adjustable Rate
Loans.................... %
Percentage of Balloon
Mortgage Loans........... %
OPTIONAL REDEMPTION
The majority holders of the trust certificate and the servicer have the option
to redeem the notes, in full but not in part, on or after any payment date on
which the aggregate principal balance of the mortgage loans has declined to less
than 10% of the aggregate principal balance of the mortgage loans as of , .
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
In the opinion of Cadwalader, Wickersham & Taft LLP and Orrick, Herrington &
Sutcliffe LLP, the notes will be characterized as debt for federal income tax
purposes and the trust will not be characterized as an association (or a
publicly traded partnership) taxable as a corporation or as a taxable mortgage
pool. The issuer and the depositor agree and each noteholder, by the acceptance
of a note, will agree to treat the notes as indebtedness for federal income tax
purposes.
ERISA CONSIDERATIONS
Subject to the considerations discussed under "ERISA Considerations" herein, the
notes may be acquired and held by employee benefit plans and other retirement
plans and arrangements subject to the provisions of the Employee Retirement
Income Security Act of 1974, as amended, or Section 4975 of the Internal Revenue
Code of 1986, as amended.
LEGAL INVESTMENT CONSIDERATIONS
The notes will not constitute "mortgage related securities" for purposes of the
Secondary Mortgage Market Enhancement Act of 1984, as amended.
Rating of the Notes
Before the trust can issue the notes, the notes must receive a rating of " " from , and a rating of
" " from in order to be issued.
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. A security rating does not address the frequency of principal
prepayments or the corresponding effect on yield to investors.
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S-11
DOCSNY1:987889.2987889.3
5542-27 SK8
RISK FACTORS
The following information, which you should carefully consider,
identifies certain significant sources of risk associated with an investment in
the notes. You should also carefully consider the information set forth under
"Risk Factors" in the prospectus. Any statistical information presented below is
based upon the characteristics of the mortgage loans as of .
Risks of the Mortgage Loans
As a Result of the Underwriting Standards, the Mortgage Loans are
Likely to Experience Higher Rates of Delinquency, Foreclosure and Bankruptcy
than those Underwritten in a More Traditional Manner. The mortgage loans have
been originated using underwriting standards that are significantly less
stringent than the underwriting standards applied by other mortgage loan
purchase programs such as those run by Fannie Mae or by Freddie Mac. For
example, the mortgage loans may have been made to mortgagors having imperfect
credit histories, ranging from minor delinquencies to bankruptcies, or
mortgagors with higher ratios of monthly mortgage payments to income or higher
ratios of total monthly credit payments to income. As a result of the
underwriting standards, the mortgage loans are likely to experience rates of
delinquency, foreclosure and bankruptcy that are higher, and that may be
substantially higher, than those experienced by mortgage loans underwritten in a
more traditional manner.
Delinquent Mortgage Loans May Result in Higher Losses. Approximately %
of the mortgage loans by principal balance as of were more than 30 days, but
less than 60 days, past due. In addition, because approximately
% of the mortgage loans by principal balance as of have a first scheduled
monthly payment due date occurring after , it is not possible for such mortgage
loans to have had a scheduled monthly payment past due as of . Substantially all
of the mortgage loans were originated or acquired within the last three months
and are not very seasoned. Accordingly, there can be no assurance as to the
likelihood of default by the mortgagors or as to the likelihood of delinquency.
The mortgage loans with higher loan-to-value ratios or combined loan-to-value
ratios may also present a greater risk of loss. Approximately % of the mortgage
loans by principal balance as of
, have combined loan-to-value ratios at origination in excess of
80%. Approximately % of the mortgage loans by principal balance as of will not
be insured by a primary mortgage insurance policy.
No assurance can be given that the values of the mortgaged properties
will not decline from those on the dates the related mortgage loans were
originated and any such decline could render the information set forth herein
with respect to the combined loan-to-value ratios of such mortgage loans an
unreliable measure of security for the related debt. If the residential real
estate market should experience an overall decline in property values such that
the outstanding principal balances of the mortgage loans become equal to or
greater than the values of such mortgaged properties, the actual rate of
delinquencies, foreclosures and losses on the related mortgage loans could be
higher than those now generally experienced in the mortgage lending industry.
Even assuming that the mortgaged properties provide adequate security for the
mortgage loans, substantial delays could be encountered in connection with the
foreclosure and liquidation of defaulted mortgage loans and corresponding delays
in the receipt of related proceeds by noteholders could occur. In the event that
any mortgaged properties fail to provide adequate security for the related
mortgage loans, any resulting losses will be covered by funds made available
through operation of the overcollateralization feature described herein, or, if
necessary, by amounts paid under the insurance policy to the extent of interest
due to the noteholders on the related payment date and the amount of any
overcollateralization deficit with respect to such payment date.
Nature of Collateral May Lead to Delays or Shortfalls in Distributions
to Noteholders. Because the mortgage loans are secured in certain cases by
second liens that are subordinate to the rights of the mortgagee or beneficiary
under the related first mortgage or deed of trust, the proceeds from any
liquidation, insurance or condemnation proceedings will be available to satisfy
the outstanding balance of such a second mortgage loan only to the extent that
the claims of such senior mortgagee or beneficiary have been satisfied in full,
including any related foreclosure costs. In addition, a junior mortgagee may not
foreclose on the property securing a second mortgage unless it forecloses
subject to the senior mortgage, in which case it must either pay the entire
amount due on the senior mortgage to the senior mortgagee at or prior to the
foreclosure sale or undertake the obligation to make payments on the senior
mortgage in the event the mortgagor is in default thereunder. In servicing
second mortgages in its portfolio, it is generally the servicer's practice to
satisfy the senior mortgage at or prior to the foreclosure sale. The issuer will
have no source of funds to satisfy the senior mortgage or make payments due to
the senior mortgagee.
Even assuming that a mortgaged property provides adequate security for
the related mortgage loan, substantial delays could be encountered in connection
with the liquidation of a mortgage loan that is delinquent, and resulting
shortfalls in distributions to noteholders could occur. Liquidation expenses
(such as legal fees, real estate taxes, and maintenance and preservation
expenses) will reduce the proceeds payable to noteholders and thereby reduce the
security for the mortgage loans. The combined loan-to-value ratio for the
mortgage loans ranged from % to % as of
, with a weighted average of % (based on principal balances).
Approximately % of the mortgage loans by principal balance as of are
secured by second mortgages or deeds of trust. Mortgage loans secured by second
mortgages are entitled to proceeds that remain from the sale of the related
mortgaged property after any related senior mortgage loan and prior statutory
liens have been satisfied. In the event that such proceeds are insufficient to
satisfy such loans and prior liens in the aggregate, the issuer and,
accordingly, the noteholders, will bear (i) the risk of delay in distributions
while a deficiency judgment against the borrower is sought and (ii) the risk of
loss if the deficiency judgment cannot be obtained or is not realized upon.
Higher Default Rates May Occur for Mortgage Loans with Balloon
Payments. Approximately % of the mortgage loans by principal balance as of are
"balloon" loans that provide for the payment of the outstanding principal
balance of such mortgage loan in a single payment at maturity. Such 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 15 years after origination. Amortization
of a balloon loan based on a scheduled period that is longer than the term of
the loan results in a remaining principal balance at maturity that is
substantially larger than the regular scheduled payments. does not have any
information regarding the default history or prepayment history of payments on
balloon loans. Because borrowers of balloon loans are required to make
substantial single payments upon maturity, it is possible that the default risk
associated with the balloon loans is greater than that associated with
fully-amortizing mortgage loans. In addition, the ability of a borrower to repay
a balloon loan at maturity frequently will depend on such borrower's ability to
refinance the related mortgage loan. The ability of a borrower to refinance such
a mortgage loan will be affected by a variety of factors, including the level of
available mortgage rates at the time, the value of the related mortgaged
property, the borrower's equity in the related mortgaged property, the financial
condition of the borrower and general economic conditions at the time. The
inability of a borrower to refinance a balloon loan may result in delinquencies
or defaults.
Geographic Concentration of Mortgaged Properties May Result in Higher
Losses of Particular Regions Experiencing Downturns. Approximately %, and % of
the mortgage loans by principal balance as of , are secured by mortgaged
properties located in and , respectively. In general, declines in the
residential real estate markets in such states may adversely affect the values
of the mortgaged properties securing such mortgage loans such that the aggregate
principal balance of such mortgage loans will equal or exceed the value of such
mortgaged properties. In addition, adverse economic conditions in such states
(which may or may not affect real property values) may affect the timely payment
by borrowers of scheduled payments of principal and interest on such mortgage
loans and, accordingly, the actual rates of delinquencies, foreclosures and
losses on such mortgage loans could be higher than those currently experienced
in the mortgage lending industry in general.
Prepayment of the Mortgage Loans May Adversely Affect the Yield to Maturity of
the Notes
The mortgage loans may be prepaid by the related mortgagors in whole or
in part, at any time. However, approximately % of the mortgage loans by
principal balance as of require the payment of a fee in connection with certain
prepayments, which may discourage prepayments. The rate of prepayments of the
mortgage loans cannot be predicted and may be affected by a wide variety of
general economic, social, competitive and other factors, including state and
federal income tax policies, interest rates, the availability of alternative
financing and homeowner mobility. Therefore, no assurance can be given as to the
level of prepayments that the mortgage loans will experience.
The average life of the notes, and, if purchased at other than par, the
yields realized by noteholders will be sensitive to levels of payment, including
prepayments, on the mortgage loans. In general, the yield on notes purchased at
a premium from the outstanding principal amount thereof will be adversely
affected by a higher than anticipated level of prepayments and enhanced by a
lower than anticipated level. Conversely, the yield on notes purchased at a
discount from the outstanding principal amount thereof will be enhanced by a
higher than anticipated level of prepayments and adversely affected by a lower
than anticipated level.
Insurance Policy Does Not Cover Certain Risks
In general, the protection afforded by the insurance policy is
protection for credit risk and not for prepayment risk. A claim cannot be made
under the insurance policy in an attempt to guarantee or insure that any
particular rate of prepayment is experienced by the assets in the trust. In
addition, the insurance policy does not cover any shortfall in interest due to
the timing of receipt of principal prepayments or the application of the
Soldiers' and Sailors' Civil Relief Act of 1940, as amended. See "Certain Legal
Aspects of Mortgage Loans--Soldiers' and Sailors' Civil Relief Act of 1940" in
the accompanying prospectus.
Credit Enhancement May Be Inadequate for the Notes
The credit enhancement features are intended to enhance the likelihood
that holders of the notes will receive regular payments of interest and
principal. However, we cannot assure you that the applicable credit enhancement
will adequately cover any shortfalls in cash available to pay your notes as a
result of delinquencies or defaults on the mortgage loans. If substantial losses
were to occur as a result of defaults and delinquent payments on the mortgage
loans, and the note insurer is unable to pay under the financial guaranty
insurance policy, you may suffer losses.
Payments of Excess Cash May Affect the Yield to Maturity on the Notes
Excess cash will be paid to reduce the outstanding principal balance of
the notes on any payment date if the level of overcollateralization required at
the time in question exceeds the actual level of overcollateralization on such
payment date. The rate at which excess cash is paid to noteholders will affect
the yield to maturity on a note, if purchased at a premium or a discount. If the
actual rate of such excess cash payments is slower than the rate anticipated by
an investor who purchases a note at a discount, the actual yield to such
investor will be lower than the investor's anticipated yield. If the actual rate
of excess cash payments is faster than the rate anticipated by an investor who
purchases a note at a premium, the actual yield to such investor will be lower
than such investor's anticipated yield.
The amount of excess cash on any payment date depends on the actual
amount of interest collected on the mortgage loans during the related collection
period. Collections of interest on the mortgage loans will be influenced by
changes in the weighted average of the interest rates on the mortgage loans
resulting from prepayments and liquidations of such mortgage loans as well as
from adjustments of interest rates on the adjustable rate loans included in the
trust. The amount of excess cash payments paid to reduce the note balance on
each payment date will be based on the level of overcollateralization required
at the time in question. The required level of overcollateralization may
increase or decrease over time. Any increase may result in an accelerated
amortization of the notes until the required level is reached. Any decrease will
result in slower amortization of the notes until the required level is reached.
Notes are Non-Recourse Obligations
The notes will be non-recourse obligations solely of the issuer and
will not represent an obligation of or interest in Wachovia Asset Securitization
Issuance, Inc.LLC, , , or any of their respective affiliates, except as
described herein. The assets included in the trust and payments under the
insurance policy will be the sole source of payments on the notes, and there
will be no recourse to Wachovia Asset Securitization Issuance, Inc.LLC, , , or
any of their respective affiliates, or any other entity, in the event that such
assets or payments are insufficient or otherwise unavailable to make all
payments provided for under the notes.
The lack of a secondary market may limit your ability to sell
your notes.
The underwriters intend to make a secondary market in the notes they
purchase, but they have no obligation to do so. There is no assurance that such
a secondary market will develop or, if it develops, that it will continue.
Consequently, you may not be able to sell your notes readily or at prices that
will enable you to realize your desired yield. The market values of the notes
are likely to fluctuate; these fluctuations may be significant and could result
in significant losses to you.
The secondary markets for mortgage backed securities have experienced
periods of illiquidity and can be expected to do so in the future. Illiquidity
can have a severely adverse effect on the prices of securities that are
especially sensitive to prepayment, credit, or interest rate risk, or that have
been structured to meet the investment requirements of limited categories of
investors.
Violations of federal and state laws may cause losses on your
notes.
Federal and state laws regulate the underwriting, origination,
servicing and collection of the loans. These laws have changed over time and
have become more restrictive or stringent with respect to specific activities of
the servicer and the originators. Actual or alleged violations of these federal
and state laws may, among other things: o limit the ability of the servicer to
collect principal or interest on the mortgage loans, o provide the mortgagors
with a right to rescind the loans, o entitle the mortgagors to refunds of
amounts previously paid or to set-off those amounts against their mortgage
loan obligations,
o result in a litigation proceeding being brought against the trust fund, and
o subject the trust fund to liability for expenses, penalties and damages
resulting from the violations.
As a result, these violations or alleged violations could result in
shortfalls in the distributions due on your notes. See "Risk Factors--Violations
of Federal Laws May Adversely Affect Ability to Collect on Loans" and "Certain
Legal Aspects of Mortgage Loans--Anti-Deficiency Legislation, the Bankruptcy
Code and Other Limitations on Lenders" in the prospectus. The seller will make
representations and warranties with respect to each mortgage loan relating to
compliance with federal and state laws at the time of origination. The seller
will be required to repurchase or replace any mortgage loan that is not
originated or serviced in compliance with all federal, state or local laws.
However, repurchase or replacement of the affected mortgage loans will not
necessarily fully compensate the trust or noteholders for any losses arising
from the related breach. For example, if a mortgagor brings legal action against
the trust fund, the trustee will be entitled to indemnification from trust
property for its defense costs. The seller will not indemnify the trust fund or
have any other responsibility to the trust fund or noteholders (other than to
repurchase or replace such loan) for any losses and liabilities the trust fund
may suffer with respect to mortgage loans as to which the representation as to
compliance with laws is breached. As a result, shortfalls in the distributions
due on your notes could occur.
Book-Entry Registration
Issuance of the notes in book-entry form may reduce the liquidity of
the notes in the secondary trading market because investors may be unwilling to
purchase notes for which they cannot obtain physical notes.
Because transactions in the notes can be effected only through the
Depository Trust Company, Cedelbank, the Euroclear system, participating
organizations, indirect participants and certain banks, the ability of a
beneficial owner to pledge a note to persons or entities that do not participate
in the Depository Trust Company, Cedelbank or Euroclear system, or otherwise to
take actions in respect of such note, may be limited due to lack of a physical
note representing such note.
Beneficial owners may experience some delay in their receipt of
payments of interest of and principal on the notes because such payments will be
forwarded by the indenture trustee to the Depository Trust Company and the
Depository Trust Company will credit such payments to the accounts of its
participants, which will thereafter credit them to the accounts of beneficial
owners either directly or indirectly through indirect participants.
Recent Developments May Increase Risk of Loss on the Mortgage Loans
On September 11, 2001, the United States was subjected to multiple
terrorist attacks, resulting in the loss of many lives and massive property
damage and destruction in New York City and the Washington, D.C. metropolitan
area. Although the damaged and destroyed properties consisted primarily of
commercial and government buildings, these tragic events may nevertheless have
an adverse effect on the value of residential real estate in the United States,
particularly in the New York and Washington, D.C. metropolitan areas. In
addition, it is possible (although the depositor cannot predict the likelihood)
that these events, or any consequential events involving the United States, may
have a temporary or sustained adverse effect on the U.S. economy generally, or
economic conditions in the New York or Washington, D.C. metropolitan areas or
other areas of the United States.
The depositor has not made a determination as to whether any of the
mortgagors of the mortgage loans may have been adversely affected by the
terrorist attacks. However, it is possible that there may be an increase in the
number of delinquencies and foreclosures of the mortgage loans as a result of
these events.
As a result of the terrorist attacks, on September 14, 2001 President
Bush authorized the placement of 50,000 military reservists on active duty
status. To the extent that any such person is a mortgagor of a mortgage loan,
the interest rate limitations and other provisions of the Soldiers' and Sailors'
Civil Relief Act of 1940, as amended, and similar state laws, would apply to
such mortgage loan during the period of active duty. It is possible that the
number of reservists placed on active duty status in the near future may
increase, and may increase substantially. In addition, other borrowers who enter
military service after the origination of their mortgage loans (including
borrowers who are members of the National Guard at the time of the origination
of their mortgage loans and are later called to active duty) would be covered by
the terms of the Soldiers and Sailors' Relief Act of 1940, as amended. See
"Certain Legal Aspects of the Mortgage Loans--Soldiers' and Sailors' Civil
Relief Act of 1940 and Similar Laws" in the prospectus.
[Additional Risk Factors to be provided as applicable]
FORWARD LOOKING STATEMENTS
This prospectus supplement and the accompanying prospectus contain
forward-looking statements relating to future economic performance or
projections and other financial items. Such forward-looking statements, together
with related qualifying language and assumptions, are found in the material,
including each of the tables, set forth under "Risk Factors" and "Prepayment and
Yield Considerations." Forward-looking statements are also found elsewhere in
this prospectus supplement and the accompanying prospectus, and may be
identified by, among other things, the use of forward-looking words such as
"expects," "intends," "anticipates," "estimates," "believes," "may" or other
comparable words. Such statements involve known and unknown risks, uncertainties
and other important factors that could cause the actual results or performance
to differ materially from such forward-looking statements. Those 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 government 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 update or revise forward-looking statements to reflect any
change in the Depositor's expectations or any change in events, conditions or
circumstances on which any forward-looking statement is based.
DESCRIPTION OF THE NOTES
Trust 200 - (the "Trust" or the "Issuer") will be formed pursuant to a deposit
trust
agreement, dated as of (the "Trust Agreement"), among Wachovia Asset
Securitization Issuance, Inc.LLC (the "Depositor"), (the "Owner Trustee"), , as
trust paying agent, and , as servicer (in its capacity as servicer, the
"Servicer" and otherwise, the "Seller"). The Issuer will issue its Asset-Backed
Notes, Series 200 - (the "Notes") pursuant to an indenture, dated as of (the
"Indenture"), between the Issuer and , as the indenture trustee (the "Indenture
Trustee"). The summaries of certain provisions of the Indenture set forth below
and under the caption "Description of the Agreements - Material Terms of the
Indenture" in the prospectus, while complete in material respects, do not
purport to be exhaustive. For more details regarding the terms of the Indenture,
prospective investors in the Notes are advised to review the Indenture, a copy
of which the Seller will provide (without exhibits) without charge upon written
request addressed to the Seller at .
General
The Notes will be secured by the Trust Fund created by the Indenture.
The Notes represent non-recourse obligations of the Issuer, and proceeds of the
assets in the Trust Fund and payments under the financial guaranty insurance
policy (the "Insurance Policy") issued by (the "Note Insurer"), if any, will be
the only sources of payments on the Notes. The Notes will not represent an
interest in or obligation of Wachovia Asset Securitization Issuance, Inc.LLC, ,
, the Indenture Trustee, the Owner Trustee, the Depositor, the Underwriters, the
Note Insurer, any of their respective affiliates or any other entity, and will
not represent an interest in or recourse obligation of the Issuer.
The assets of the trust (the "Trust Fund") will consist primarily of:
o a pool (the "Mortgage Pool") of primarily fixed rate and adjustable
rate mortgage loans (the "Mortgage Loans") secured by first and second
lien mortgages or deeds of trust, on the related Mortgaged Properties,
and including the related promissory notes (the "Mortgage Notes");
o all payments in respect of principal and interest on the Mortgage
Loans, including prepayment premiums (other than any principal or
interest payments due thereon on or prior to (the "Cut-off Date");
o security interests in the Mortgaged Properties; and
o the Issuer's rights under the Sale Agreement and the servicing
agreement among the Issuer, the Servicer and the Indenture Trustee (the
"Servicing Agreement").
Payments on the Notes will be made on the th day of each month, or if
such day is not a business day, on the following business day (each, a "Payment
Date"), commencing . All payments on the Notes will be made by or on behalf of
the Indenture Trustee to each holder of a Note (a "Noteholder" ) of record on
the business day immediately preceding the related Payment Date or, with respect
to Notes in definitive form, the last day of the month immediately preceding the
month in which such Payment Date occurs (the "Record Date"). Payments on Notes
issued in book-entry form will be made by or on behalf of the Indenture Trustee
to DTC. Payments on notes issued in definitive form ("Definitive Notes")
generally will be made either (i) by check mailed to the address of each
Noteholder as it appears in the register maintained by the Indenture Trustee or
(ii) by wire transfer of immediately available funds to the account of a
Noteholder, if such Noteholder (a) is the registered holder of Definitive Notes
having an initial principal amount of at least $1,000,000 and (b) has provided
the Indenture Trustee with wiring instructions in writing five days prior to the
related Record Date or has provided the Indenture Trustee with such instructions
for any previous Payment Date. A fee may be charged by the Indenture Trustee to
a Noteholder of Definitive Notes for any payment made by wire transfer.
Notwithstanding the above, the final payment in redemption of any Definitive
Note will be made only upon presentation and surrender of such Definitive Note
at the office or agency designated by the Indenture Trustee for that purpose.
The Notes will be issued in denominations of not less than $ principal
amount and multiples of $ in excess thereof, with the exception of one Note
which may be issued in a lesser amount.
The stated maturity date (the "Stated Maturity") for the notes, on
which the final payment of principal must ultimately be made, is , which is the
payment date that occurs in the thirteenth month following the month in which
the last maturity date of any mortgage loan conveyed to the trust is scheduled
to occur. The Depositor anticipates, however, that actual final payment of
principal on the notes will occur significantly earlier.
The Trust will also issue a trust certificate (the "Residual Interest")
which represents the ownership interest in the Mortgage Loans and is subordinate
in priority of payment to the Notes. , a corporation will hold the trust
certificate.
Book-Entry Registration and Definitive Notes
The Notes initially will be book-entry notes (the "Book-Entry Notes")
clearing through The Depository Trust Company ("DTC") (in the United States) or
Clearstream Banking ("Clearstream") or the Euroclear System ("Euroclear") (in
Europe). Persons acquiring beneficial ownership interests in the Notes ("Note
Owners") will hold such Notes through DTC in the United States, or Clearstream
or Euroclear in Europe if they are participants of such systems (the "DTC
Participants"), or indirectly through organizations which are participants in
such systems (the "Indirect Participants"). The Book-Entry Notes initially will
be issued in one or more notes which equal the aggregate Note Balance of such
Notes and will initially be registered in the name of Cede & Co., the nominee of
DTC. Clearstream and Euroclear will hold omnibus positions on behalf of their
participants through customers' securities accounts in Clearstream's and
Euroclear's names on the books of their respective depositaries which in turn
will hold such positions in customers' securities accounts in the depositaries'
names on the books of DTC. Citibank will act as depositary for Clearstream and
The Chase Manhattan Bank will act as depositary for Euroclear (in such
capacities, individually the "Relevant Depositary" and collectively the
"European Depositaries"). Investors may hold such beneficial interests in the
Book-Entry Notes in minimum denominations of $25,000. Except as described below,
no person acquiring a Book-Entry Note (each, a "beneficial owner") will be
entitled to receive a physical note representing such Note (a "Definitive
Note"). Unless and until Definitive Notes are issued, it is anticipated that the
only "Noteholder" of the Notes will be Cede & Co., as nominee of DTC. Note
Owners will not be Noteholders as that term is used in the Indenture. Note
Owners are only permitted to exercise their rights indirectly through DTC
Participants and DTC.
The beneficial owner's ownership of a Book-Entry Note will be recorded
on the records of the brokerage firm, bank, thrift institution or other
financial intermediary (each, a "Financial Intermediary") that maintains the
beneficial owner's account for such purpose. In turn, the Financial
Intermediary's ownership of such Book-Entry Note will be recorded on the records
of DTC (or of a participating firm that acts as agent for the Financial
Intermediary, whose interest will in turn be recorded on the records of DTC, if
the beneficial owner's Financial Intermediary is not a DTC Participant and on
the records of Clearstream or Euroclear, as appropriate).
Note Owners will receive all payments of principal of and interest on
the Book-Entry Notes from the Indenture Trustee through DTC and DTC
Participants. While the Book-Entry Notes are outstanding (except under the
circumstances described below), under the rules, regulations and procedures
creating and affecting DTC and its operations (the "Rules"), DTC is required to
make book-entry transfers among DTC Participants on whose behalf it acts with
respect to the Book-Entry Notes and is required to receive and transmit payments
of principal of, and interest on, the Book-Entry Notes. DTC Participants and
Indirect Participants with whom Note Owners have accounts with respect to
Book-Entry Notes are similarly required to make book-entry transfers and receive
and transmit such payments on behalf of their respective Note Owners.
Accordingly, although Note Owners will not possess certificates representing
their respective interests in the Book-Entry Notes, the Rules provide a
mechanism by which Note Owners will receive payments and will be able to
transfer their interest.
Noteholders will not receive or be entitled to receive certificates
representing their respective interests in the Book-Entry Notes, except under
the limited circumstances described below. Unless and until Definitive Notes are
issued, Noteholders who are not DTC Participants may transfer ownership of
Book-Entry Notes only through DTC Participants and Indirect Participants by
instructing such DTC Participants and Indirect Participants to transfer
Book-Entry Notes, by book-entry transfer, through DTC for the account of the
purchasers of such Book-Entry Notes, which account is maintained with their
respective DTC Participants. Under the Rules and in accordance with DTC's normal
procedures, transfers of ownership of Book-Entry Notes will be executed through
DTC and the accounts of the respective DTC Participants at DTC will be debited
and credited. Similarly, the DTC Participants and Indirect Participants will
make debits or credits, as the case may be, on their records on behalf of the
selling and purchasing Noteholders.
Because of time zone differences, credits of securities received in
Clearstream or Euroclear as a result of a transaction with a DTC Participant
will be made during subsequent securities settlement processing and dated the
Business Day following the DTC settlement date. Such credits or any transactions
in such securities settled during such processing will be reported to the
relevant Euroclear or Clearstream Participants on such Business Day. Cash
received in Clearstream or Euroclear as a result of sales of securities by or
through a Clearstream Participant or Euroclear Participant to a DTC Participant
will be received with value on the DTC settlement date but will be available in
the relevant Clearstream or Euroclear cash account only as of the Business Day
following settlement in DTC. For information with respect to tax documentation
procedures relating to the Notes, see "Federal Income Tax
Consequences--Partnership Trust Funds--Taxation of Certain Foreign
Investors--Backup Withholding" and "-Reporting Requirements" in the prospectus
and "Global Clearance, Settlement and Tax Documentation Procedures--Certain U.S.
Federal Income Tax Documentation Requirements" in Annex I to this prospectus
supplement.
Transfers between DTC Participants will occur in accordance with DTC
rules. Transfers between Clearstream Participants and Euroclear Participants
will occur in accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Clearstream
Participants or Euroclear Participants, on the other, will be effected in
accordance with DTC rules on behalf of the relevant European international
clearing system by the Relevant Depositary; however, such cross market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in accordance
with its rules and procedures and within its established deadlines (European
time). The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to the
Relevant Depositary to take action to effect final settlement on its behalf by
delivering or receiving securities in DTC, and making or receiving payment in
accordance with normal procedures for same day funds settlement applicable to
DTC. Clearstream Participants and Euroclear Participants may not deliver
instructions directly to the European Depositaries.
DTC, which is a New York-chartered limited purpose trust company,
performs services for its DTC Participants, some of which (and/or their
representatives) own DTC. In accordance with its normal procedures, DTC is
expected to record the positions held by each DTC Participant in the Book-Entry
Notes, whether held for its own account or as a nominee for another person. In
general, beneficial ownership of Book-Entry Notes will be subject to the Rules,
as in effect from time to time.
Clearstream, 67 Bd Grande-Duchesse Charlotte, L-1331 Luxembourg, was
incorporated in 1970 as a limited company under Luxembourg law. Clearstream is
owned by banks, securities dealers and financial institutions, and currently has
about 100 shareholders, including U.S. financial institutions or their
subsidiaries. No single entity may own more than five percent of Clearstream's
stock.
Clearstream is registered as a bank in Luxembourg, and as such is
subject to regulation by the Institute Monetaire Luxembourgeois ("IML"), the
Luxembourg Monetary Authority, which supervises Luxembourg banks.
Clearstream holds securities for its customers ("Clearstream
Participants") and facilitates the clearance and settlement of securities
transactions by electronic book-entry transfers between their accounts.
Clearstream provides various services, including safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. Clearstream also deals with domestic securities markets
in several countries through established depository and custodial relationships.
Clearstream has established an electronic bridge with Euroclear Bank S.A./N.V.
as the Euroclear Operator in Brussels to facilitate settlement of trades between
systems. Clearstream currently accepts over 70,000 securities issues on its
books.
Clearstream's customers are world-wide financial institutions including
underwriters, securities brokers and dealers, banks, trust companies and
clearing corporations. Clearstream's United States customers are limited to
securities brokers and dealers and banks. Currently, Clearstream has
approximately 3,000 customers located in over 60 countries, including all major
European countries, Canada, and the United States. Indirect access to
Clearstream is available to other institutions which clear through or maintain a
custodial relationship with an account holder of Clearstream.
Euroclear was created in 1968 to hold securities for its participants
("Euroclear Participants") and to clear and settle transactions between
Euroclear Participants through simultaneous electronic book-entry delivery
against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Transactions may be settled in any of 29 currencies, including United
States dollars. Euroclear includes various other services, including securities
lending and borrowing and interfaces with domestic markets in several countries
generally similar to the arrangements for cross-market transfers with DTC
described above. Euroclear is operated by Euroclear Bank S.A./N.V. (the
"Euroclear Operator"), under contract with Euroclear Clearance Systems S.C., a
Belgian cooperative corporation (the "Cooperative"). All operations are
conducted by the Euroclear Operator, and all Euroclear securities clearance
accounts and Euroclear cash accounts are accounts with the Euroclear Operator,
not the Cooperative. The Cooperative establishes policy for Euroclear on behalf
of Euroclear Participants. Euroclear Participants include banks (including
central banks), securities brokers and dealers and other professional financial
intermediaries. Indirect access to Euroclear is also available to other firms
that clear through or maintain a custodial relationship with a Euroclear
Participant, either directly or indirectly.
Securities clearance accounts and cash accounts with the Euroclear
Operator are governed by the Terms and Conditions Governing Use of Euroclear and
the related Operating Procedures of the Euroclear System and applicable Belgian
law (collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities and
cash from Euroclear, and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of specific notes to specific securities clearance accounts. The
Euroclear Operator acts under the Terms and Conditions only on behalf of
Euroclear Participants, and has no record of or relationship with persons
holding through Euroclear Participants.
Payments on the Book-Entry Notes will be made on each Payment Date by
the Indenture Trustee to Cede & Co., as nominee of DTC. DTC will be responsible
for crediting the amount of such payments to the accounts of the applicable DTC
Participants in accordance with DTC's normal procedures. Each DTC Participant
will be responsible for disbursing such payments to the beneficial owners of the
Book-Entry Notes that it represents and to each Financial Intermediary for which
it acts as agent. Each such Financial Intermediary will be responsible for
disbursing funds to the beneficial owners of the Book-Entry Notes that it
represents.
Under a book-entry format, beneficial owners of the Book-Entry Notes
may experience some delay in their receipt of payments since such payments will
be forwarded by the Indenture Trustee to Cede & Co. Payments with respect to
Notes held through Clearstream or Euroclear will be credited to the cash
accounts of Clearstream Participants or Euroclear Participants in accordance
with the relevant system's rules and procedures, to the extent received by the
Relevant Depositary. Such payments will be subject to tax reporting in
accordance with relevant United States tax laws and regulations. See "Federal
Income Tax Consequences--REMICS--Taxation of Certain Foreign Investors" in the
prospectus. Because DTC can only act on behalf of DTC Participants, the ability
of a beneficial owner to pledge Book-Entry Notes to persons or entities that do
not participate in the Depository system, or otherwise take actions in respect
of such Book-Entry Notes, may be limited due to the lack of physical
certificates for such Book-Entry Notes. In addition, issuance of the Book-Entry
Notes in book-entry form may reduce the liquidity of such Notes in the secondary
market since certain potential investors may be unwilling to purchase Notes for
which they cannot obtain physical certificates.
Monthly and annual reports on the Trust Fund will be provided to Cede &
Co., as nominee of DTC, and may be made available by Cede & Co. to beneficial
owners upon request, in accordance with the rules, regulations and procedures
creating and affecting the DTC Participants to whose DTC accounts the Book-Entry
Notes of such beneficial owners are credited.
DTC has advised the Indenture Trustee that, unless and until Definitive
Notes are issued, DTC will take any action the holders of the Book-Entry Notes
are permitted to take under the Indenture only at the direction of one or more
Financial Intermediaries to whose DTC accounts the Book-Entry Notes are
credited, to the extent that such actions are taken on behalf of Financial
Intermediaries whose holdings include such Book-Entry Notes. Clearstream or the
Euroclear Operator, as the case may be, will take any other action permitted to
be taken by a Noteholder under the Indenture on behalf of a Clearstream
Participant or Euroclear Participant only in accordance with its relevant rules
and procedures and subject to the ability of the Relevant Depositary to effect
such actions on its behalf through DTC. DTC may take actions, at the direction
of the related DTC Participants, with respect to some Book-Entry Notes which
conflict with actions taken with respect to other Book-Entry Notes.
Definitive Notes will be issued to beneficial owners of the Book-Entry
Notes, or their nominees, rather than to DTC, only if: o DTC or the Issuer
advises the Indenture Trustee in writing that DTC is no longer willing,
qualified or able to
discharge properly its responsibilities as nominee and depository with
respect to the Book-Entry Notes and the Issuer or the Indenture Trustee
is unable to locate a qualified successor,
o the Issuer, at its sole option, with the consent of the Indenture
Trustee, elects to terminate a book-entry system
through DTC or
o after the occurrence of an Event of Default, beneficial owners having
Percentage Interests aggregating not less than 51% of the Note Balance
of the Book-Entry Notes advise the Indenture Trustee and DTC through
the Financial Intermediaries and the DTC Participants in writing that
the continuation of a book-entry system through DTC (or a successor
thereto) is no longer in the best interests of beneficial owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Indenture Trustee will be required to notify all
beneficial owners of the occurrence of such event and the availability through
DTC of Definitive Notes. Upon surrender by DTC of the global certificates
representing the Book-Entry Notes and instructions for re-registration, the
Indenture Trustee will issue Definitive Notes, and thereafter the Trustee will
recognize the holders of such Definitive Notes as Noteholders under the
Indenture.
Although DTC, Clearstream and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of Book-Entry Notes among
participants of DTC, Clearstream and Euroclear, they are under no obligation to
perform or continue to perform such procedures and such procedures may be
discontinued at any time.
Neither the Depositor, the Servicer nor the Indenture Trustee will have
any responsibility for any aspect of the records relating to or payments made on
account of beneficial ownership interests of the Book-Entry Notes held by Cede &
Co., as nominee for DTC, or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interests.
Assignment of Mortgage Loans
The Mortgage Loans were originated by the Seller or acquired by the
Seller, through its network of brokers and correspondents and retail origination
offices. On or prior to the date the Notes are issued, the Seller will convey
each Mortgage Loan to the Depositor pursuant to a mortgage loan sale agreement
between the Seller and the Depositor (the "Sale Agreement") and the Depositor in
turn will convey each such Mortgage Loan to the Issuer.
At the time of issuance of the Notes, the Issuer will pledge all of its
right, title and interest in and to the Mortgage Loans, including all principal
and interest due on each such Mortgage Loan after the Cut-off Date, without
recourse, to the Indenture Trustee pursuant to the Indenture as collateral for
the Notes; provided, however, that the Seller will reserve and retain all its
right, title and interest in and to principal and interest due on such Mortgage
Loan on or prior to the Cut-off Date (whether or not received on or prior to
such Cut-off Date), and to prepayments received on or prior to the Cut-off Date.
The Indenture Trustee, concurrently with such assignment, will authenticate and
deliver the Notes at the direction of the Issuer in exchange for, among other
things, the Mortgage Loans.
The Indenture will require the Issuer to deliver the Mortgage Loans to
the Indenture Trustee or to a permitted custodian designated by the Indenture
Trustee, the related Mortgage Notes endorsed without recourse to the Indenture
Trustee, the related mortgages or deeds of trust with evidence of recording
thereon, the title policies with respect to the related Mortgaged Properties,
all intervening mortgage assignments, if applicable, and certain other documents
relating to the Mortgage Loans (the "Mortgage Files"). Assignments of the
mortgages from the Seller to the Indenture Trustee will not be recorded in any
state unless required by either Rating Agency to obtain the initial ratings on
the Notes.
The Indenture Trustee or a custodian on behalf of the Indenture Trustee
will review the Mortgage Files delivered to it and if any document required to
be included in any Mortgage File is found to be missing or to be defective in
any material respect and such defect is not cured within 60 days following
notification thereof to the Servicer, the Issuer, the Depositor, the Note
Insurer and the Seller by the Indenture Trustee, the Indenture Trustee will
require either that the related Mortgage Loan be removed from the Mortgage Pool
or that a Mortgage Loan conforming to the requirements of the Indenture (a
"Qualified Replacement Mortgage") be substituted for the related Mortgage Loan
in the manner described below.
In connection with the transfer of the Mortgage Loans to the Depositor,
the Seller will make certain representations and warranties as to the accuracy
in all material respects of the information set forth on a schedule identifying
and describing each Mortgage Loan. In addition, the Seller will make certain
other representations and warranties regarding the Mortgage Loans, including,
for instance, that each Mortgage Loan, at its origination, complied in all
material respects with applicable state and federal laws, that each first
mortgage is a valid first priority lien and that each second mortgage is a valid
lien, that, as of the Cut-off Date, no Mortgage Loan will be more than two
payments past due, that each Mortgaged Property consists of a one- to
four-family residential property, mixed-use property or unit in a condominium or
planned unit development, that the Seller had good title to each Mortgage Loan
prior to such transfer and that the originator was authorized to originate each
Mortgage Loan. The rights of the Depositor to enforce remedies for breaches of
such representations and warranties in the Sale Agreement against the Seller
will be assigned to the Indenture Trustee pursuant to the Indenture.
If with respect to any Mortgage Loan (1) a defect in any document
constituting a part of the related Mortgage File remains uncured within the
period specified above and materially and adversely affects the value of any
such Mortgage Loan or materially and adversely affects the interest of the
Indenture Trustee, the Noteholders or the Note Insurer therein or (2) a breach
of any representation or warranty made by the Seller relating to such Mortgage
Loan occurs and such breach materially and adversely affects the value of any
such Mortgage Loan or materially and adversely affects the interests of the
Indenture Trustee, the Noteholders or the Note Insurer therein, the Indenture
Trustee will enforce the remedies for such defects or breaches against the
Seller by requiring the Seller to remove the related Mortgage Loan (any such
Mortgage Loan, a "Defective Mortgage Loan") from the Trust Fund by remitting to
the Indenture Trustee an amount equal to the Principal Balance of such Defective
Mortgage Loan together with interest accruing at the Mortgage Rate (net, if the
Seller is then the Servicer, of the applicable Servicing Fee Rate) on such
Defective Mortgage Loan from the date interest was last paid by the related
mortgagor to the end of the Collection Period immediately preceding the related
Deposit Date, less any payments received during the related Collection Period in
respect of such Defective Mortgage Loan plus any unreimbursed Monthly Advances
in respect of principal and Servicing Advances (the "Release Price"). The Seller
will also have the option, but not the obligation, to substitute for such
Defective Mortgage Loan a Qualified Replacement Mortgage. Upon delivery of a
Qualified Replacement Mortgage and deposit of certain amounts in the Note
Account as set forth in the Indenture, or deposit of the Release Price in the
Note Account (as hereinafter defined) and receipt by the Indenture Trustee and
the Note Insurer of written notification of any such substitution or removal, as
the case may be, the Indenture Trustee shall execute and deliver an instrument
of transfer or assignment necessary to vest legal and beneficial ownership of
such Defective Mortgage Loan (including any property acquired in respect thereof
or proceeds of any insurance policy with respect thereto) to the Seller and
release such Defective Mortgage Loan from the Trust Fund.
The "Collection Period" with respect to a Payment Date will be the
period beginning on the first day of the calendar month immediately preceding
the month in which such Payment Date occurs (or, in the case of the first
Payment Date, the period beginning on the Cut-Off Date) and ending on the last
day of such calendar month. The "Deposit Date" will be the th day of the month,
or if such day is not a business day, the next succeeding business day. The "Due
Period" with respect to any Payment Date will be the period commencing on the
second day of the calendar month immediately preceding the calendar month in
which such Payment Date occurs (or, with respect to the first Payment Date,
commencing on the day following the Cut-off Date for each Mortgage Loan) and
ending on the first day of the calendar month in which such Payment Date occurs.
The obligation of the Seller to cure, remove or substitute any Mortgage
Loan as described above will constitute the sole remedy available to
Noteholders, the Depositor, the Issuer, the Note Insurer (with certain
exceptions) or the Indenture Trustee for a Defective Mortgage Loan.
Payments on the Notes
Payments on the Notes will be made by the Indenture Trustee (in such
capacity, the "Paying Agent") on each Payment Date, commencing with the Payment
Date in , to Noteholders as of the Record Date in an amount equal to the product
of such Noteholders' Percentage Interest and the amount paid in respect of the
Notes. Payments on the Notes will be made solely from Available Funds. The
"Percentage Interest" represented by any Note will be equal to the percentage
obtained by dividing the aggregate principal balance of such Note by the Note
Balance.
On each Payment Date, the Paying Agent will be required to pay the
following amounts with respect to the Notes, in the following order of priority,
out of Available Funds:
first, to the PMI Insurer, the amount owing to the PMI Insurer
for the premium payable in respect of the PMI Mortgage Loans;
second, to the Note Insurer, the amount owing to the Note
Insurer for the premium payable in respect of the Notes;
third, to the Noteholders, the Note Interest with respect to such
Payment Date;
fourth, to the Noteholders, the amount of Monthly Principal
for the Notes with respect to such Payment Date, in reduction of the
Note Balance until the Note Balance is reduced to zero;
fifth, to the Note Insurer, the amount owing to the Note
Insurer under the Insurance Agreement for reimbursement for prior draws
made on the Insurance Policy in respect of the Notes and any other
amounts owing to the Note Insurer under the Insurance Agreement
(including any unpaid premiums in respect of the Notes);
sixth, to the Noteholders, the Overcollateralization
Deficiency Amount, if any, on such Payment Date (after giving effect to
application of Monthly Principal for such Payment Date), in reduction
of the Note Balance until the Note Balance is reduced to zero; and
seventh, to the Indenture Trustee, certain costs and expenses,
including costs and expenses incurred by the Indenture Trustee in
connection with the appointment of a successor servicer, to the extent
such costs and expenses have not previously been reimbursed.
Any Available Funds remaining after application in the manner specified
above will be released to the holder(s) of the Residual Interest on such Payment
Date, free from the lien of the Indenture, and such amounts will not be
available to make payments on the Notes or payments to the Note Insurer on any
subsequent Payment Date.
In the event that, with respect to a particular Payment Date, Available
Funds on such date are not sufficient to pay any portion of Note Interest for
the Notes, the Indenture Trustee will file a claim on the Insurance Policy in an
amount equal to such deficiency and apply the Insured Payment in respect of such
claim to the payment of the deficiency in Note Interest. In addition, the
Indenture Trustee will file a claim on the Insurance Policy in an amount equal
to any Overcollateralization Deficit on a Payment Date (after taking into
account payments in respect of Monthly Principal and Excess Cash on such Payment
Date) and apply the portion of the Insured Payment related to such
Overcollateralization Deficit to reduce the Note Balance on such Payment Date by
the amount of such Overcollateralization Deficit. Any Insured Payment paid to
make up any Overcollateralization Deficit will be paid to the Noteholders, in
reduction of the Note Balance, until the Note Balance is reduced to zero.
The Insurance Policy will not cover any interest shortfall resulting
from the timing of principal prepayments (a "Prepayment Interest Shortfall") or
the application of the Relief Act (a "Relief Act Shortfall").
In no event will the aggregate payments of principal to Noteholders
exceed $ (the "Original Note
Balance").
The Note Insurer will be entitled to receive a monthly premium (the
"Note Insurer Premium") on each Payment Date payable from Available Funds.
"Insurance Agreement" means the insurance agreement dated as of
, among the Note Insurer, the
Seller, the Depositor and the Issuer.
"Note Interest" for any Payment Date will be an amount equal to
interest accrued during the related Interest Period at the Note Interest Rate on
the Note Balance as of the preceding Payment Date, after giving effect to the
payment, if any, in reduction of principal made on the Notes on such preceding
Payment Date.
"Interest Period" means, with respect to any Payment Date, the
immediately preceding calendar month.
All calculations of interest on the Notes will be computed on the basis
of a year of 360 days and of twelve 30 day months.
The "Note Interest Rate" for each Interest Period on or prior to the
Initial Redemption Date will be a per annum rate equal to %, and for each
Interest Period thereafter, a per annum rate equal to %.
The "Note Balance" will equal, as of any Payment Date, the Original
Note Balance less all amounts paid to the Noteholders on previous Payment Dates
in reduction of the Note Balance (exclusive, for the sole purpose of effecting
the Note Insurer's subrogation rights, of payments made by the Note Insurer in
respect of any Overcollateralization Deficit under the Insurance Policy, except
to the extent reimbursed to the Note Insurer pursuant to the Indenture).
"Monthly Principal" for any Payment Date will be an amount equal to (A)
the aggregate of:
o all scheduled payments of principal received or advanced with respect
to the Mortgage Loans due during the related Due Period and all other
amounts collected, received or otherwise recovered in respect of
principal on such Mortgage Loans (including partial and full Principal
Prepayments, but not including Payments Ahead that are not allocable to
principal for the related Due Period) during or in respect of the
related Collection Period,
o the aggregate of the amounts allocable to principal deposited in the
Note Account on the related Deposit Date by the Issuer, the Seller or
the Note Insurer in connection with a repurchase, release, removal or
substitution of any such Mortgage Loans pursuant to the Indenture, and
o in connection with the redemption of the Notes, that portion of
the redemption price in respect of principal,
reduced by
(B) the amount of any Overcollateralization Surplus with respect to such Payment
Date.
The "Principal Balance" of a Mortgage Loan with respect to any
Determination Date is the actual outstanding principal balance thereof as of the
close of business on the Determination Date in the preceding month (or, in the
case of the first Payment Date, as of the Cut-off Date), less:
o all scheduled payments of principal received or advanced with respect
to the Mortgage Loans and due during the related Due Period and all
other amounts collected, received or otherwise recovered in respect of
principal on the Mortgage Loans (including Principal Prepayments, but
not including Payments Ahead that are not allocable to principal for
the related Due Period) during or in respect of the related Collection
Period, Net Liquidation Proceeds and Insurance Proceeds allocable to
principal recovered or collected in respect of such Mortgage Loan
during the related Collection Period,
o the portion of the Release Price allocable to principal remitted by the
Issuer, the Servicer or the Note Insurer to the Indenture Trustee on or
prior to the next succeeding Deposit Date in connection with a release
and removal of such Mortgage Loan pursuant to the Indenture, to the
extent such amount is actually remitted on or prior to such Deposit
Date, and
o the amount to be remitted by the Seller to the Indenture Trustee on the
next succeeding Deposit Date in connection with a substitution of a
Qualified Replacement Mortgage for such Mortgage Loan pursuant to the
Indenture, to the extent such amount is actually remitted on or prior
to such Deposit Date.
Mortgage Loans that have become Liquidated Mortgage Loans since the preceding
Determination Date (or, in the case of the first Determination Date, since the
Cut-off Date) will be deemed to have a Principal Balance of zero on the current
Determination Date.
"Determination Date" means, as to any Payment Date, the last day of the
Due Period relating to such Payment Date.
"Payments Ahead" means any payment of one or more scheduled monthly
payments remitted by a mortgagor with respect to a Mortgage Note in excess of
the scheduled monthly payment due during the related Due Period with respect to
such Mortgage Note, which sums the related mortgagor has instructed the Servicer
to apply to scheduled monthly payments due in one or more subsequent Due
Periods. Payments Ahead will be deemed received in the Due Period in which they
would have become due had they not been paid in advance.
"Principal Prepayment" means any mortgagor payment or other recovery in
respect of principal on a Mortgage Loan (including Net Liquidation Proceeds and
Insurance Proceeds allocable to principal) which, in the case of a mortgagor
payment, is received in advance of its scheduled due date and is not accompanied
by an amount as to interest representing scheduled interest for any month
subsequent to the month of such payment, or that is accompanied by instructions
from the related mortgagor directing the Servicer to apply such payment to the
Principal Balance of such Mortgage Loan currently.
"Liquidated Mortgage Loan" means, as to any Payment Date, any Mortgage
Loan as to which the Servicer has determined during the related Collection
Period, in accordance with its customary servicing procedures, that all
Liquidation Proceeds which it expects to recover from or on account of such
Mortgage Loan have been recovered.
"Available Funds" with respect to any Payment Date will consist of the
sum of the amounts described in the clauses below, less (i) the Administrative
Fee Amount in respect of such Payment Date, (ii) Monthly Advances and Servicing
Advances previously made that are reimbursable to the Servicer (other than those
included in liquidation expenses for any Liquidated Mortgage Loan and already
reimbursed from the related Liquidation Proceeds) in such Collection Period to
the extent permitted by the Servicing Agreement and (iii) the aggregate amounts
(A) deposited into the Collection Account or Note Account that may not be
withdrawn therefrom pursuant to a final and nonappealable order of a United
States bankruptcy court of competent jurisdiction imposing a stay pursuant to
Section 362 of the United States Bankruptcy Code and that would otherwise have
been included in Available Funds on such Payment Date and (B) received by the
Indenture Trustee that are recoverable and sought to be recovered from the
Issuer as a voidable preference by a trustee in bankruptcy pursuant to the
United States Bankruptcy Code in accordance with a final nonappealable order of
a court of competent jurisdiction: o all scheduled payments of interest received
with respect to the Mortgage Loans due during the related Due Period
and all other interest payments on or in respect of such Mortgage Loans
received by or on behalf of the Servicer during the related Collection
Period, net of amounts representing interest accrued on such Mortgage
Loans in respect of any period prior to the Cut-off Date, plus any
Compensating Interest Payments made by the Servicer in respect of the
Mortgage Loans and any net income from related REO Properties for such
Collection Period;
o all scheduled payments of principal received with respect to the
Mortgage Loans and due during the related Due Period and all other
principal payments (including Principal Prepayments and prepayment
premiums, but excluding amounts described elsewhere in this definition)
received or deemed to be received during the related Collection Period
in respect of such Mortgage Loans;
o the aggregate of any proceeds from or in respect of any policy of
insurance covering a Mortgaged Property that are received during the
related Collection Period and applied by the Servicer to reduce the
Principal Balance of the related Mortgage Loan ("Insurance Proceeds"),
which proceeds will not include any amounts applied to the restoration
or repair of the related Mortgaged Property or released to the related
mortgagor in accordance with applicable law, the Servicer's customary
servicing procedures or the terms of the related Mortgage Loan;
o the aggregate of any other proceeds received by the Servicer during the
related Collection Period in connection with the liquidation of any
Mortgaged Property securing a Mortgage Loan, whether through trustee's
sale, foreclosure, condemnation, taking by eminent domain or otherwise
(including any Insurance Proceeds to the extent not duplicative of
amounts in the third clause above) ("Liquidation Proceeds"), net of
expenses incurred by the Servicer in connection with the liquidation of
such Mortgage Loan (such net amount, "Net Liquidation Proceeds");
o the aggregate of the amounts received in respect of any Mortgage Loans
that are required or permitted to be repurchased, released, removed or
substituted by the Seller during the related Collection Period as
described in "--Assignment of Mortgage Loans" and "Servicing of the
Mortgage Loans" herein, to the extent such amounts are received by the
Indenture Trustee on or before the related Deposit Date;
o the amount of any Monthly Advances made for such Payment Date; and
o the aggregate of amounts deposited in the Note Account by the Indenture
Trustee, the Issuer or the Note Insurer, as the case may be, during
such Collection Period in connection with redemption of the Notes as
described under "--Redemption of the Notes" herein.
The "Administrative Fee Amount" for any Payment Date is equal to the
sum of the Servicing Fee and the Indenture Trustee Fee relating to such Payment
Date.
Note Account
Pursuant to the Indenture, the Indenture Trustee is required to
establish and maintain an account with respect to the Notes (a "Note Account")
from which all payments with respect to the Notes will be made. As described
below, not later than the Deposit Date, the Servicer will be required pursuant
to the Servicing Agreement to wire transfer to the Indenture Trustee for deposit
in the Note Account the sum, without duplication, of all amounts on deposit in
the Collection Account that constitute any portion of Available Funds for the
related Payment Date. See "Description of the Trust Funds--Accounts" in the
prospectus.
Investment of Note Account. All or a portion of the Note Account may be
invested and reinvested by the Indenture Trustee in one or more Permitted
Investments bearing interest or sold at a discount. The Indenture Trustee or any
affiliate thereof may be the obligor on any investment in the Note Account which
otherwise qualifies as a Permitted Investment. No investment in the Note Account
may mature later than the Business Day preceding the Payment Date.
The Indenture Trustee will not in any way be held liable by reason of
any insufficiency in the Note Account resulting from any loss on any Permitted
Investment included therein, except to the extent the Indenture Trustee is the
obligor thereon or manages or advises such Permitted Investment.
All income or other gain from investments in the Note Account will not
be available to Noteholders or otherwise subject to any claims or rights of the
Noteholders and will be held in the Note Account for the benefit of the
Servicer, subject to withdrawal from time to time as permitted by the Indenture.
Any loss resulting from such investments will be for the account of the
Servicer. The Servicer will be required to deposit the amount of any such loss
immediately upon the realization of such loss to the extent such loss will not
be offset by other income or gain from investments in the Note Account and then
available for such application.
Permitted Investments. The Indenture will define "Permitted Investments" generally as follows:
o direct obligations of, and obligations fully guaranteed by, the United States of America, the Freddie Mac, Fannie
Mae, the Federal Home Loan Banks or any agency or instrumentality of
the United States of America, the obligations of which are backed by
the full faith and credit of the United States of America;
o (i) demand and time deposits in, certificates of deposit of, banker's acceptances issued by or federal funds sold
by any depository institution or trust company, including the Indenture Trustee or its agent acting in their
respective commercial capacities, incorporated under the laws of the United States of America or any state thereof
and subject to supervision and examination by federal and/or state authorities, so long as, at the time of such
investment or contractual commitment providing for such investment, such depository institution or trust company
or its ultimate parent has a short-term unsecured debt rating in one of the two highest available rating
categories of and the highest available rating category of and provided that each such
investment has an original maturity of no more than 365 days, and (ii) any other demand or time deposit or deposit
which is fully insured by the Federal Deposit Insurance Corporation;
o repurchase obligations with a term not to exceed 30 days with respect to any security described in the first
clause above and entered into with a depository institution or trust company (acting as a principal) rated " " or
higher by and rated " " or higher by ; provided, however, that collateral transferred
pursuant to such repurchase obligation must be of the type described in the first clause above and must (i) be
valued daily at current market price plus accrued interest, (ii) pursuant to such valuation, be equal, at all
times, to % of the cash transferred by the Indenture Trustee in exchange for such collateral and (iii) be
delivered to the Indenture Trustee or, if the Indenture Trustee is supplying the collateral, an agent for the
Indenture Trustee, in such a manner as to accomplish perfection of a security interest in the collateral by
possession of certified securities;
o securities bearing interest or sold at a discount issued by any
corporation incorporated under the laws of the United States of America
or any state thereof which has a long-term unsecured debt rating in the
highest available rating category of each of the Rating Agencies at the
time of such investment;
o commercial paper having an original maturity of less than 365 days and
issued by an institution having a short-term unsecured debt rating in
the highest available rating category of each of the Rating Agencies at
the time of such investment;
o a guaranteed investment contract approved by each of the Rating
Agencies and the Note Insurer and issued by an insurance company or
other corporation having a long-term unsecured debt rating in the
highest available rating category of each of the Rating Agencies at the
time of such investment;
o money market funds having ratings in one of the two highest available
rating categories of the Rating Agencies at the time of such investment
which invest only in other Permitted Investments (any such money market
funds which provide for demand withdrawals being conclusively deemed to
satisfy any maturity requirements for Permitted Investments set forth
herein), including money market funds of the Indenture Trustee and any
such funds that are managed by the Indenture Trustee or its affiliates
or for which the Indenture Trustee or any affiliate acts as advisor as
long as such money market funds satisfy the criteria of this clause;
and
o any investment approved in writing by the Note Insurer and as to which
the Indenture Trustee receives written evidence that any such
investment will not result in a downgrading or withdrawal of the rating
by each Rating Agency on the Notes.
The Indenture Trustee may purchase from or sell to itself or an
affiliate, as principal or agent, the Permitted Investments listed above. All
Permitted Investments in a trust account under the Indenture shall be made in
the name of the Indenture Trustee for the benefit of the Noteholders and the
Note Insurer.
Overcollateralization Feature
Credit enhancement with respect to the Notes will be provided in part
by overcollateralization resulting from the aggregate Principal Balances of the
Mortgage Loans as of the end of each Due Period exceeding the Note Balance for
the related Payment Date, after taking into account the Monthly Principal and
Excess Cash to be paid on such Payment Date in reduction of the Note Balance.
The Indenture requires that the Overcollateralization Amount be increased to,
and thereafter maintained at, the Required Overcollateralization Amount. This
increase and subsequent maintenance is intended to be accomplished by the
application of monthly Excess Cash to accelerate the pay-down of the Note
Balance until the Overcollateralization Amount reaches the Required
Overcollateralization Amount. Such applications of Excess Cash, because they
consist of interest collections on the Mortgage Loans, but are distributed as
principal on the Notes, will increase the Overcollateralization Amount. Such
overcollateralization is intended to result in amounts received on the Mortgage
Loans in excess of the amount necessary to pay the Note Interest and Monthly
Principal required to be paid on the Notes on any Payment Date being applied to
reduce the Note Balance to zero no later than the Stated Maturity of the Notes.
The "Excess Cash" with respect to any Payment Date will be equal to
Available Funds for such Payment Date, reduced by the sum of: o the amount owing
to the PMI Insurer and Note Insurer for the premium payable in respect of the
Notes, o the Note Interest for the related Payment Date, o the Monthly Principal
for the related Payment Date and o the amount owing to the Note Insurer under
the Insurance Agreement for reimbursement for prior draws made on the
Insurance Policy in respect of the Notes and any other amounts owing to
the Note Insurer under the Insurance Agreement, including any unpaid
premiums in respect of the Notes.
The "Overcollateralization Amount" with respect to any Payment Date is
the amount, if any, by which (x) the aggregate Principal Balance of the Mortgage
Loans as of the end of the related Due Period exceeds (y) the Note Balance of
the Notes as of such Payment Date after taking into account payments of Monthly
Principal (disregarding any permitted reduction in Monthly Principal due to an
Overcollateralization Surplus) made on such Payment Date. The required level of
the Overcollateralization Amount with respect to any Payment Date (the "Required
Overcollateralization Amount") will be equal to the amount specified as such in
the Indenture. The Indenture generally provides that the Required
Overcollateralization Amount may, over time, decrease or increase, subject to
certain floors, caps and triggers including triggers that allow the Required
Overcollateralization Amount to decrease or "step down" based on the performance
on the Mortgage Loans with respect to certain delinquency rate and loss tests
specified in the Indenture. In addition, Excess Cash will be applied to the
payment in reduction of principal of the Notes during the period that the
Mortgage Loans are unable to meet certain tests specified in the Indenture based
on delinquency rates. Any increase in the Required Overcollateralization Amount
may result in an accelerated amortization of the Notes until such Required
Overcollateralization Amount is reached. Conversely, any decrease in the
Required Overcollateralization Amount will result in a decelerated amortization
of the Notes until such Required Overcollateralization Amount is reached.
The "Overcollateralization Deficiency Amount" with respect to any
Payment Date is the amount, if any, by which the Required Overcollateralization
Amount exceeds the Overcollateralization Amount.
The application of Excess Cash to reduce the Note Balance on any
Payment Date will have the effect of accelerating the amortization of the Notes
relative to the amortization of the Mortgage Loans.
In the event that the Required Overcollateralization Amount is
permitted to decrease or "step down" on any Payment Date in the future, the
Indenture will provide that all of the Excess Cash that would otherwise be paid
to the Notes on any such Payment Date in reduction of the Note Balance will be
released to the holder(s) of the Residual Interest.
With respect to any Payment Date, an "Overcollateralization Surplus"
means, the amount, if any, by which (x) the Overcollateralization Amount for
such Payment Date exceeds (y) the then applicable Required Overcollateralization
Amount for such Payment Date. As a technical matter, an Overcollateralization
Surplus may result even prior to the occurrence of any decrease or "step down"
in the Required Overcollateralization Amount because the Notes will be entitled
to receive 100% of collected principal on the Mortgage Loans, even though the
Note Balance will, as a result of the accelerated amortization caused by the
application of the Excess Cash, be less than the aggregate Principal Balance of
the Mortgage Loans, in the absence of any Realized Losses on the Mortgage Loans.
The Indenture will provide that, on any Payment Date, all amounts
collected on the Mortgage Loans in respect of principal to be applied on such
Payment Date will be paid to Noteholders in reduction of the Note Balance on
such Payment Date, except as provided above with respect to any Payment Date for
which there exists an Overcollateralization Surplus. If any Mortgage Loan became
a Liquidated Mortgage Loan during such prior Collection Period, the Net
Liquidation Proceeds related thereto and allocated to principal may be less than
the Principal Balance of the related Mortgage Loan; the amount of any such
deficiency is a "Realized Loss." In addition, the Indenture will provide that
the Principal Balance of any Mortgage Loan that becomes a Liquidated Mortgage
Loan shall equal zero. The Indenture will not require that the amount of any
Realized Loss be paid to Noteholders on the Payment Date following the event of
loss. However, the occurrence of a Realized Loss will reduce the
Overcollateralization Amount for the Notes, and will result in more Excess Cash,
if any, being paid on the Notes in reduction of the Note Balance on subsequent
Payment Dates than would be the case in the absence of such Realized Loss.
Overcollateralization and the Insurance Policy. The Indenture will
require the Indenture Trustee to file a claim for an Insured Payment under the
Insurance Policy not later than 12:00 noon (New York City time) on the third
Business Day prior to any Payment Date as to which the Indenture Trustee has
determined that an Overcollateralization Deficit with respect to the Notes will
occur for the purpose of applying the proceeds of such Insured Payment as a
payment of principal to the Noteholders on such Payment Date. With respect to
any Payment Date, an "Overcollateralization Deficit" will mean the amount, if
any, by which (x) the Note Balance, after taking into account all payments to be
made on such Payment Date in reduction thereof, including any Excess Cash
payments, exceeds (y) the sum of aggregate Principal Balance of the Mortgage
Loans as of the end of the applicable Due Period. Accordingly, the Insurance
Policy is similar to the provisions described above with respect to the
overcollateralization provisions insofar as the Insurance Policy guarantees
ultimate collection of the full amount of the Note Balance, rather than current
payments of the amounts of any Realized Losses to the Noteholders. Investors in
the Notes should realize that, under certain loss or delinquency scenarios, they
may temporarily receive no payments in reduction of the Note Balance.
Reports to Noteholders
Concurrently with each payment to Noteholders, the Indenture Trustee
will make available a statement to each Noteholder, the Note Insurer and the
Underwriters in the form required by the Indenture and setting forth the
following information, to the extent the Servicer makes such information (other
than the information described in the second clause) below, available to the
Indenture Trustee:
o the amount of such payment to the Noteholders on the related Payment
Date allocable to Monthly Principal (separately setting forth Principal
Prepayments) and any Excess Cash payment;
o the amount of such payment to the Noteholders on such Payment Date allocable
to Note Interest; o the Note Balance after giving effect to the payment of
Monthly Principal and any Excess Cash applied to reduce the
Note Balance on such Payment Date;
o the aggregate Principal Balance of the Mortgage Loans as of the end of the
related Due Period; o the amount of Monthly Advances made with respect to such
Payment Date and the aggregate amount of unreimbursed
Monthly Advances and Servicing Advances, if any;
o the number and the aggregate of the Principal Balances of the Mortgage
Loans delinquent (i) one month, (ii) two months and (iii) three or more
months as of the end of the related Collection Period;
o the aggregate of the Principal Balances of the Mortgage Loans in
foreclosure or other similar proceedings or in which the borrower is in
bankruptcy and the book value of any real estate acquired through
foreclosure or grant of a deed in lieu of foreclosure during the
related Collection Period;
o the aggregate of the Principal Balances of the Mortgage Loans
repurchased by the Seller or the Servicer, separately setting forth the
aggregate of the Principal Balances of Mortgage Loans delinquent for
three consecutive monthly installments purchased by the Servicer at its
option pursuant to the Servicing Agreement;
o the Insured Payment, if any, for such Payment Date;
o the amount of the Servicing Fee paid to or retained by the Servicer with
respect to such Payment Date; o the Overcollateralization Amount, the then
applicable Required Overcollateralization Amount, the
Overcollateralization Surplus, if any, and the Overcollateralization
Deficit, if any, with respect to such Payment
Date; and
o the aggregate outstanding principal balance of the three largest
outstanding Mortgage Loans.
In the case of information furnished pursuant to the first and second
clauses above, the amounts shall be expressed as a dollar amount per Note with a
$1,000 principal denomination.
The Indenture Trustee will make the reports to Noteholders (and, at its
option, any additional files containing the same information in an alternative
format) available each month to noteholders, and other parties to the Indenture
via the Indenture Trustee's internet website. The Indenture Trustee's internet
website shall initially be located at
. Assistance in using the website can be obtained by calling the
Indenture Trustee's customer service desk at . Parties that are unable to use
the above distribution option are entitled to have a paper copy mailed to them
via first class mail by calling the customer service desk and indicating such.
The Indenture Trustee will have the right to change the way the reports to
Noteholders are distributed in order to make such distribution more convenient
and/or more accessible and the Indenture Trustee will provide timely and
adequate notification to all above parties regarding any such changes.
Within 90 days after the end of each calendar year, the Indenture
Trustee will mail to each person who at any time during such calendar year was a
Noteholder and to the Underwriters, if requested in writing by any such person,
a statement containing the information set forth in the first and second clauses
above, aggregated for such calendar year or, in the case of each person who was
a Noteholder for a portion of such calendar year, setting forth such information
for each month thereof. Such obligation of the Indenture Trustee shall be deemed
to have been satisfied to the extent that substantially comparable information
shall be prepared and furnished by the Indenture Trustee to Noteholders pursuant
to any requirements of the Code as are in force from time to time.
Redemption of the Notes
The Notes will be subject to redemption, in whole but not in part, at
the option of the holders of a majority of the Residual Interest or, if not
exercised, at the option of the Servicer, on or after the first Payment Date
(such date, the "Initial Redemption Date") on which the aggregate Principal
Balance of the Mortgage Loans has declined to less than 10% of the aggregate
Principal Balance of the Mortgage Loans as of the Cut-off Date (the date on
which the Notes are to be redeemed, the "Redemption Date").
The Notes will be redeemed at a redemption price of 100% of the then
outstanding Note Balance, plus accrued but unpaid interest thereon through the
end of the Interest Period immediately preceding the related Payment Date;
provided, however, that no redemption may take place unless, in connection with
such redemption, any amounts due and owing to the Note Insurer under the
Insurance Agreement are paid in full to the Note Insurer. There will be no
prepayment premium in connection with such a redemption. Notice of an optional
redemption of the Notes must be mailed by the Indenture Trustee to the
Noteholders and the Note Insurer at least ten days prior to the Payment Date set
for such redemption.
Payments to the Holder(s) of the Residual Interest
On each Payment Date, any portion of Available Funds remaining after
making payments of interest and principal due on the Notes and other
distributions required on such Payment Date will be released to the holder(s) of
the Residual Interest, free of the lien of the Indenture. Any such remaining
amounts will not be available to make payments on the Notes or payments to the
Note Insurer on any subsequent Payment Date.
The Indenture Trustee
will be the Indenture Trustee under the Indenture.
The Indenture will provide that the
Indenture Trustee is entitled to a fee (the "Indenture Trustee Fee"), payable
monthly on each Payment Date at one-twelfth of % of the aggregate Principal
Balance of the Mortgage Loans as of the first day of the related Due Period, and
reimbursement of certain expenses. will also perform certain monitoring
functions and act as successor servicer under the Servicing Agreement and, upon
a termination of the Servicer, shall be obligated to succeed to the obligations
of the Servicer or to appoint an eligible successor servicer.
The Indenture also will provide that the Indenture Trustee may resign
at any time, upon notice to the Issuer, the Servicer, the Note Insurer and any
Rating Agency, in which event the Issuer will, with the consent of the Note
Insurer (and if the Issuer fails to do so within 30 days, the Note Insurer may),
appoint a successor Indenture Trustee. The Issuer, with the prior consent of the
Note Insurer, will remove the Indenture Trustee if the Indenture Trustee ceases
to be eligible to continue as such under the Indenture or if the Indenture
Trustee becomes insolvent. Any resignation or removal of the Indenture Trustee
and appointment of a successor Indenture Trustee will not become effective until
acceptance of the appointment by the successor Indenture Trustee. The Indenture
will provide that the Indenture Trustee is under no obligation to exercise any
of the rights or powers vested in it by the Indenture at the request or
direction of any of the Noteholders, unless such Noteholders shall have offered
to the Indenture Trustee reasonable security or indemnity against the costs,
expenses and liabilities which might be incurred by it in compliance with such
request or direction. The Indenture Trustee may execute any of the rights or
powers granted by the Indenture or perform any duties thereunder either directly
or by or through its agents or attorneys; provided, however, the Indenture
Trustee will remain liable for the performance of all of its duties. Pursuant to
the Indenture, the Indenture Trustee is not liable for any action it takes or
omits to take in good faith which it reasonably believes to be authorized by an
authorized officer of any person or within its rights or powers under the
Indenture. The Indenture Trustee and any director, officer, employee or agent of
the Indenture Trustee may rely and will be protected in acting or refraining
from acting in good faith in reliance on any certificate, notice or other
document of any kind prima facie properly executed and submitted by the
authorized officer of any person respecting any matters arising under the
Indenture. The Indenture Trustee will be indemnified by the Servicer for certain
losses and other events to the extent described in the Servicing Agreement.
Voting
Unless otherwise specified in the Indenture, with respect to any
provisions of the Indenture providing for the action, consent or approval of the
Noteholders evidencing specified "Voting Interests," each Noteholder will have a
Voting Interest equal to the Percentage Interest represented by such
Noteholder's Note. Unless the Note Insurer fails to make a payment under the
Insurance Policy or if certain events of bankruptcy or insolvency occur with
respect to the Note Insurer and such event is continuing, the Voting Interests
of the Noteholders will be exercised solely by or with the consent of the Note
Insurer.
Note Events of Default
An "Event of Default" with respect to the Notes will occur if either
(i) an event of default under the Insurance Agreement occurs or (ii) on any
Payment Date, after taking into account all payments made in respect of the
Notes on such Payment Date, the Note Interest for such Payment Date remains
unpaid or an Overcollateralization Deficit still exists with respect to the
Notes. See "Description of the Agreements--Material Terms of the
Indenture--Events of Default" in the prospectus for a description of the
circumstances under which a default on the Notes, other than a payment default,
may occur. For a description of the rights of Noteholders in connection with any
Event of Default with respect to the Notes, see "Description of the
Agreements--Material Terms of the Indenture--Events of Default" in the
prospectus. In the absence of a failure by the Note Insurer to pay Insured
Payments, no acceleration of the maturity of the Notes shall be permitted
without the consent of the Note Insurer.
The PMI Policy
of the Mortgage Loans (the "PMI Mortgage Loans") with original
Loan-to-Value Ratios in excess of 80% are insured by (the "PMI Insurer")
pursuant to the primary mortgage insurance policy (the "PMI Policy"). The amount
of coverage provided by the PMI Policy (which is also referred to below as the
"insured percentage of the claim") varies on a loan-by-loan basis between % and
% based upon the original Loan-to-Value Ratio of the PMI Mortgage Loan.
The PMI Policy is required to remain in force with respect to each PMI
Mortgage Loan until: o the Principal Balance of such PMI Mortgage Loan is paid
in full, o the Principal Balance of such PMI Mortgage Loan has amortized down to
a level that results in a Loan-to-Value
Ratio for such Mortgage Loan of % or less; provided, however, that no
coverage of any PMI Mortgage Loan under the PMI Policy is required
where prohibited by applicable law or
o any other event specified in the PMI Policy occurs that allows for
termination of the PMI Policy.
The PMI Policy may not be assigned or transferred without the prior written
consent of the PMI Insurer; provided, however that the PMI Insurer has
previously provided written consent to the assignment of the PMI Policy from the
Indenture Trustee to the Seller in connection with any Mortgage Loan repurchased
or substituted for by the Seller.
The PMI Policy generally requires that delinquencies on any PMI
Mortgage Loan must be reported to the PMI Insurer within four months of default,
and appropriate proceedings to obtain title to the property securing the PMI
Mortgage Loan must be commenced within six months of default. The PMI Policy
under which the PMI Mortgage Loans are insured contains provisions substantially
as follows:
o for the insured to present a claim, the insured must have acquired, and
tendered to the PMI Insurer, good and merchantable title to the
property securing the PMI Mortgage Loan, free and clear of all liens
and encumbrances, including, but not limited to, any right of
redemption by the mortgagor unless such acquisition of good and
merchantable title is excused under the terms of the PMI Policy;
o a claim generally includes unpaid principal, accrued interest to the
date of such tender to the PMI Insurer by the insured, and certain
expenses;
o when a claim is presented the PMI Insurer will have the option of
either (i) paying the claim in full, taking title to the property
securing the PMI Mortgage Loan, and arranging for its sale, or (ii)
paying the insured percentage of the claim and with the insured
retaining title to the property securing the PMI Mortgage Loan;
o claims generally must be filed within 60 days after the insured has
acquired good and merchantable title to the property securing the PMI
Mortgage Loan; and
o a claim generally must be paid within 60 days after the claim is filed
by the insured.
No payment for a loss will be made under the PMI Policy unless the property
securing the PMI Mortgage Loan is in the same physical condition as when the PMI
Mortgage Loan was originally insured, except for reasonable wear and tear and
unless premiums on the standard homeowner's insurance policy, real estate taxes
and foreclosure protection and preservation expenses have been advanced by or on
behalf of the insured. The responsibilities of the insured prescribed by the PMI
Policy are required to be performed by the Servicer.
In issuing the PMI Policy, the PMI Insurer has relied upon certain
information and data regarding the PMI Mortgage Loans furnished to the PMI
Insurer by the Seller. The PMI Policy will not insure against a loss sustained
by reason of a default arising from or involving certain matters, including:
o fraud or negligence in origination or servicing of the PMI Mortgage
Loans, including, but not limited to, misrepresentation by the lender
or certain other persons involved in the origination of the PMI
Mortgage Loan or the application for insurance;
o failure to construct a property securing a PMI Mortgage Loan in accordance
with specified plans; or o physical damage to a property securing a PMI Mortgage
Loan.
For a more complete description of these provisions, terms and
conditions, reference is made to the PMI Policy, a copy of which is available
upon request from the Indenture Trustee.
DESCRIPTION OF THE MORTGAGE POOL
The following is a brief description of certain terms of the Mortgage
Loans as of the Cut-off Date. The information presented herein does not take
into account any Mortgage Loans which may prepay in full or be removed, prior to
the Closing Date, from the Mortgage Pool and that other Mortgage Loans may be
substituted therefor. As a result, the information regarding the Mortgage Loans
set forth herein may vary from comparable information based in the actual
composition of the Mortgage Pool at the Closing Date, although such variance
will not be material.
General
The Mortgage Pool will consist of primarily fixed rate and adjustable
rate mortgage loans secured by first and second liens, on one- to four-family
residential properties located in states. No Mortgage Loan will have an original
term to stated maturity in excess of years or a scheduled maturity date later
than . All of the Mortgage Loans will be originated or acquired by the Seller
through its network of brokers and correspondents and through its retail
origination offices.
The Mortgage Loans have been originated using underwriting standards
that are significantly less stringent than the underwriting standards applied by
other mortgage loan purchase programs such as those administered by Fannie Mae
or by Freddie Mac. See "Underwriting Standards" and "Risk Factors" herein.
The Mortgage Loans are generally not assumable pursuant to the terms of
the related Mortgage Note. See "Prepayment and Yield Considerations" herein.
None of the Mortgage Loans are or will be insured or guaranteed by the
Issuer, the Seller, the Depositor, the Servicer, the Indenture Trustee, the Note
Insurer, any originator or any of their respective affiliates, or by any
governmental agency or other person, except as described herein. None of the
Mortgage Loans will be insured by mortgage pool insurance policies.
The Mortgage Pool Statistics
The Pool Balance as of the Cut-off Date is equal to $ (the "Initial
Pool Balance"). The Mortgage Loans have original terms to maturity ranging from
to months. The following statistical information, unless otherwise specified, is
based upon the Pool Balance as of the Cut-off Date.
The Mortgage Loans are secured by mortgages, deeds of trust or other
similar security instruments (each, a "Mortgage") creating first liens on one-
to four-family residential properties consisting of attached or detached one- to
four-family dwelling units and individual condominium units (each, a "Mortgaged
Property").
[Approximately % of the Mortgage Loans had a Loan-to-Value Ratio at
origination in excess of 80% and do not have primary mortgage insurance.] [All
of the Mortgage Loans that had a Loan-to-Value Ratio at origination in excess of
80% have primary mortgage insurance.] There can be no assurance that the current
loan-to-value ratio of any Mortgage Loan determined at any time after
origination is less than or equal to its original Loan-to-Value Ratio. % of the
Mortgage Loans have scheduled Monthly Payments due on the first day of the
month.
[None of the Mortgage Loans will have been originated with interest
rates or fees which make them subject to the Home Ownership and Equity
Protection Act of 1994, however the Mortgage Loans may be subject to comparable
state laws with lower threshold tests.]
Approximately % of the Mortgage Loans provide for payment by the
mortgagor of a prepayment penalty in limited circumstances on certain
prepayments. The term of any prepayment penalty on the Mortgage Loans vary from
to years and the majority of the Mortgage Loans with prepayment penalties charge
a penalty of months interest on the prepaid balance greater than % of the
Principal Balance at origination over a rolling 12 month period.
Approximately % of the Mortgage Loans by Principal Balance as of the
Cut-off Date are loans that provide for the payment of a substantial portion of
the original Principal Balance in a single payment at maturity ("Balloon
Loans").
[Each fixed rate Mortgage Loan accrues interest at a per annum rate
(the "Mortgage Rate") of not less than % per annum and not more than % per annum
and as of the Cut-off Date the weighted average Mortgage Interest Rate of the
Mortgage Loans was approximately % per annum.]
The weighted average remaining term to maturity of the Mortgage Loans
will be approximately months as of the Cut-off Date. None of the Mortgage Loans
had a first Due Date prior to or after or will have a remaining term to maturity
of less than months or greater than months as of the Cut-off Date. The month of
the latest maturity date of any Mortgage Loan is .
The average Principal Balance of the Mortgage Loans at origination was
approximately $ . No Mortgage Loan had a Cut-off Date Principal Balance of
greater than approximately $ or less than approximately $ . The average Cut-off
Date Principal Balance of the Mortgage Loans was approximately $ .
[Each fixed rate Mortgage Loan had a Net Mortgage Interest Rate of not
less than % per annum, and not more than % per annum and as of the Cut-off Date,
the weighted average Net Mortgage Interest Rate of the Mortgage Loans was
approximately %.]
[Each adjustable rate Mortgage Loan has an interest rate equal to the
sum of a specified index and a gross margin, subject to periodic caps and
lifetime minimum and maximum rates. The index used with respect to each
adjustable rate Mortgage Loan is the average of interbank offered rates for
six-month U.S. dollar-denominated deposits in the London market ("Six-Month
LIBOR").]
The Mortgage Loans are expected to have the following characteristics
as of the Cut-off Date (the sum in any column may not equal the total indicated
due to rounding):
Cut-off Date Principal Balances of the Mortgage Loans(1)
Number of Aggregate Unpaid Principal Percentage of Aggregate Unpaid
Principal Balance ($) Mortgage Loans Balance Principal Balance
-------------------------------------------------------------------------------------------------------------------
$ %
====================================
====================================
------------------------------------
====================================
====================================
====================================
====================================
====================================
====================================
====================================
====================================
====================================
--------------------------------------------------------------------------------
100.00%
================================================================================
- -----------------------------
(1) The average Cut-off Date Principal Balance of the Mortgage Loans was approximately $ .
Original Terms to Maturity of the Mortgage Loans(1)
Original Term (months) Number Aggregate Unpaid Principal Percentage of Aggregate Unpaid
of Mortgage
Loans Balance Principal Balance
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
$ %
--------------------------------------------------------------------------------
Total $ 100.00%
================================================================================
- -----------------------------
(1) The weighted average original term of the Mortgage Loans was approximately
months.
Property Types of the Mortgage Loans
Property Type Number Aggregate Unpaid Principal Percentage of Aggregate Unpaid
of Mortgage
Loans Balance Principal Balance
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
Single Family Detached $ %
PUD(1) Detached
2- to 4-Family
Condominium
Manufactured Housing
Single Family Attached
--------------------------------------------------------------------------------
PUD(1) Attached
================================================================================
--------------------------------------------------------------------------------
Total $ 100.00%
================================================================================
- -----------------------------
(1) PUD refers to a Planned Unit Development.
FICO Score(1)
Range of FICO Scores Number Aggregate Unpaid Principal Percentage of Aggregate Unpaid
of Mortgage
Loans Balance Principal Balance Outstanding
- ---------------------------------------------------------------------------------------------------------------------
$ %
--------------------------------------------------------------------------------
Total $ 100.00%
================================================================================
- -----------------------------
(1) The weighted average FICO Score of the Mortgage Loans as of the Cut-off
Date was approximately . "FICO Scores"are statistical credit scores
obtained by many mortgage lenders in connection with the loan application
to help assess a borrower's credit-worthiness. FICO Scores are generated by
models developed by a third party and are made available to lenders through
three national credit bureaus. The models were derived by analyzing data on
consumers in order to establish patterns which are believed to be
indicative of the borrower's probability of default. The FICO Score is
based on a borrower's historical credit data, including, among other
things, payment history, delinquencies on accounts, levels of outstanding
indebtedness, length of credit history, types of credit, and bankruptcy
experience. FICO Scores range from approximately 250 to approximately 900,
with higher scores indicating an individual with a more favorable credit
history compared to an individual with a lower score. However, a FICO Score
purports only to be a measurement of the relative degree of risk a borrower
represents to a lender, i.e., that a borrower with a higher score is
statistically expected to be less likely to default in payment than a
borrower with a lower score. In addition, it should be noted that FICO
Scores were developed to indicate a level of default probability over a
two-year period which does not correspond to the life of a mortgage loan.
Furthermore, FICO Scores were not developed specifically for use in
connection with mortgage loans, but for consumer loans in general.
Therefore, a FICO Score does not take into consideration the effect of
mortgage loan characteristics on the probability of repayment by the
borrower. The FICO Scores set forth in the table above were obtained at
either the time of origination of the Mortgage Loan or more recently. The
Depositor makes no representations or warranties as to the actual
performance of any Mortgage Loan or that a particular FICO Score should be
relied upon as a basis for an expectation that the borrower will repay the
Mortgage Loan according to its terms.
Credit Grade
Credit Grade Number Aggregate Unpaid Principal Percentage of Aggregate Unpaid
of Mortgage
Loans Balance Principal Balance
- ---------------------------------------------------------------------------------------------------------------------
$ %
-------------------------------------------------------------------------------
Total $ 100.00%
===============================================================================
Occupancy Status of the Mortgage Loans(1)
Occupancy Status Number Aggregate Unpaid Principal Percentage of Aggregate Unpaid
of Mortgage
Loans Balance Principal Balance
- ---------------------------------------------------------------------------------------------------------------------
Primary $ %
Investor
Secondary
-------------------------------------------------------------------------------
Total $ 100.00%
===============================================================================
- -----------------------------
(1) Based on a representation made by the borrower at the time of origination.
Purpose of the Mortgage Loans
Purpose Number Aggregate Unpaid Percentage of Aggregate Unpaid
of Mortgage
Loans Principal Balance Principal Balance
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
Equity-out Refinance $ %
Refinance
Purchase
-------------------------------------------------------------------------------
Total $ 100.00%
===============================================================================
Mortgage Interest Rates of the Mortgage Loans(1)
Mortgage Interest Rate (%) Number Aggregate Unpaid Percentage of Aggregate Unpaid
of Mortgage
Loans Principal Balance Principal Balance
- ---------------------------------------------------------------------------------------------------------------------
$ %
-------------------------------------------------------------------------------
Total $ 100.00%
===============================================================================
- -----------------------------
(1) The weighted average Mortgage Interest Rate of the Mortgage Loans as of the Cut-off Date was approximately % per
annum.
Combined Loan-to-Value Ratios of the Mortgage Loans(1)
Combined Loan-to-Value Ratio Number Aggregate Unpaid Percentage of Aggregate Unpaid
of Mortgage
Loans Principal Balance Principal Balance
- ---------------------------------------------------------------------------------------------------------------------
$ %
-------------------------------------------------------------------------------
Total $ 100.00%
===============================================================================
- -----------------------------
(1) The weighted average Combined Loan-to-Value Ratio of the Mortgage Loans as of the Cut-off Date was approximately %.
The "Combined Loan-to-Value Ratio" of a Mortgage Loan shall generally
mean that ratio, expressed as a percentage, borne by (a) the sum of the
principal amount of the Mortgage Loan at origination plus the then-current
principal balance of all mortgage loans (each a "Senior Loan" ) secured by liens
on the related Mortgaged Property having priorities senior to that of the lien
which secures such Mortgage Loan over (b) the minimum of the purchase price or
the appraised value of the related Mortgaged Property at origination.
Geographic Distribution of the Mortgage Loans(1)
Location Number Aggregate Unpaid Percentage of Aggregate Unpaid
of Mortgage Loans Principal Balance Principal Balance
- ---------------------------------------------------------------------------------------------------------------------
$ %
--------------------------------------------------------------------------------
Total $ 100.00%
================================================================================
- -----------------------------
(1) The greatest ZIP Code geographic concentration of the Mortgage Loans, by
Principal Balance as of the Cut-off Date, was approximately % in the ZIP
Code, located in .
Documentation Levels of the Mortgage Loans(1)
Documentation Level Number Aggregate Unpaid Percentage of Aggregate Unpaid
of Mortgage Loans Principal Balance Principal Balance
- ---------------------------------------------------------------------------------------------------------------------
Full Documentation $ %
Alternative Documentation
Stated Documentation
--------------------------------------------------------------------------------
Total $ 100.00%
================================================================================
(1) For a description of each documentation level, see "Underwriting Standards"
in this prospectus supplement.
Status of the Mortgage Loans
Status Number Aggregate Unpaid Percentage of Aggregate Unpaid
of Mortgage Loans Principal Balance Principal Balance
- ---------------------------------------------------------------------------------------------------------------------
Current $ %
30 Days Past Due
--------------------------------------------------------------------------------
Total $ 100.00%
================================================================================
Maximum Interest Rates of the Adjustable Rate Mortgage Loans
Percentage of Aggregate
Aggregate Unpaid Principal Unpaid Principal Balance
Range of Maximum Interest Number of Adjustable Rate Balance of the Adjustable of the Adjustable Rate
Rates Mortgage Loans Rate Mortgage Loans Mortgage Loans
Total $ 100.00%
Minimum Interest Rates of the Adjustable Rate Mortgage Loans
- -----------------------------------------------------------------------------------------------------------------------------
Percentage of Aggregate
Aggregate Unpaid Principal Unpaid Principal Balance
Range of Minimum Interest Number of Adjustable Rate Balance of the Adjustable of the Adjustable Rate
Rates Mortgage Loans Rate Mortgage Loans Mortgage Loans
Total $ 100.00%
Next Interest Rate Adjustment Date of the Adjustable Rate Mortgage Loans
- -----------------------------------------------------------------------------------------------------------------------------
Percentage of Aggregate
Aggregate Unpaid Principal Unpaid Principal Balance
Month and Year of Next Number of Adjustable Rate Balance of the Adjustable of the Adjustable Rate
Interest Rate Adjustment Mortgage Loans Rate Mortgage Loans Mortgage Loans
Total $ 100.00%
- -----------------------------------------------------------------------------------------------------------------------------
THE ISSUER
The Issuer is a Delaware business trust established by the Depositor
pursuant to the Trust Agreement. The principal office of the Issuer is located
in , Attention:
. The Issuer does not have, nor is it expected in
the future to have, any significant assets,
other than the assets included in the Trust Fund.
THE SELLER
On or about , 200 (the "Closing Date"), the Mortgage Loans will be sold to the Depositor by (the
"Seller").
[Further information relating to Seller to be inserted]
THE SERVICER
The information in this section has been provided by . Neither the
Depositor nor the Underwriters make any representation or warranty as to the
accuracy or completeness of this information.
General
(in its capacity as servicer, the "Servicer" will act as servicer of the Mortgage Loans pursuant
to the Servicing Agreement. The Servicer is an indirect subsidiary of , a corporation.
As of , the Servicer and its subsidiaries were servicing approximately
mortgage loans in its Owned and Managed Servicing Portfolio representing an
aggregate outstanding principal balance of approximately $ , and approximately
mortgage loans in its Third-Party Servicing Portfolio representing an aggregate
outstanding principal balance of approximately $ .
The Notes will not represent an interest in, or an obligation of, nor
are the Mortgage Loans guaranteed by, the Servicer or any of its affiliates.
Delinquency and Loss Experience of the Servicer
Owned and Managed Servicing Portfolio. The following tables set forth
information relating to the delinquency, loan loss and foreclosure experience of
the Servicer for its Owned and Managed Servicing Portfolio for , and for each of
the prior years. The Servicer's "Owned and Managed Servicing Portfolio" consists
of the Servicer's servicing portfolio of fixed and variable rate mortgage loans
excluding certain loans serviced by the Servicer that were not originated or
purchased and reunderwritten by the Servicer or an affiliate thereof. In
addition to the Owned and Managed Servicing Portfolio, the Servicer serviced as
of , approximately mortgage loans with an aggregate principal balance as of such
date of approximately $ ; such loans were not originated by the Servicer or any
affiliate thereof and are being serviced for third parties on a contract
servicing basis (the "Third-Party Servicing Portfolio"). No loans in the
Third-Party Servicing Portfolio are included in the tables set forth below.
Delinquency and Foreclosure Experience of
the Servicer's Owned and Managed Servicing Portfolio
Year Ending December 31,
Months Ending 200 200
------------- ---- ---
Number of By Dollar Number of By Dollar Number of By Dollar
Mortgage Amount of Mortgage Amount of Mortgage Amount of
Loans Loans Loans Loans Loans Loans
(Dollar Amounts in Thousands)
Portfolio
Delinquency
Percentage (1)
30-59 Days
60-89 Days
90 Days or more
Total
Foreclosure Rate (2)
REO Properties (3)
Year Ending December 31,
200 200
---- ---
Number of By Dollar Number of By Dollar
Mortgage Amount of Mortgage Amount of
Loans Loans Loans Loans
(Dollar Amounts in Thousands)
Portfolio
Delinquency
Percentage (1)
30-59 Days
60-89 Days
90 Days or more
Total
Foreclosure Rate (2)
REO Properties (3)
(1) The period of delinquency is based on the number of days payments are
contractually past due.
(2) "Foreclosure Rate" is the number of mortgage loans or the dollar amount of
mortgage loans in foreclosure as a percentage of the total number of
mortgage loans or the dollar amount of mortgage loans, as the case may be,
as of the date indicated.
(3) REO Properties (i.e., "real estate owned" properties - properties relating
to mortgage foreclosed or for which deeds in lieu of foreclosure have been
accepted, and held by the Servicer pending disposition) percentages are
calculated using the number of loans, not the dollar amount.
Loan Loss Experience of the Servicer's Owned
and Managed Servicing Portfolio of Mortgage Loans
Months Ending Year Ending December 31,
(Dollar Amounts in Thousands)
Average Amount Outstanding (1)
Gross Losses (2)
Recoveries (3)
Net Losses (4)
Net Losses as a percentage of
Average amount outstanding
(1) "Average Amount Outstanding" during the period is the arithmetic average
of the principal balances of the mortgage loans outstanding on the last
business day of each month during the period.
(2) "Gross Losses" are amounts which have been determined to be uncollectible
relating to mortgage loans for each respective period.
(3) "Recoveries" are recoveries from liquidation proceeds and deficiency
judgments. (4) "Net Losses" represents "Gross Losses" minus "Recoveries."
There can be no assurance that the delinquency experience of the
Mortgage Loans will correspond to the delinquency experience of the Servicer's
servicing portfolio set forth in the foregoing tables. The statistics shown
above represent the delinquency experience for the Servicer's portfolio only for
the periods presented, whereas the aggregate delinquency experience on the
Mortgage Loans will depend on the results obtained over the life of the Mortgage
Loans. The Servicer's servicing portfolio includes mortgage loans with a variety
of payment and other characteristics (including geographic location) which are
not necessarily representative of the payment and other characteristics of the
Mortgage Loans. The Servicer's servicing portfolio includes mortgage loans
underwritten pursuant to guidelines not necessarily representative of those
applicable to the Mortgage Loans. It should be noted that if the residential
real estate market should experience an overall decline in property values, the
actual rates of delinquencies and foreclosures could be higher than those
previously experienced by the Servicer. In addition, adverse economic conditions
may affect the actual rates of delinquencies and foreclosures with respect to
the Mortgage Loans.
[Further information relating to the Servicer to be inserted]
UNDERWRITING STANDARDS
The Seller provided the information in the following paragraphs. None
of the Depositor, the Trustee, the Underwriters, or any of their respective
affiliates have made or will make any representations as to the accuracy or
completeness of such information. The following is a description of the
underwriting standards used by the Seller in connection with its acquisition of
the Mortgage Loans.
[All of the Mortgage Loans were underwritten, and all of the Mortgage
Loans will be underwritten, by the Seller in accordance with the "Standard
Non-Conforming Program" which does not meet the credit underwriting standards of
Fannie Mae or Freddie Mac. The Seller's current single family loan volume is
generally originated based on loan packages submitted through a broker network.
Such loan packages, which generally contain relevant credit, property and
underwriting information on the loan request, are compiled by the applicable
mortgage broker and submitted to the Seller for approval and funding. The
mortgage broker receives as compensation all or a portion of the loan
origination fee charged to the mortgagor at the time the loan is made. As part
of its quality control procedures, the Seller accepts loan packages submitted by
pre-approved mortgage brokers. In connection with the approval process, it
requires that the mortgage broker be licensed by the appropriate state agencies,
as required, and review a package of documents consisting of, among other
things, an application, resumes of key personnel, narrative of the company,
organizational documentation and financial statements. At least annually, the
Seller reviews the performance of each of its mortgage brokers for poor
processing, misrepresentation, fraud or delinquency, and substandard mortgage
brokers are terminated.
Each prospective mortgagor completes a mortgage loan application that
includes information with respect to the applicant's liabilities, income, credit
history, employment history and personal information. At least two credit
reports on each applicant from national credit reporting companies are required.
The report typically contains information relating to such matters as credit
history with local and national merchants and lenders, installment debt payments
and any record of defaults, bankruptcies, repossessions, or judgements.
Mortgaged properties are appraised by licensed appraisers. The Seller
does not approve all appraisers but instead relies on the mortgage brokers to
evaluate the appraiser's experience and ability; however, in the event that a
mortgage broker uses an appraiser who has not been approved by the Seller, the
related appraisal will be reviewed by an approved appraiser of the Seller in
conformance with its guidelines. The Seller requires the appraiser to address
neighborhood conditions, site and zoning status and condition and valuation
improvements. Following each appraisal, the appraiser prepares a report which
includes a reputation cost analysis (when appropriate) based on the current cost
of constructing a similar home and the market value analysis based on recent
sales of comparable homes in the area. All of the appraisals are required to
conform to the Uniform Standards of Professional Appraisal Practice and must be
on forms acceptable to Fannie Mae and Freddie Mac. Every appraisal is reviewed
by a non-affiliated review firm or by another review appraiser acceptable to the
Seller before the mortgage loan is made.]
[Describe any other material elements of the
underwriting criteria for Mortgage
Loans applied by Seller.]
PREPAYMENT AND YIELD CONSIDERATIONS
General
The effective yield of the Notes will be affected by the rate and
timing of payments of principal on the Mortgage Loans securing the Notes
(including, for this purpose, prepayments and amounts received by virtue of
refinancings, liquidations of Mortgage Loans due to defaults, casualties,
condemnations, and repurchases, whether optional or required, by the Seller or
the Note Insurer), the amount and timing of mortgagor delinquencies and defaults
resulting in realized losses, and the application of Excess Cash on the Notes.
Such yield may be adversely affected by a higher or lower than anticipated rate
of principal payments (including principal prepayments) on the Mortgage Loans.
The rate of principal payments on such Mortgage Loans will in turn be affected
by the amortization schedules of such Mortgage Loans, the rate and timing of
principal prepayments thereon by the mortgagors, liquidations of defaulted
Mortgage Loans and optional or required repurchases of Mortgage Loans as
described herein. The timing of changes in the rate of prepayments, liquidations
and repurchases of the Mortgage Loans may, and the timing of Realized Losses
could, significantly affect the yield to an investor, even if the average rate
of principal payments experienced over time is consistent with an investor's
expectation. Since the rate and timing of principal payments on the Mortgage
Loans will depend on future events and on a variety of factors (as described
more fully herein), no assurance can be given as to such rate or the timing of
principal prepayments on the Notes.
Because all amounts available for payment on the Notes after payments
in respect of interest on the Notes, including all or a portion of the Excess
Cash, are applied as reductions of the Note Balance, the weighted average life
of the Notes will also be influenced by the amount of Excess Cash so applied.
Because Excess Cash attributable to the overcollateralization feature is derived
from interest collections on the Mortgage Loans and will be applied to reduce
the Note Balance, the aggregate payments in reduction of the Note Balance on a
Payment Date will usually be greater than the aggregate amount of principal
payments (including Principal Prepayments) on the Mortgage Loans payable on such
Payment Date until the Required Overcollateralization Amount is reached and
assuming an Overcollateralization Deficit does not occur. As a consequence,
Excess Cash available for payment in reduction of the Note Balance for the Notes
will increase in proportion to the outstanding Note Balance over time in the
absence of offsetting Realized Losses for the Mortgage Loans.
Excess Cash will be paid on the Notes in reduction of the Note Balance
on each Payment Date to the extent the then applicable Required
Overcollateralization Amount exceeds the related Overcollateralization Amount on
such Payment Date. Any remaining Excess Cash will be released to the holder(s)
of the Residual Interest. If a Note is purchased at other than par, its yield to
maturity will be affected by the rate at which the Excess Cash is paid to the
Noteholders. If the actual rate of Excess Cash payments on the Notes applied in
reduction of the Note Balance is slower than the rate anticipated by an investor
who purchases a Note at a discount, the actual yield to such investor will be
lower than such investor's anticipated yield. If the actual rate of Excess Cash
payments applied in reduction of the Note Balance is faster than the rate
anticipated by an investor who purchases a Note at a premium, the actual yield
to such investor will be lower than such investor's anticipated yield. The
amount of Excess Cash on any Payment Date will be affected by, among other
things, the actual amount of interest received, collected or recovered in
respect of the Mortgage Loans during the related Collection Period and such
amount will be influenced by changes in the weighted average of the Mortgage
Rates resulting from prepayment and liquidations of the Mortgage Loans. The
amount of Excess Cash paid to the Noteholders applied to the Note Balance on
each Payment Date will be based on the Required Overcollateralization Amount.
The Indenture generally provides that the Required Overcollateralization Amount
may, over time, decrease, or increase, subject to certain floors, caps and
triggers, including triggers that allow the Required Overcollateralization
Amount to decrease or "step down" based on the performance on the Mortgage Loans
with respect to certain tests specified in the Indenture based on delinquency
rates. Any increase in the Required Overcollateralization Amount may result in
an accelerated amortization until such Required Overcollateralization Amount is
reached. Conversely, any decrease in the Required Overcollateralization Amount
will result in a decelerated amortization of the Notes.
The Mortgage Loans generally may be prepaid in full or in part at any
time, although a substantial portion of the Mortgage Loans provide for payment
of a prepayment charge. The Mortgage Loans generally are not assumable and the
related Mortgaged Property will be due on sale, in which case the Servicer shall
enforce any due-on-sale clause contained in any Mortgage Note or Mortgage, to
the extent permitted under applicable law and governmental regulations;
provided, however, if the Servicer determines that it is reasonably likely that
the mortgagor will bring, or if any mortgagor does bring legal action to declare
invalid or otherwise avoid enforcement of a due-on-sale clause contained in any
Mortgage Note or Mortgage, the Servicer will not be required to enforce the
due-on-sale clause or to contest such action.
The rate of defaults on the Mortgage Loans will also affect the rate
and timing of principal payments on the Mortgage Loans. See "Risk Factors"
herein and in the prospectus. The rate of default on Mortgage Loans that are
refinance or limited documentation mortgage loans, and on Mortgage Loans with
high Loan-to-Value Ratios, may be higher than for other types of Mortgage Loans.
As a result of the underwriting standards applicable to the Mortgage Loans, the
Mortgage Loans are likely to experience rates of delinquency, foreclosure,
bankruptcy and loss that are higher, and that may be substantially higher, than
those experienced by mortgage loans underwritten in accordance with the
standards applied by Fannie Mae and Freddie Mac mortgage loan purchase programs.
See "Underwriting Standards" herein. In addition, because of such underwriting
criteria and their likely effect on the delinquency, foreclosure, bankruptcy and
loss experience of the Mortgage Loans, the Mortgage Loans will generally be
serviced in a manner intended to result in a faster exercise of remedies, which
may include foreclosure, in the event Mortgage Loan delinquencies and defaults
occur, than would be the case of the Mortgage Loans were serviced in accordance
with such other programs. Furthermore, the rate and timing of prepayments,
defaults and liquidations on the Mortgage Loans will be affected by the general
economic condition of the region of the country in which the related Mortgaged
Properties are located. The risk of delinquencies and loss is greater and
prepayments are less likely in regions where a weak or deteriorating economy
exists, as may be evidenced by, among other factors, increasing unemployment or
falling property values. To the extent that the locations of the Mortgaged
Properties are concentrated in a given region, the risk of delinquencies, loss
and involuntary prepayments resulting from adverse economic conditions in such
region or from other factors, such as fires, storms, landslides and mudflows and
earthquakes, is increased. Certain information regarding the location of the
Mortgaged Properties is set forth under "The Mortgage Pool--The Mortgage Pool
Statistics" herein. See "Risk Factors--Risks Associated with Geographic
Concentration of the Mortgage Properties" herein.
Certain of the Mortgage Loans are Balloon Loans. Balloon Loans involve
a greater degree of risk than fully amortizing loans because the ability of the
borrower to make a balloon payment typically will depend upon its ability either
to refinance the loan or to sell the related Mortgaged Property. The ability of
a borrower to accomplish either of these goals will be affected by a number of
factors, including the level of available mortgage rates at the time of the
attempted sale or refinancing, the borrower's equity in the related Mortgaged
Property, the financial condition of the borrower and operating history of the
related Mortgaged Property, tax laws, prevailing economic conditions and the
availability of credit for commercial real estate projects generally.
Other factors affecting prepayment of Mortgage Loans include changes in
mortgagors' housing needs, job transfers, unemployment and mortgagors' net
equity in the Mortgaged Properties. Since the rate of payment of principal of
the Notes will depend on the rate of payment (including prepayments) of the
principal of the Mortgage Loans, the actual maturity of the Notes could occur
significantly earlier than the Stated Maturity. See "--Weighted Average Life"
herein.
In addition, the yield to maturity of the Notes will depend on the
price paid by the holders of the Notes and the Note Interest Rate. The extent to
which the yield to maturity of a Note is sensitive to prepayments will depend
upon the degree to which it is purchased at a discount or premium.
Prepayments of principal on the Mortgage Loans will generally be passed
through to the Indenture Trustee and included in the Available Funds in the
month following the month of receipt thereof by the Servicer. Any prepayment of
a Mortgage Loan or liquidation of a Mortgage Loan (by foreclosure proceedings or
by virtue of the repurchase of a Mortgage Loan) will have the effect of
resulting in payments on the Notes of amounts that otherwise would be paid in
amortized increments over the remaining term of such Mortgage Loan.
To the extent that principal prepayments with respect to the Mortgage
Loans result in prepayments on the Notes during periods of generally lower
interest rates, Noteholders may be unable to reinvest such principal prepayments
in securities having a yield and rating comparable to the Notes.
The yield on the Notes may be affected by any delays in receipt of
payments thereon as described under "Description of the Notes--Book-Entry
Registration and Definitive Notes" herein and "Risk Factors--Owners of Book
Entry Securities Not Entitled To Exercise Rights of Holders of Securities" and
"Description of the Securities--Book Entry Registration and Form" in the
prospectus.
The yield on the Notes may also be affected by a redemption of the
Notes as described under "Description of the Notes--Redemption of the Notes"
herein.
No representation is made as to the rate of principal payments on the
Mortgage Loans or as to the yield to maturity of the Notes. An investor is urged
to make an investment decision with respect to the Notes based on the
anticipated yield to maturity of the Notes resulting from its price and such
investor's own determination as to anticipated Mortgage Loan prepayment rates.
Prospective investors are urged to analyze fully the effect of Mortgage Loan
principal prepayments and market conditions on the yield and value of the Notes,
before acquiring any Notes. In particular, investors that are required to
perform periodic valuations on their investment portfolios should consider the
effect of such fluctuations in value. In addition, investors should carefully
consider the factors discussed under "Risk Factors--Prepayment of the Mortgage
Loans May Adversely Affect the Yield to Maturity of the Notes" herein.
Weighted Average Life
Weighted average life refers to the amount of time that will elapse
from the date of issuance of a security until each dollar of principal of such
security will be repaid to the investor. The weighted average lives of the Notes
will be influenced by the rate at which principal on the Mortgage Loans is paid,
which may be in the form of scheduled payments or prepayments (including
prepayments of principal by the borrower as well as amounts received by virtue
of repurchases, condemnation, insurance or foreclosure with respect to the
Mortgage Loans), and the timing thereof.
The weighted average life of the Notes also will be influenced by the
overcollateralization of the Notes because interest collections are applied as
principal payments to the Notes until the outstanding Note Balance is less than
the aggregate Principal Balance of the Mortgage Loans by an amount equal to the
Required Overcollateralization Amount. These payments have the effect of
accelerating the amortization of the Notes, thereby shortening their weighted
average life.
Prepayments on mortgage loans are commonly measured relative to a
prepayment model or standard. A common model ("Constant Prepayment Rate" or
"CPR") represents an assumed constant rate of prepayment each month, expressed
as an annual rate, relative to the then outstanding principal balance on a pool
of mortgage loans for the life of such loans. The model used in the prospectus
supplement with respect to the Notes is the Home Equity Prepayment assumption
("HEP"). HEP assumes that a pool of loans prepays in the first month of the life
of such loans at a CPR that corresponds to one tenth the given HEP percentage
and increases by an additional one-tenth each month thereafter until the tenth
month, where it remains at a CPR equal to the given HEP percentage. For example,
with respect to a pool of mortgage loans, a 25% HEP assumes a CPR of 2.5% in the
first month of the life of such loans and an increase of 2.5% CPR each month
thereafter until the tenth month. Beginning in the tenth month and in each month
thereafter during the life of such mortgage loans, 25% HEP assumes a CPR of 25%
each month. Neither the prepayment model used herein nor any other prepayment
model or assumption purports to be an historical description of prepayment
experience or a prediction of the anticipated rate of prepayment of any pool of
mortgage loans, including the Mortgage Loans included in the Mortgage Pool.
Each of the following tables is based on the following assumptions (the
"Modeling Assumptions"): o the Mortgage Pool consists of Mortgage Loans with the
characteristics set forth in the table below, o distributions on the Notes are
received, in cash, on the th day of each month, commencing in
,
o the Mortgage Loans prepay at the percentage of HEP indicated,
o the Notes are not redeemed on the Initial Redemption Date,
other than as set forth in the Weighted Average Life to
10% Call,
o no defaults or delinquencies occur in the payment by mortgagors of
principal and interest on the Mortgage Loans and no shortfalls due to
the application of the Soldiers' and Sailors' Civil Relief Act of 1940,
as amended (the "Relief Act"), are incurred,
o none of the Seller, the Servicer or any other person purchases from the
Trust any Mortgage Loan pursuant to any obligation or option under the
Sale Agreement, the Servicing Agreement or others,
o scheduled monthly payments of principal and interest on the Mortgage
Loans are received on the first day of each month commencing in , and
are computed prior to giving effect to any prepayments received in the
prior month,
o prepayments representing payment in full of individual Mortgage Loans
are received on the last day of each month commencing in , and include
30 days' interest thereon,
o the scheduled monthly payment for each Mortgage Loan is calculated
based on its Principal Balance, gross coupon rate and remaining
amortization term, such that the Mortgage Loan will amortize in amounts
sufficient to repay the remaining principal balance of such Mortgage
Loan by its remaining amortization term,
o the coupon on the Notes is as set forth herein,
o the Notes are purchased on ,
o no investment earnings on the Note Account or the Collection Account is
available for payment to the Noteholders, o the Servicing Fee is equal to % per
annum of the aggregate Principal Balance of the Mortgage Loans, o the Indenture
Trustee Fee is equal to % per annum of the aggregate Principal Balance of the
Mortgage Loans
and the Note Insurer Premium is equal to the amount set forth in the
Insurance Agreement,
o the Required Overcollateralization Amount is as set forth in the
Indenture and all collateral performance tests
have been satisfied,
o the level of Six-Month LIBOR remains constant at %,
o no prepayment premium is received during the related Collection Period,
o the PMI Insurer premium is equal to % per annum of the aggregate Principal
Balance of the Mortgage Loans, and o the gross coupon rate for each adjustable
rate Mortgage Loan is adjusted on its next rate adjustment date (and
every six months thereafter) to equal the sum of (a) the level of
Six-Month LIBOR and (b) the respective gross margin, subject to
applicable interest rate caps and floors.
S-61
DOCSNY1:987889.2987889.3
5542-27 SK8
Mortgage Loan Pool Characteristics
Number of
Remaining Months until
Gross Original Remaining Term To Initial Ongoing next rate
Pool Principal Coupon Amortization Amortization Maturity Gross Periodic Periodic Lifetime Lifetime adjustment
Number Balance( $ ) Rate (%) Term (months) Term (months) (months) Margin (%)Cap (%) Cap (%) Cap (%) Floor (%)date
- -----------------------------------------------------------------------------------------------------
S-84
DOCSNY1:987889.2987889.3
5542-27 SK8
S-62
611441.1DOCSNY1:987889.2987889.3
5542-27 SK8
There will be discrepancies between the characteristics of the actual
Mortgage Loans and the characteristics assumed in preparing the table. Any such
discrepancy may have an effect upon the percentages of the initial Note Balance
outstanding (and the weighted average life) of the Notes set forth in the table.
In addition, since the actual Mortgage Loans will have characteristics that
differ from those assumed in preparing the table set forth below, the Notes may
mature earlier or later than indicated by the table. Based on the foregoing
assumptions, the table indicates the weighted average life of the Notes and sets
forth the percentages of the initial Note Balance that would be outstanding
after each of the Payment Dates shown, at various percentages of HEP. Variations
in the prepayment experience and the balance of the Mortgage Loans that prepay
may increase or decrease the percentages of initial Note Balances (and weighted
average lives) shown in the following table. Such variations may occur even if
the average prepayment experience of all such Mortgage Loans equals any of the
specified percentages of HEP. The following table indicates the percentage of
the initial Note Balance that would be outstanding after each of the dates shown
at various percentages of HEP and the corresponding weighted average lives of
the Notes.
Percent of Original Principal Balance Outstanding(1) of the Notes at the
Following HEP Percentages
Payment Date % % % % % %
Weighted Average Life to Maturity
(in Years)(1)
Weighted Average Life to 10% Call
(in Years)(1)
(1) Rounded to the nearest whole percentage.
- --------------------------------------------------------------------------------
(2) The weighted average life of the Notes is determined by (i) multiplying the
amount of each principal payment by the number of years from the date of
issuance to the related Payment Date, (ii) adding the results, and (iii)
dividing the sum by the original Note Balance.
There is no assurance that prepayments of the Mortgage Loans will
conform to any of the levels of the prepayment assumption indicated in the table
above, or to any other level, or that the actual weighted average life of the
Notes will conform to any of the weighted average lives set forth in the table
above. Furthermore, the information contained in the table with respect to the
weighted average life of the Notes is not necessarily indicative of the weighted
average life that might be calculated or projected under different or varying
HEP.
The characteristics of the Mortgage Loans will differ from those
assumed in preparing the table above. In addition, it is unlikely that any
Mortgage Loan will prepay at any constant percentage until maturity or that all
of the Mortgage Loans will prepay at the same rate. The timing of changes in the
rate of prepayments may significantly affect the actual yield to maturity to
investors, even if the average rate of principal prepayments is consistent with
the expectations of investors.
THE SERVICING AGREEMENT
General
The summaries of certain provisions of the Servicing Agreement set
forth below and in other places in this prospectus supplement, while complete in
material respects, do not purport to be exhaustive. For more details regarding
the terms of the Servicing Agreement, prospective investors in the Notes are
advised to review the Servicing Agreement, a copy of which the Seller will
provide (without exhibits) without charge upon written request addressed to the
Seller.
Generally, the Servicer will be authorized and empowered pursuant to
the Servicing Agreement (i) to execute and deliver, or procure the execution and
delivery by the Indenture Trustee of, any and all instruments of satisfaction or
cancellation or of partial or full release or discharge and all other comparable
instruments with respect to the Mortgage Loans and with respect to the Mortgaged
Properties and (ii) to institute foreclosure proceedings or obtain deeds in lieu
of foreclosure so as to convert title to of any Mortgaged Property in the name
of the Indenture Trustee on behalf of the Noteholders and the Note Insurer.
Payments on Mortgage Loans and Establishment of Collection
Account
The Servicer shall establish and maintain in the name of the Indenture
Trustee for the benefit of Noteholders and the Note Insurer one or more accounts
(collectively, the "Collection Account") at one or more institutions meeting the
requirements set forth in the Servicing Agreement. The Collection Account, and
all amounts deposited therein from time to time, shall be part of the Trust
Fund. The Servicer will deposit into the Collection Account not later than two
Business Days after receipt, all payments on or in respect of the Mortgage Loans
received from or on behalf of mortgagors and all proceeds of the Mortgage Loans,
net of servicing fees, all other items of servicing compensation, and
reimbursable outstanding Servicing Advances and Monthly Advances, to the extent
the Servicer's automated system deducts such amounts prior to deposit to the
Collection Account. On or prior to 12:00 noon Eastern Standard Time on each
Deposit Date, funds to be remitted to the Note Account will be remitted from the
Collection Account to the Indenture Trustee for deposit into the Note Account.
Notwithstanding the foregoing, payments and collections that do not constitute
Available Funds (e.g., amounts representing interest accrued on Mortgage Loans
in respect of any period prior to the Cut-off Date, fees, late payment charges,
charges for checks returned for insufficient funds, extension or other
administrative charges or other amounts received for application towards the
payment of taxes, insurance premiums, assessments and similar items) will not be
required to be deposited into the Collection Account. The Servicer may make
withdrawals from the Collection Account only for the following purposes:
o to make deposits into the Note Account as described above;
o to pay itself any monthly Servicing Fees and other items of servicing
compensation and investment income on Permitted Investments to the
extent permitted by the Servicing Agreement;
o to make any Servicing Advance to the extent permitted by the Servicing
Agreement or to reimburse itself for any Servicing Advance or Monthly
Advance previously made to the extent permitted by the Servicing
Agreement;
o to withdraw amounts that have been deposited to the Collection Account
in error; and
o to clear and terminate the Collection Account.
Investment of Collection Account
All or a portion of the Collection Account may be invested and
reinvested in one or more Permitted Investments bearing interest or sold at a
discount, at the Servicer's written direction. The Indenture Trustee or any
affiliate thereof may be the obligor on, or manager or advisor of, any
investment in any Collection Account which otherwise qualifies as a Permitted
Investment. No investment in the Collection Account may mature later than the
Deposit Date next succeeding the date of investment.
The Indenture Trustee will not in any way be held liable by reason of
any insufficiency in the Collection Account resulting from any loss on any
Permitted Investment included therein, except to the extent the Indenture
Trustee is the obligor thereon.
All income or other gain from investments in the Collection Account
will be held in the Collection Account for the benefit of the Servicer as
additional servicing compensation and will be subject to withdrawal from time to
time as permitted by the Servicing Agreement. Any loss resulting from such
investments will be for the account of the Servicer. The Servicer will be
required to deposit the amount of any such loss immediately upon the realization
of such loss to the extent such loss will not be offset by other income or gain
from investments in the Collection Account and then available for such
application.
Monthly Advances
In order to maintain a regular flow of scheduled interest to
Noteholders (rather than to guarantee or insure against losses), the Servicing
Agreement will require that, not later than the close of business on the Deposit
Date prior to each Payment Date, the Servicer will remit or cause to be remitted
a Monthly Advance, if necessary, to the Indenture Trustee for deposit in the
Note Account to be paid on the related Payment Date. A "Monthly Advance" will be
equal to the sum of (i) the interest and principal portions of the aggregate
amount of monthly payments (net of the related Servicing Fee) due on the
Mortgage Loans during the related Due Period but delinquent so as not to have
been deposited into the Collection Account as of the close of business on the
last day before the related Deposit Date and (ii) with respect to each Mortgaged
Property that was acquired in foreclosure or similar action (each, an "REO
Property") during or prior to the related Collection Period and as to which
final sale did not occur during the related Collection Period, an amount equal
to the excess, if any, of interest on the Principal Balance of the Mortgage
Loan, but not of any portion that represents late payment charges, extension
fees or collections allocable to payments to be made by mortgagors for payment
of insurance premiums or similar items, relating to such REO Property for the
related Collection Period at the related Mortgage Rate (net of the Servicing
Fee) over the net income from the REO Property transferred to the Note Account
for such Payment Date; provided, however, that in no case will the Servicer be
required to make advances with respect to any period following the final due
date with respect to any Mortgage Loan.
The Servicing Agreement provides that the Servicer may pay all or a
portion of any Monthly Advance out of amounts on deposit in the Collection
Account which are being held for payment on a subsequent Payment Date; any such
amounts so used are required to be replaced by the Servicer by deposit to the
Collection Account on or before the Deposit Date relating to such subsequent
Payment Date.
The Servicer may recover Monthly Advances, if not theretofore recovered
from the mortgagor on whose behalf such Monthly Advance was made, from
subsequent collections on the related Mortgage Loan, including Liquidation
Proceeds, Insurance Proceeds (but only to the extent of such Insurance Proceeds
or Liquidation Proceeds) and such other amounts as may be collected by the
Servicer from the mortgagor or otherwise relating to the Mortgage Loan. To the
extent the Servicer, in its good faith business judgment, determines that any
Monthly Advance will not be ultimately recoverable from subsequent collections,
Insurance Proceeds, Liquidation Proceeds on the related Mortgage Loans or
otherwise ("Nonrecoverable Advances"), the Servicer may reimburse itself on the
first Deposit Date thereafter out of collections received on other Mortgage
Loans.
The Servicer will not be required to make any Monthly Advance that it
determines would be a Nonrecoverable Advance.
Compensating Interest Payments
With respect to each Mortgage Loan as to which a prepayment in whole or
in part was received, the Servicer will be required with respect to such Payment
Date to remit to the Indenture Trustee no later than the related Deposit Date,
from amounts otherwise payable to the Servicer as the Servicing Fee for the
related Payment Date, an amount equal to the lesser of (a) the monthly Servicing
Fee for such Collection Period and (b) the excess, if any, of (i) 30 days'
interest on the Principal Balance of each such Mortgage Loan (immediately prior
to such prepayment) at the related Mortgage Rate, less (ii) the amount of
interest actually received by the Servicer on such Mortgage Loan during the
related Due Period (each such amount, a "Compensating Interest Payment") for
payment on the Notes on such Payment Date. The Servicer will not be entitled to
be reimbursed from collections on the Mortgage Loans or any assets of the Trust
Fund for any Compensating Interest Payments made.
Realization upon Defaulted Mortgage Loans
The Servicing Agreement will require the Servicer, acting as the agent
of the Indenture Trustee, to foreclose upon or otherwise comparably convert to
ownership in the name of the Indenture Trustee, on behalf of the Noteholders and
the Note Insurer, Mortgaged Properties securing such of the Mortgage Loans as
come into default, as to which no satisfactory arrangements can be made for the
collection of delinquent payments and which the Servicer has not reacquired
pursuant to the option described below; provided, however, that if the Servicer
has actual knowledge or reasonably believes that any Mortgaged Property is
contaminated by hazardous or toxic wastes or substances, the Servicer will cause
an environmental inspection (in no event at the Indenture Trustee's expense) of
the Mortgaged Property that complies with Fannie Mae's selling and servicing
guide applicable to single family homes and its servicing procedures to be
conducted. If the environmental inspection reveals any potentially hazardous
substances, the Servicer will notify the Indenture Trustee and the Note Insurer,
and the Servicer will not foreclose or accept a deed in lieu of foreclosure on
the Mortgaged Property without the consent of the Indenture Trustee and the Note
Insurer. In connection with such foreclosure or other conversion, the Servicer
will follow such practices as it deems necessary or advisable and as are in
keeping with its general mortgage loan servicing activities; provided, however,
that the Servicer will not be required to expend its own funds in connection
with foreclosure or other conversion, correction of a default on a senior deed
of trust or restoration of any Mortgaged Property unless the Servicer determines
that such foreclosure, correction or restoration will increase Net Liquidation
Proceeds.
In servicing the Mortgage Loans, the Servicer will be required to
determine, with respect to each defaulted Mortgage Loan, when it has recovered,
whether through trustee's sale, foreclosure sale or otherwise, all amounts, if
any, it expects to recover from or on account of such defaulted Mortgage Loan,
whereupon such Mortgage Loan will be charged off and will become a Liquidated
Mortgage Loan.
The Servicer may have the right and the option under the Servicing
Agreement, but not the obligation, to reacquire for its own account any Mortgage
Loan which becomes delinquent, in whole or in part, as to three consecutive
monthly installments or any Mortgage Loan as to which enforcement proceedings
have been brought by the Servicer. Any such Mortgage Loan so reacquired will be
withdrawn from the Mortgage Pool on a Deposit Date at the Release Price
therefor. The Servicer may only repurchase Mortgage Loans in the order of
delinquency, from most delinquent to least or from highest projected loss (as
shown on the Servicer's monthly report) to lowest projected loss.
Evidence as to Compliance
The Servicing Agreement provides that on or before a specified date in
each year, a firm of nationally recognized independent public accountants will
furnish a report to the Issuer, Indenture Trustee, the Rating Agencies and the
Note Insurer to the effect that on the basis of certain procedures substantially
in conformance with the Uniform Single Attestation Program for Mortgage Bankers
("USAP") (to the extent the procedures are applicable to the servicing
obligations set forth in the Servicing Agreement), the servicing by or on behalf
of the Servicer of mortgage loans, and such procedures have disclosed no
exceptions or errors in records relating to the mortgage loans serviced by the
Servicer for others which, in the opinion of such firm, such firm's required to
report under USAP, except for such exceptions as will be referred to in the
report. The Servicing Agreement will provide that the Servicer will be required
to deliver to the Issuer, the Indenture Trustee, the Rating Agencies and the
Note Insurer, on or before a specified date in each year, an officer's
certificate of the Servicer to the effect that the Servicer has fulfilled its
material obligations under the Servicing Agreement throughout the preceding
year.
Resignation of Servicer; Certain Matters Regarding Servicer's
Servicing Obligations
The Servicing Agreement will provide that the Servicer may not resign
from its obligations and duties as the Servicer thereunder, except upon the
delivery, at the Servicer's expense, of an opinion of counsel addressed to the
Issuer, the Indenture Trustee and the Note Insurer and in form and substance
acceptable to the Indenture Trustee and the Note Insurer to the effect that its
duties thereunder are no longer permissible under applicable law or regulation
or are in material conflict by reason of applicable law or regulation with any
other of its activities carried on as of the date of the Servicing Agreement. No
such resignation will become effective until the Indenture Trustee or a
successor servicer approved by the Note Insurer has assumed the servicing
obligations and duties of the Servicer under the Servicing Agreement.
The Servicing Agreement will also provide that neither the Servicer,
nor any of its directors, officers, employees or agents, will be liable to the
Indenture Trustee, the Trust or the Noteholders for any action taken or for
refraining from the taking of any action by the Servicer pursuant to the
Servicing Agreement, or for errors in judgment; provided, however, that neither
the Servicer nor any such person will be protected against any liability which
would otherwise be imposed by reason of willful misfeasance, bad faith or
negligence in the performance of duties of the Servicer, or by reason of
reckless disregard of obligations and duties of the Servicer, thereunder.
In addition, the Servicing Agreement will provide that the Servicer
will not be under any obligation to appear in, prosecute or defend any legal
action which is not incidental to its duties to service the Mortgage Loans under
the Servicing Agreement and which in its opinion may involve it in any expense
or liability.
The Servicing Agreement will provide that any corporation or other
entity (a) into which the Servicer may be merged or consolidated, (b) that may
result from any merger, conversion or consolidation to which the Servicer shall
be a party or (c) that may succeed to all or substantially all of the business
of the Servicer, will, in any case where an assumption is not effected by
operation of law, execute an agreement of assumption to perform every obligation
of the Servicer under the Servicing Agreement, and will be the successor to the
Servicer thereunder without the execution or filing of any document or any
further act by any of the parties to the Servicing Agreement; provided, however,
that if the Servicer in any of the foregoing cases is not the surviving entity,
the surviving entity shall execute and deliver to the Issuer and the Indenture
Trustee an agreement of assumption to perform every obligation of the Servicer
thereunder and provided further that if the surviving entity is not the
Servicer, the surviving entity must (A) be acceptable to the Note Insurer and
(B) each Rating Agency must have issued written confirmation that the succession
of such successor will not result in a downgrading of the implied rating then
assigned by such Rating Agency to the Notes (without taking into account the
Insurance Policy).
Servicer Events of Default
Events of default (each, a "Servicer Event of Default") under the
Servicing Agreement will generally include: o any failure by the Servicer to
make a required Monthly Advance on the related Deposit Date as required or any
failure by the Servicer to deposit in the Collection Account or Note
Account any other amount required to be so deposited under the
Servicing Agreement;
o any failure by the Servicer to duly observe or perform in any material
respect any other of its covenants or agreements in the Servicing
Agreement or the Sale Agreement which materially and adversely affects
the rights of Noteholders or the Note Insurer and continues unremedied
for the applicable cure period, if any, after the giving of written
notice of such failure to the Servicer by the Indenture Trustee, at the
direction of the Note Insurer, or by the Note Insurer or, with the
consent of the Note Insurer, the Noteholders evidencing Voting
Interests represented by all Notes aggregating not less than 51%;
o certain events of insolvency, readjustment of debt, marshaling of
assets and liabilities or similar proceedings regarding the Servicer
and certain actions by the Servicer indicating its insolvency or
inability to pay its obligations;
o any representation or warranty made by the Servicer in the Servicing
Agreement or the Sale Agreement or certificate delivered by the
Servicer pursuant thereto having been incorrect in any material respect
as of the time made and the circumstance in respect of which such
representation and warranty is incorrect, if capable of being cured,
not having been cured within any applicable cure period after notice is
given to the Servicer by the Indenture Trustee, at the direction of the
Note Insurer, or the Note Insurer, or, with the consent of the Note
Insurer, the Noteholders evidencing Voting Interests represented by all
Notes aggregating not less than 51%;
o the failure by the Servicer to satisfy certain net worth and other financial
requirements of the Note Insurer; o the occurrence of delinquencies and/or
losses in respect of the Mortgage Loans in excess of a level, and for a
period of time, as specified in the Servicing Agreement; and
o the occurrence of an event of default under the Insurance Agreement.
Rights Upon Servicer Events of Default
Upon the occurrence of a Servicer Event of Default, the Note Insurer
or, with the written consent of the Note Insurer, Noteholders evidencing Voting
Interests represented by all Notes aggregating not less than 51% or the
Indenture Trustee, at the direction of the Note Insurer, may terminate all of
the rights and obligations of the Servicer under the Servicing Agreement,
whereupon the Note Insurer may (and if the Note Insurer fails to do so, the
Indenture Trustee will be obligated to) appoint a successor Servicer or, if
neither the Note Insurer nor the Indenture Trustee appoints a successor
Servicer, the Indenture Trustee will succeed to all the responsibilities, duties
and liabilities of the Servicer under the Servicing Agreement and will be
entitled to such compensation as the Servicer would have been entitled to under
the Servicing Agreement. In the event neither the Note Insurer nor the Indenture
Trustee appoints a successor Servicer and the Indenture Trustee is unwilling or
legally unable to act as Servicer, the Indenture Trustee may petition a court of
competent jurisdiction for the appointment of a successor Servicer. Any such
successor Servicer must be an established housing and home finance institution
or any institution that regularly services nonconforming residential mortgage
loans, that is currently servicing a nonconforming residential mortgage loan
portfolio, that has all licenses, permits and approvals required by applicable
law and a net worth of at least $10,000,000. The appointment of any such
successor Servicer (other than the Indenture Trustee) shall be acceptable to the
Note Insurer, which acceptance shall not be unreasonably withheld, and shall not
result in the qualification, reduction or withdrawal of the implied rating
assigned to the Notes by the Rating Agencies (without taking into account the
Insurance Policy). Pending appointment of a successor Servicer, unless the
Indenture Trustee is prohibited by law from so acting, the Indenture Trustee
will be obligated to act as Servicer. The Note Insurer and such successor
Servicer may agree upon the servicing compensation to be paid, which may be
greater than the compensation described above.
No Noteholder, solely by virtue of its status as a Noteholder, will
have any right under the Servicing Agreement to institute any action, suit or
proceeding with respect to the Servicing Agreement unless the Note Insurer shall
have consented thereto, and such Noteholder previously has given to the
Indenture Trustee written notice of default and unless Noteholders evidencing
Voting Interests represented by all Notes aggregating not less than 51% have
made written request upon the Indenture Trustee to institute such action, suit
or proceeding in its own name as Indenture Trustee thereunder and have offered
to the Indenture Trustee reasonable indemnity for costs, expenses and
liabilities to be incurred, and the Indenture Trustee for 60 days has neglected
or refused to institute any such action, suit or proceeding. However, the
Indenture Trustee will be under no obligation to exercise any of the rights or
powers vested in it by the Servicing Agreement or to institute, conduct or
defend any litigation thereunder or in relation thereto at the request, order or
direction of any of the Noteholders, unless such Noteholders have offered to the
Indenture Trustee reasonable security or indemnity against the costs, expenses
and liabilities which may be incurred therein or thereby.
Amendments
Subject to the prior written consent of the Note Insurer, at any time
and from time to time, without the consent of the Noteholders, the Indenture
Trustee, the Issuer and the Servicer may amend the Servicing Agreement for the
purposes of (a) curing any ambiguity or mistake or correcting or supplementing
any provision of such agreement that may be inconsistent with any other
provision of such agreement or (b) complying with the requirements of the Code;
provided, however, that such action shall not materially and adversely affect
the interests of any Noteholder, as evidenced by an opinion of counsel delivered
to the Indenture Trustee to such effect (which opinion shall not be at the
expense of the Indenture Trustee) and written confirmation from each of the
Rating Agencies that such action will not result in a qualification, reduction
or withdrawal of the implied ratings on the Notes (without taking into account
the Insurance Policy).
The Servicing Agreement may also be amended by the Indenture Trustee,
the Issuer and the Servicer, at any time and from time to time, with the prior
written approval of the Rating Agencies, the Note Insurer and not less than a
majority of the Voting Interests represented by the Notes then outstanding, for
the purpose of adding any provisions or changing in any manner or eliminating
any of the provisions thereof or of modifying in any manner the rights of the
Noteholders thereunder; provided, however, that no such amendment shall (a)
reduce in any manner the amount of, or delay the timing of, payments which are
required to be paid to the Note Account without the consent of all Noteholders
or (b) reduce the aforesaid percentages of Voting Interests which are required
to consent to any such amendments, without the consent of all Noteholders.
Servicing and Other Compensation; Payment of Expenses
The Servicing Fee will be the primary compensation to be paid to or
retained by the Servicer in respect of its servicing activities under the
Servicing Agreement and will be paid to the Servicer on each Deposit Date out of
collections of interest received on or in respect of the Mortgage Loans for the
related Collection Period. The servicing fee (the "Servicing Fee") will equal
one-twelfth (1/12) of the product of (a) % (the "Servicing Fee Rate") and (b)
the aggregate scheduled principal balance of the Mortgage Loans as of the close
of business on the first day of the related Due Period. The Servicer shall be
entitled to retain the Servicing Fee from amounts to be deposited in the
Collection Account. In addition, the Servicer will retain the benefit, if any,
from any deposit, maintenance or investment of funds in the Collection Account.
Assumption fees, late payment charges, charges for checks returned for
insufficient funds, and extension and other administrative charges, to the
extent collected from mortgagors, will be retained by the Servicer as additional
servicing compensation.
Subject to its right to refuse to make Nonrecoverable Advances as
described below, the Servicer will be required to pay all reasonable and
customary "out-of-pocket" costs and expenses incurred in the performance of its
servicing obligations, including, but not limited to, the payment of fees for
any sub-servicer and the cost of (i) any enforcement or judicial proceedings
relating to the mortgagors, including foreclosures, and (ii) the management and
liquidation of Mortgaged Properties acquired in satisfaction of the related
Mortgage Loans. Such expenditures (each, a "Servicing Advance") may include
costs of collection efforts, reappraisals, forced placement of hazard insurance
if a borrower allows his hazard policy to lapse, legal fees in connection with
foreclosure actions, advancing delinquent property taxes and upkeep and
maintenance of the Mortgaged Property if it is acquired through foreclosure and
similar types of expenses.
The Servicing Agreement provides that the Servicer may pay all or a
portion of any Servicing Advance out of amounts on deposit in the Collection
Account which are being held for payment on a subsequent Payment Date relating
to such Collection Period; any such amounts so used are required to be replaced
by the Servicer by deposit to the Collection Account on or before the Deposit
Date relating to such subsequent Payment Date.
The Servicer may recover Servicing Advances, if not theretofore
recovered from the mortgagor on whose behalf such Servicing Advance was made,
from subsequent collections on the related Mortgage Loan, including Liquidation
Proceeds, Insurance Proceeds and such other amounts as may be collected by the
Servicer from the mortgagor or otherwise relating to the Mortgage Loan. To the
extent the Servicer, in its good faith business judgment, determines that any
Servicing Advance will be or has become a Nonrecoverable Advance, the Servicer
may reimburse itself for such advance from the Collection Account.
The Servicer will not be required to make any Servicing Advance that it
determines would be a Nonrecoverable Advance if made.
THE NOTE INSURANCE
The Insurance Policy
Simultaneously with the issuance of the Notes, the Note Insurer will
deliver the Insurance Policy to the Indenture Trustee for the benefit of the
holders of the Notes. Under the Insurance Policy, the Note Insurer will
irrevocably and unconditionally guarantee payment to the Indenture Trustee on
behalf of the holders of the Notes on each Payment Date for the benefit of the
holders of the Notes, the full and complete payment of Insured Payments with
respect to the Notes calculated in accordance with the original terms of the
Notes when issued and without regard to any amendment or modification of the
Notes or the Indenture except amendments or modifications to which the Note
Insurer has given its prior written consent. "Insured Payments" shall mean with
respect to the Notes as of any Payment Date, the sum of: o any shortfall in
amounts available to pay the Note Interest on such Notes for the related
Interest Period, o the excess, if any, of (a) the Note Balance of the Notes then
outstanding, after giving effect to payments on such
Payment Date, over (b) the aggregate principal balances of the Mortgage
Loans then outstanding and o without duplication of the amount specified in the
second clause, the Note Balance of the Notes to the extent
unpaid on the stated maturity date, after giving effect to payments on
such Payment Date, or the earlier redemption of the Notes pursuant to
the terms of the Indenture.
Notwithstanding the foregoing, the Note Insurer has the right to pay a Realized
Loss. The Insurance Policy does not cover any Prepayment Interest Shortfalls or
Relief Act Shortfalls.
If any Insured Payment is avoided as a preference payment under
applicable bankruptcy, insolvency, receivership or similar law, the Note Insurer
will pay such amount out of funds of the Note Insurer on the later of (a) the
date when due to be paid pursuant to the Order referred to below or (b) the
first to occur of (i) the fourth Business Day following Receipt by the Note
Insurer from the Indenture Trustee of (A) a certified copy of the order of the
court or other governmental body which exercised jurisdiction to the effect that
a holder of Notes is required to return principal or interest distributed with
respect to a Note during the Term of the Insurance Policy because such payments
were voidable preferences under applicable bankruptcy law (the "Order"), (B) a
certificate of such holder of Notes that the Order has been entered and is not
subject to any stay, and (C) an assignment duly executed and delivered by such
holder of Notes, in such form as is reasonably required by the Note Insurer and
provided to such holder of Notes by the Note Insurer, irrevocably assigning to
the Note Insurer all rights and claims of such holder of Notes relating to or
arising under the Notes against the debtor which made such preference payment or
otherwise with respect to such preference payment, or (ii) the date of Receipt
by the Note Insurer from the Indenture Trustee of the items referred to in
clauses (A), (B) and (C) above if, at least four Business Days prior to such
date of Receipt, the Note Insurer shall have Received written notice from the
Indenture Trustee that such items were to be delivered on such date and such
date was specified in such notice. Such payment shall be disbursed to the
receiver, conservator, debtor-in-possession or Indenture Trustee in bankruptcy
named in the Order and not to the Indenture Trustee or holder of Notes directly,
unless a holder of Notes has previously paid such amount to the receiver,
conservator, debtor-in-possession or Indenture Trustee in bankruptcy named in
the Order, in which case such payment shall be disbursed to the Indenture
Trustee for payment to such holder of the Notes upon proof of such payment
reasonably satisfactory to the Note Insurer. In connection with the foregoing,
the Note Insurer shall have the rights provided pursuant to the Indenture.
Payment of claims under the Insurance Policy made in respect of Insured
Payments will be made by the Note Insurer following Receipt by the Note Insurer
of the appropriate notice for payment on the later to occur of (a) 12:00 noon,
New York City time, on the third Business Day following Receipt of such notice
for payment, and (b) 12:00 noon, New York City time, on the relevant Payment
Date.
The terms "Receipt" and "Received", with respect to the Insurance
Policy, means actual delivery to the Note Insurer and to its fiscal agent
appointed by the Note Insurer at its option, if any, prior to 12:00 p.m., New
York City time, on a Business Day; delivery either on a day that is not a
Business Day or after 12:00 p.m., New York City time, shall be deemed to be
Receipt on the next succeeding Business Day. If any notice or certificate given
under the Insurance Policy by the Indenture Trustee is not in proper form or is
not properly completed, executed or delivered, it shall be deemed not to have
been Received, and the Note Insurer or the fiscal agent shall promptly so advise
the Indenture Trustee and the Indenture Trustee may submit an amended notice.
Under the Insurance Policy, "Business Day" means any day other than (i)
a Saturday or Sunday or (ii) a day on which banking institutions in the City of
New York, New York, the State of New York or in the city in which the corporate
trust office of the Indenture Trustee is located, are authorized or obligated by
law or executive order to be closed. The Note Insurer's obligations under the
Insurance Policy to make Insured Payments shall be discharged to the extent
funds are transferred to the Indenture Trustee as provided in the Insurance
Policy, whether or not such funds are properly applied by the Indenture Trustee.
Insured Payments shall be made only at the time set forth in the
Insurance Policy and no accelerated Insured Payments shall be made regardless of
any acceleration of the Notes, unless such acceleration is at the sole option of
the Note Insurer.
"Term of the Insurance Policy" means the period from and including the
date of issuance of the Insurance Policy to and including the date on which the
Note Balance of the Notes are reduced to zero, plus such additional period, to
the extent specified in the Insurance Policy, during which any payment on the
Notes could be avoided in whole or in part as a preference payment.
The Note Insurer shall be subrogated to the rights of the holders of
the Notes to receive payments on principal and interest, as applicable, with
respect to payments on such Notes to the extent of any payment by the Note
Insurer under the Insurance Policy. To the extent the Note Insurer makes Insured
Payments, either directly or indirectly (as by paying through the Indenture
Trustee), to the holders of the Notes, the Note Insurer will be subrogated to
the rights of the holders of the Notes with respect to such Insured Payment and
shall be deemed to the extent of the payments so made to be a registered holder
of the Notes for purposes of payment.
Claims under the Insurance Policy constitute direct unsecured and
unsubordinated obligations of the Note Insurer, and will rank not less than pari
passu with any other unsecured and unsubordinated indebtedness of the Note
Insurer except for certain obligations in respect to tax and other payments to
which preference is or may become afforded by statute. The terms of the
Insurance Policy cannot be modified, altered or affected by any other agreement
or instrument, or by the merger, consolidation or dissolution of the Issuer. The
Insurance Policy by its terms may not be canceled or revoked prior to
distribution in full of all Scheduled Payments (as defined therein). The
Insurance Policy is governed by the laws of the State of New York. The Insurance
Policy is not covered by the property/casualty insurance security fund specified
in Article 76 of the New York Insurance Law.
To the fullest extent permitted by applicable law, the Note Insurer
agrees under the Insurance Policy not to assert, and waives, for the benefit of
each holder of the Notes, all its rights (whether by counterclaim, setoff or
otherwise) and defenses (including, without limitation, the defense of fraud),
whether acquired by subrogation, assignment or otherwise, to the extent that
such rights and defenses may be available to the Note Insurer to avoid payment
of its obligations under the Insurance Policy in accordance with the express
provisions of the Insurance Policy.
The Depositor, the Issuer, the Seller and Servicer and the Note Insurer
will enter into an Insurance and Indemnity Agreement (the "Insurance Agreement")
pursuant to which the Depositor, the Issuer and the Seller will agree to
reimburse, with interest, the Note Insurer for amounts paid pursuant to claims
under the Insurance Policy. The Depositor, the Issuer and the Seller will
further agree to pay the Note Insurer all reasonable charges and expenses which
the Note Insurer may pay or incur relative to any amounts paid under the
Insurance Policy or otherwise in connection with the transaction and to
indemnify the Note Insurer against certain liabilities. Except to the extent
provided therein, amounts owing under the Insurance Agreement will be payable
solely from the Trust Fund. An event of default by the Seller under the
Insurance Agreement will constitute an Event of Default by the Servicer under
the Servicing Agreement and allow the Note Insurer, among other things, to
direct the Indenture Trustee to terminate the Servicer. An "event of default" by
the Seller under the Insurance Agreement includes:
o the Seller's failure to pay when due any amount owed under the Insurance
Agreement or certain other documents, o the Seller's untruth or incorrectness in
any material respect of any representation or warranty of the Seller in
the Insurance Agreement, the Servicing Agreement (in its capacity as
Servicer) or certain other documents, o the Seller's failure to perform or to
observe any covenant or agreement in the Insurance Agreement, the Servicing
Agreement (in its capacity as Servicer) and certain other documents,
o the Seller's failure to pay its debts in general or the occurrence
of certain events of insolvency or bankruptcy
with respect to the Seller,
o the occurrence of an Event of Default relating to the Servicer
under the Servicing Agreement or certain other
documents, and
o a claim for payment is made on the Insurance Policy.
For a more complete description of these provisions, terms and
conditions, reference is made to the Insurance Policy, a copy of which is
available upon request from the Indenture Trustee.
The Note Insurer
The information set forth in this section has been provided by the Note
Insurer. No representation is made by the Underwriters, the Issuer, the
Depositor, the Seller, the Servicer or any of their affiliates as to the
accuracy or completeness of such information or any information related to the
Note Insurer incorporated by reference herein.
General. The Note Insurer is a monoline insurance company incorporated
in under the laws of the State of . The Note Insurer is licensed
to engage in financial guaranty insurance business in all 50
states, the
District of Columbia and Puerto Rico.
The Note Insurer and its subsidiaries are engaged in the business of
writing financial guaranty insurance, principally in respect of securities
offered in domestic and foreign markets. In general, financial guaranty
insurance consists of the issuance of a guaranty of scheduled payments of an
issuer's securities - thereby enhancing the credit rating of those
securities--in consideration for the payment of a premium to the insurer. The
Note Insurer and its subsidiaries principally insure asset-backed,
collateralized and municipal securities. Asset-backed securities are generally
supported by residential mortgage loans, consumer or trade receivables,
securities or other assets having an ascertainable cash flow or market value.
Collateralized securities include public utility first mortgage bonds and
sale/leaseback obligation bonds. Municipal securities consist largely of general
obligation bonds, special revenue bonds and other special obligations of state
and local governments. The Note Insurer insures both newly issued securities
sold in the primary market and outstanding securities sold in the secondary
market that satisfy the Note Insurer's underwriting criteria.
The principal executive offices of the Note Insurer are located at ,
, and
its telephone number at that location is .
Reinsurance. Pursuant to an intercompany agreement, liabilities on
financial guaranty insurance written or reinsured from third parties by the Note
Insurer or its domestic or Bermuda operating insurance company subsidiaries are
generally reinsured among such companies on an agreed-upon percentage
substantially proportional to their respective capital, surplus and reserves,
subject to applicable statutory risk limitations. In addition, the Note Insurer
reinsures a portion of its liabilities under certain of its financial guaranty
insurance policies with other reinsurers under various treaties and on a
transaction-by-transaction basis. Such reinsurance is utilized by the Note
Insurer as a risk management device and to comply with statutory and rating
agency requirements; it does not alter or limit the Note Insurer's obligations
under any financial guaranty insurance policy.
Ratings. The Note Insurer's insurance financial strength is rated " "
by . The Note Insurer's insurer financial strength is rated " " by . The Note
Insurer's claims-paying ability is rated " " by
. Such ratings reflect only the views of the respective rating
agencies, are not recommendations to buy, sell or hold securities and are
subject to revision or withdrawal at any time by such rating agencies.
Capitalization. The following table sets forth the capitalization of
the Note Insurer and its wholly owned subsidiaries on the basis of generally
accepted accounting principles as of :
[Note Insurer to provide]
For further information concerning the Note Insurer, see the
Consolidated Financial Statements of , and the notes thereto
incorporated herein by reference. The Note Insurer's
financial statements are
included as exhibits in the Annual Reports on Form 10-K and the Quarterly
Reports on Form 10-Q filed with the Securities and Exchange Commission (the
"Commission") by and may be reviewed at the EDGAR website maintained by the
Commission and at . Copies of the statutory quarterly and annual statements
filed with the State of
Insurance Department by the Note Insurer are available upon request
to the State of Insurance
Department.
Incorporation of Certain Documents by Reference. The consolidated
financial statements of the Note Insurer included in, or as exhibits to, the
following documents, which have been filed with the Commission by , are hereby
incorporated by reference in this prospectus supplement: (a) the Annual Report
on Form 10-K, as amended, for the year ended , and (b) the Quarterly Report on
Form 10-Q for the period ended .
All financial statements of the Note Insurer included in documents
filed by pursuant to Section 13(a), 13(c), 14 or 15(d) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), subsequent to the date of
this prospectus supplement and prior to the termination of the offering of the
Notes shall be deemed to be incorporated by reference into this prospectus
supplement and to be a part hereof from the respective dates of filing such
documents.
The Seller will provide without charge to any person to whom this
prospectus supplement is delivered, upon oral or written request of such person,
a copy of any or all of the foregoing financial statements incorporated herein
by reference. Requests for such copies should be directed to the Seller at .
The Seller on behalf of the Trust hereby undertakes that, for purposes
of determining any liability under the Securities Act, each filing of the
Trust's annual report pursuant to Section 13(a) or Section 15(d) of the Exchange
Act and each filing of the financial statements of the Note Insurer included in
or as an exhibit to the annual report of filed pursuant to Section 13(a) or
Section 15(d) of the Exchange Act that is incorporated by reference in the
Registration Statement (as defined in the prospectus) shall be deemed to be a
new registration statement relating to the Notes offered hereby, and the
offering of such Notes at that time shall be deemed to be the initial bona fide
offering thereof.
Insurance Regulation. The Note Insurer is licensed and subject to
regulation as a financial guaranty insurance corporation under the laws of the
State of , its state of domicile. In addition, the Note Insurer and its
insurance subsidiaries are subject to regulation by insurance laws of the
various other jurisdictions in which they are licensed to do business. As a
financial guaranty insurance corporation licensed to do business in the State of
, the Note Insurer is subject to Article of the Insurance Law which, among other
things, limits the business of each such insurer to financial guaranty insurance
and related lines, requires that each such insurer maintain a minimum surplus to
policyholders, establishes contingency, loss and unearned premium reserve
requirements for each such insurer, and limits the size of individual
transactions ("single risks") and the volume of transactions ("aggregate risks")
that may be underwritten by each such insurer. Other provisions of the Insurance
Law, applicable to non-life insurance companies such as the Note Insurer,
regulate, among other things, permitted investments, payment of dividends,
transactions with affiliates, mergers, consolidations, acquisitions or sales of
assets and incurrence of liability for borrowings.
ERISA CONSIDERATIONS
Section 406 of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), and Section 4975 of the Internal Revenue Code of 1986, as
amended (the "Code"), prohibit a pension, profit sharing or other employee
benefit plan, as well as individual retirement accounts and annuities and
certain Keogh Plans, and entities deemed to hold assets of such plans (each, a
"Plan") from engaging in certain transactions involving "plan assets" with
persons that are "parties in interest" under ERISA or "disqualified persons"
under the Code with respect to such Plan. A violation of these "prohibited
transaction rules" may generate excise tax and other penalties and liabilities
under ERISA and the Code for such persons. Title I of ERISA also requires that
fiduciaries of a Plan subject to ERISA make investments that are prudent,
diversified (except if prudent not to do so) and in accordance with governing
plan documents.
Under regulations of the Department of Labor set forth in 29 C.F.R. ss.
2510.3-101 (the "Plan Asset Regulations"), the assets of a Plan generally
include not only securities held by a Plan but also the underlying assets of the
issuer of any equity securities (the "Look-Through Rule") unless one or more
exceptions specified in the Plan Asset Regulations are satisfied. For purposes
of those Plan Asset Regulations, an equity security is a security other than a
security that is treated as debt under applicable local law and that has no
substantial equity features. The Issuer believes that the Notes will be treated
as debt obligations without significant equity features for purposes of the Plan
Asset Regulations. Accordingly, a Plan that acquires a Note should not be
treated as having acquired a direct interest in the assets of the Issuer.
However, there can be no complete assurance that the Notes will be treated as
debt obligations without significant equity features for purposes of the Plan
Asset Regulations. If the Notes are treated as having substantial equity
features, the purchaser of a Note could be treated as having acquired a direct
interest in the Mortgage Loans securing the Notes. In that event, the purchase,
holding, or resale of the Notes could result in a transaction that is prohibited
under ERISA or the Code.
However, even if the Notes are treated as debt for such purposes, the
acquisition or holding of Notes by or on behalf of a Plan could be considered to
give rise to a prohibited transaction if the Issuer or any of its affiliates is
or becomes a "party in interest" under ERISA or a "disqualified person" under
the Code with respect to such Plan. In such case, certain exemptions from the
prohibited transaction rules could be applicable depending on the type and
circumstances of the plan fiduciary making the decision to acquire Notes.
Included among these exemptions are: Prohibited Transaction Class Exemption
("PTCE") 96-23, regarding transactions effected by "in-house asset managers";
PTCE 90-1, regarding investments by insurance company pooled separate accounts;
PTCE 95-60, regarding investments by insurance company general accounts; PTCE
91-38, regarding investments by bank collective investment funds; and PTCE
84-14, regarding transactions effected by "qualified professional asset
managers." A purchaser of a Note should be aware, however, that even if the
conditions specified in one or more exemptions are met, the scope of the relief
provided by an exemption might not cover all acts that might be construed as
prohibited transactions. The purchase of a Note will be deemed a representation
by the acquirer that either (i) it is not, and is not purchasing a Note on
behalf of or with the assets of a Plan, or (ii) the acquisition and holding of a
Note by the acquirer qualifies for exemptive relief under PTCE 95-60, PTCE
96-23, PTCE 91-38, PTCE 90-1, PTCE 84-14 or another Department of Labor class
exemption.
A governmental plan as defined in Section 3(32) of ERISA is not subject
to Title I of ERISA or Section 4975 of the Code. However, such a governmental
plan may be subject to a federal, state, or local law which is, to a material
extent, similar to the foregoing provisions of ERISA or the Code ("Similar
Law"). A fiduciary of a governmental plan should make its own determination as
to the need for and the availability of any exemptive relief under Similar Law.
A Plan fiduciary considering the purchase of Notes should consult its
tax and/or legal advisors regarding the applicability of the fiduciary
responsibility provisions of ERISA to such investment, whether the assets of the
Issuer would be considered plan assets, the possibility of exemptive relief from
the prohibited transaction rules, and other related issues and their potential
consequences. The sale of Notes to a Plan is in no respect a representation by
the Issuer or the Underwriters that this investment meets all relevant legal
requirements with respect to investments by Plans generally or any particular
Plan, or that this investment is appropriate for Plans generally or any
particular Plan. See "ERISA Considerations" in the prospectus.
USE OF PROCEEDS
The Issuer intends to use the net proceeds to be received from the sale
of the Notes to acquire the Mortgage Loans from the Depositor and the Seller and
to pay other expenses associated with the pooling of the Mortgage Loans and the
issuance of the Notes. See "Method of Distribution" in this prospectus
supplement.
LEGAL INVESTMENT
The Notes will not constitute "mortgage related securities" for
purposes of the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA").
Institutions whose 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. See "Legal
Investment" in the prospectus.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting
Agreement among Wachovia SecuritiesCapital Markets, an indirect, wholly-owned
subsidiary of Wachovia Corporation, and [Other Underwriter] ("[Other
Underwriter]" and, together with Wachovia SecuritiesCapital Markets, the
"Underwriters") and the Depositor, the Underwriters have agreed to purchase and
the Depositor has agreed to cause the Issuer to sell to the Underwriters the
Notes as follows: [To be provided]. Wachovia Corporation conducts its investment
banking, institutional, and capital markets businesses through its various bank,
broker-dealer and nonbank subsidiaries (including Wachovia SecuritiesCapital
Markets) under the trade name of Wachovia SecuritiesCapital Markets. Any
references to Wachovia SecuritiesCapital Markets in this prospectus supplement,
however, do not include Wachovia Securities, Inc.Capital Markets, LLC, member
NASD/SIPC, a separate broker-dealer subsidiary of Wachovia Corporation and
sister affiliate of Wachovia SecuritiesCapital Markets which is not
participating as a selling group member in the distribution of the Notes.
Distribution of the Notes will be made by the Underwriters from time to
time in negotiated transactions or otherwise at varying prices to be determined
at the time of sale. Total proceeds to the Depositor from the sale of the Notes,
before deducting expenses payable by the Depositor, will be approximately % of
the initial Principal Balance of the Notes. The Underwriters may effect such
transactions by selling Notes to or through dealers and such dealers may receive
from the Underwriters, for which it acts as agent, compensation in the form of
underwriting discounts, concessions or commissions. The Underwriters and any
dealers that participate with the Underwriters in the distribution of such Notes
may be deemed to be underwriters, and any discounts, commissions or concessions
received by them, and any profits on resale of the Notes purchased by them, may
be deemed to be underwriting discounts and commissions under the Securities Act
of 1933, as amended (the "Securities Act").
The Depositor has been advised by the Underwriters that they intend to
make a market in the Notes but have no obligation to do so. There can be no
assurance that a secondary market for the Notes will develop or, if it does
develop, that it will continue.
The Depositor has agreed to indemnify the Underwriters against, or make
contributions to the Underwriters with respect to, certain liabilities,
including liabilities under the Securities Act.
EXPERTS
The consolidated balance sheets of and subsidiaries as of and and the
related consolidated statements of income, changes in shareholder's equity and
cash flows for each of the three years in the period ended incorporated by
reference in this prospectus supplement, have been incorporated herein in
reliance on the report of , independent accountants, given on the authority of
that firm as experts in accounting and auditing.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following is a general discussion of the material anticipated
federal income tax considerations to investors of the purchase, ownership and
disposition of the Notes offered hereby. The discussion is based upon laws,
regulations, rulings and decisions now in effect, all of which are subject to
change. The discussion below does not purport to deal with all federal tax
considerations applicable to all categories of investors, some of which may be
subject to special rules. Investors should consult their own tax advisors in
determining the federal, state, local and any other tax consequences to them of
the purchase, ownership and disposition of the Notes.
Treatment of the Notes as Indebtedness. The Seller agrees, and the
Noteholders will agree by their purchase of Notes, to treat the Notes as debt
for all federal, state and local income tax purposes. There are no regulations,
published rulings or judicial decisions involving the characterization for
federal income tax purposes of securities with terms substantially the same as
the Notes. In general, whether instruments such as the Notes constitute
indebtedness for federal income tax purposes is a question of fact, the
resolution of which is based primarily upon the economic substance of the
instruments and the transaction pursuant to which they are issued rather than
merely upon the form of the transaction or the manner in which the instruments
are labeled. The Internal Revenue Service (the "IRS") and the courts have set
forth various factors to be taken into account in determining, for federal
income tax purposes, whether or not an instrument constitutes indebtedness and
whether a transfer of property is a sale because the transferor has relinquished
substantial incidents of ownership in the property or whether such transfer is a
borrowing secured by the property. On the basis of its analysis of such factors
as applied to the facts and its analysis of the economic substance of the
contemplated transaction, Cadwalader, Wickersham & Taft LLP and Orrick,
Herrington & Sutcliffe LLP, tax counsel to the Depositor ("Tax Counsel") is of
the opinion that, while no transaction closely comparable to that contemplated
has been subject to any Treasury regulation, revenue ruling or judicial
decision, and therefore the matter is subject to interpretation, for federal
income tax purposes, the Notes will be treated as indebtedness of the Trust, and
not as an ownership interest in the Mortgage Loans, or an equity interest in the
Trust or in a separate association taxable as a corporation or other taxable
entity. Further, Tax Counsel is of the opinion that neither the Issuer nor the
Mortgage Pool will be characterized as an association (or as a publicly traded
partnership) taxable as a corporation or as a taxable mortgage pool.
If the Notes are characterized as indebtedness, interest paid or
accrued on a Note will be treated as ordinary income to the Noteholders and
principal payments on a Note will be treated as a return of capital to the
extent of the Noteholder's basis in the Note allocable thereto. An accrual
method taxpayer will be required to include in income interest on the Notes when
earned, even if not paid, unless it is determined to be uncollectible. The Trust
will report to Noteholders of record and the IRS in respect of the interest paid
and original issue discount, if any, accrued on the Notes to the extent required
by law.
Although, as described above, it is the opinion of Tax Counsel that,
for federal income tax purposes, the Notes will be characterized as debt, such
opinion is not binding on the IRS and thus no assurance can be given that such a
characterization will prevail. If the IRS successfully asserted that the Notes
did not represent debt for federal income tax purposes, holders of the Notes
would likely be treated as owning an interest in a partnership and not an
interest in an association (or publicly traded partnership) taxable as a
corporation. If the Noteholders were treated as owning an equitable interest in
a partnership, the partnership itself would not be subject to federal income
tax; rather each partner would be taxed individually on their respective
distributive share of the partnership's income, gain, loss, deductions and
credits. The amount, timing and characterization of items of income and
deductions for a Noteholder would differ if the Notes were held to constitute
partnership interests, rather than indebtedness. Since the parties will treat
the Notes as indebtedness for federal income tax purposes, none of the Servicer,
the Indenture Trustee or the Owner Trustee will attempt to satisfy the tax
reporting requirements that would apply under this alternative characterization
of the Notes. Investors that are foreign persons are strongly advised to consult
their own tax advisors in determining the federal, state, local and other tax
consequences to them of the purchase, ownership and disposition of the Notes.
Original Issue Discount. It is anticipated that the Notes will not have
any original issue discount ("OID") other than possibly OID within a de minimis
exception and that accordingly the provisions of sections 1271 through 1273 and
1275 of the Code generally will not apply to the Notes. OID will be considered
de minimis if it is less than 0.25% of the principal amount of a Note multiplied
by its expected weighted average life. The prepayment assumption that will be
used for purpose of computing original issue discount, if any, for federal
income tax purposes is % HEP.
Market Discount. A subsequent purchaser who buys a Note for less than
its principal amount may be subject to the "market discount" rules of Section
1276 through 1278 of the Code. If a subsequent purchaser of a Note disposes of
the Note (including certain nontaxable dispositions such as a gift), or receives
a principal payment, any gain upon such sale or other disposition will be
recognized, or the amount of such principal payment will be treated, as ordinary
income to the extent of any "market discount" accrued for the period that such
purchaser holds the Note. Such holder may instead elect to include market
discount in income as it accrues with respect to all debt instruments acquired
in the year of acquisition of the Notes and thereafter. Market discount
generally will equal the excess, if any, of the then current unpaid principal
balance of the Note over the purchaser's basis in the Note immediately after
such purchaser acquired the Note. In general, market discount on a Note will be
treated as accruing over the term of such Note in the ratio of interest for the
current period over the sum of such current interest and the expected amount of
all remaining interest payments, or at the election of the holder, under a
constant yield method (taking into account the prepayment assumption). At the
request of a holder of a Note, information will be made available that will
allow the holder to compute the accrual of market discount under the first
method described in the preceding sentence.
The market discount rules also provide that a holder who incurs or
continues indebtedness to acquire a Note at a market discount may be required to
defer the deduction of all or a portion of the interest on such indebtedness
until the corresponding amount of market discount is included in income.
Notwithstanding the above rules, market discount on a Note will be
considered to be zero if it is less than a de minimis amount, which is 0.25% of
the remaining principal balance of the Note multiplied by its expected weighted
average remaining life. If OID or market discount is de minimis, the actual
amount of discount must be allocated to the remaining principal distributions on
the Notes and, when each such distribution is received, capital gain equal to
the discount allocated to such distribution will be recognized.
Market Premium. A subsequent purchaser who buys a Note for more than
its remaining principal amount generally will be considered to have purchased
the Note at a premium. Such holder may amortize such premium, using a constant
yield method, over the remaining term of the Note and, except as future
regulations may otherwise provide, may apply such amortized amounts to reduce
the amount of interest reportable with respect to such note over the period from
the purchase date to the date of maturity of the Note. The amortization of such
premium on an obligation that provides for partial principal payments prior to
maturity should be governed by the methods for accrual of market discount on
such an obligation (described above). A holder that elects to amortize premium
must reduce the tax basis in the related obligation by the amount of the
aggregate deductions (or interest offsets) allowable for amortizable premium. If
a debt instrument purchased at a premium is redeemed in full prior to its
maturity, a purchaser who has elected to amortize premium should be entitled to
a deduction for any remaining unamortized premium in the taxable year of
redemption.
Sale or Redemption of Notes. If a Note is sold or retired, the seller
will recognize gain or loss equal to the difference between the amount realized
on the sale and such holder's adjusted basis in the Note. Such adjusted basis
generally will equal the cost of the Note to the seller, increased by any
original issue discount included in the seller's gross income in respect of the
Note (and by any market discount which the taxpayer elected to include in income
or was required to include in income), and reduced by payments other than
payments of qualified stated interest in respect of the Note received by the
seller and by any amortized premium. Similarly, a holder who receives a payment
other than a payment of qualified stated interest in respect of a Note, either
on the date on which such payment is scheduled to be made or as a prepayment,
will recognize gain equal to the excess, if any, of the amount of the payment
over his adjusted basis in the Note allocable thereto. A Noteholder who receives
a final payment which is less than his adjusted basis in the Note will generally
recognize a loss in the amount of the shortfall on the last day of his taxable
year. Generally, any such gain or loss realized by an investor who holds a Note
as a "capital asset" within the meaning of Code Section 1221 should be capital
gain or loss, except as described above in respect of market discount and except
that a loss attributable to accrued but unpaid interest may be an ordinary loss.
Taxation of Certain Foreign Investors. Interest payments (including
OID) on the Notes made to a Noteholder who is a nonresident alien individual,
foreign corporation or other non-United States person (a "foreign person")
generally will be "portfolio interest" which is not subject to United States tax
if such payments are not effectively connected with the conduct of a trade or
business in the United States by such foreign person, provided the foreign
person is not a "10-percent shareholder" or a "controlled foreign corporation",
within the meaning of the Code, with respect to the Trust, the Depositor or the
Seller, and if the Trust (or other person who would otherwise be required to
withhold tax from such payments) is provided with an appropriate statement that
the beneficial owner of the Note identified on the statement is a foreign
person.
Backup Withholding. Distributions of interest and principal as well as
distributions of proceeds from the sale of the Notes, may be subject to the
"backup withholding tax" under Section 3406 of the Code at rate of 30% (29% in
2004-2005, and 28% beginning in 2006) if recipients of such distributions fail
to furnish to the payor certain information, including their taxpayer
identification numbers, or otherwise fail to establish an exemption from such
tax. Any amounts deducted and withheld from a distribution to 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 of distributions that
is required to supply information but does not do so in the proper manner.
STATE TAX CONSIDERATIONS
Potential Noteholders should consider the state and local income tax
consequences of the purchase, ownership and disposition of the Notes. State and
local income tax laws may differ substantially from the corresponding federal
law, and this discussion does not purport to describe any aspect of the income
tax laws of any state or locality. Therefore, potential Noteholders should
consult their own tax advisors with respect to the various state and local tax
consequences of an investment in the Notes.
LEGAL MATTERS
Certain legal matters in connection with the issuance of the Notes will
be passed upon by Cadwalader, Wickersham & Taft LLP, New York, New York, and
Orrick, Herrington & Sutcliffe LLP, New York, New York, as counsel for the
Depositor and the Underwriters.
Certain federal income tax consequences with respect to the Notes will
be passed upon for the Issuer by Cadwalader, Wickersham & Taft LLP, New York,
New York and Orrick, Herrington & Sutcliffe LLP, New York, New York.
RATING OF THE NOTES
It is a condition to the issuance of the Notes that each shall be
rated " " by (" ")
and " " by (" " and, together with
, the "Rating Agencies").
Explanations of the significance of such ratings may be obtained from ,
, and , . Each rating will be the view only of the assigning Rating
Agency.
The ratings on the Notes are based in substantial part on the
claims-paying ability of the Note Insurer. Any changes in the ratings of the
Note Insurer by the Rating Agencies may result in a change in the ratings of the
Notes.
The ratings assigned to the Notes do not represent any assessment of
the likelihood or rate of principal prepayments and do not address the
possibility that Noteholders might suffer a lower than anticipated yield.
There is no assurance that any rating assigned to the Notes will
continue for any period of time or that such ratings will not be revised or
withdrawn. Any such revision or withdrawal of such ratings may have an adverse
effect on the market price or liquidity of the Notes.
The ratings of the Notes should be evaluated independently form similar
ratings on other types of securities. A security rating is not a recommendation
to buy, sell or hold securities.
There can be no assurances as to whether any other rating agency will
rate the Notes, or, if one does, what rating will be assigned by such other
rating agency. A rating on the Notes by another rating agency, if assigned at
all, may be lower than the ratings assigned to the Notes by or .
DOCSNY1:987889.2987889.3
5542-27 SK8 S-88
INDEX OF PRINCIPAL TERMS
[
[Other Underwriter]..............................................................................................78
A
Administrative Fee Amount........................................................................................29
aggregate risks..................................................................................................76
Available Funds..................................................................................................28
B
Balloon Loans....................................................................................................40
beneficial owner.................................................................................................18
Book-Entry Notes.................................................................................................18
Business Day.....................................................................................................72
C
Clearstream......................................................................................................18
Clearstream Participants.........................................................................................20
Closing Date.....................................................................................................50
Code.............................................................................................................76
Collection Account...............................................................................................63
Collection Period................................................................................................25
Combined Loan-to-Value Ratio.....................................................................................45
Commission.......................................................................................................75
Compensating Interest Payment....................................................................................65
Constant Prepayment Rate.........................................................................................57
Cooperative......................................................................................................21
CPR..............................................................................................................57
Cut-off Date.....................................................................................................17
D
Defective Mortgage Loan..........................................................................................24
Definitive Note..................................................................................................19
Definitive Notes.................................................................................................18
Deposit Date.....................................................................................................25
Depositor........................................................................................................17
Determination Date...............................................................................................28
DTC..............................................................................................................18
DTC Participants.................................................................................................18
Due Period.......................................................................................................25
E
ERISA............................................................................................................76
Euroclear........................................................................................................18
Euroclear Operator...............................................................................................21
Euroclear Participants...........................................................................................21
European Depositaries............................................................................................18
Event of Default.................................................................................................37
Excess Cash......................................................................................................32
Exchange Act.....................................................................................................75
F
FICO Scores......................................................................................................43
Financial Intermediary...........................................................................................19
foreign person...................................................................................................81
H
HEP..............................................................................................................57
I
IML..............................................................................................................20
Indenture........................................................................................................17
Indenture Trustee................................................................................................17
Indenture Trustee Fee............................................................................................36
Indirect Participants............................................................................................18
Initial Pool Balance.............................................................................................39
Initial Redemption Date..........................................................................................35
Insurance Agreement..............................................................................................26
Insurance Policy.................................................................................................17
Insurance Proceeds...............................................................................................29
Insured Payments.................................................................................................71
Interest Period..................................................................................................26
IRS..............................................................................................................79
Issuer...........................................................................................................17
L
Liquidated Mortgage Loan.........................................................................................28
Liquidation Proceeds.............................................................................................29
Look-Through Rule................................................................................................76
M
Modeling Assumptions.............................................................................................58
Monthly Advance..................................................................................................64
Monthly Principal................................................................................................27
Mortgage.........................................................................................................39
Mortgage Files...................................................................................................23
Mortgage Loans...................................................................................................17
Mortgage Notes...................................................................................................17
Mortgage Pool....................................................................................................17
Mortgage Rate....................................................................................................40
Mortgaged Property...............................................................................................39
N
Net Liquidation Proceeds.........................................................................................29
New Regulations...................................................................................................4
Nonrecoverable Advances..........................................................................................65
Note Account.....................................................................................................29
Note Balance.....................................................................................................27
Note Insurer.....................................................................................................17
Note Insurer Premium.............................................................................................26
Note Interest....................................................................................................26
Note Interest Rate...............................................................................................26
Note Owners......................................................................................................18
Noteholder...................................................................................................17, 19
Notes............................................................................................................17
O
OID..............................................................................................................80
Order............................................................................................................71
Original Note Balance............................................................................................26
Overcollateralization Amount.....................................................................................32
Overcollateralization Deficiency Amount..........................................................................32
Overcollateralization Deficit....................................................................................33
Overcollateralization Surplus....................................................................................33
Owned and Managed Servicing Portfolio............................................................................50
Owner Trustee....................................................................................................17
P
Paying Agent.....................................................................................................25
Payment Date.....................................................................................................17
Payments Ahead...................................................................................................28
Percentage Interest..............................................................................................25
Permitted Investments............................................................................................30
Plan.............................................................................................................76
Plan Asset Regulations...........................................................................................76
PMI Insurer......................................................................................................37
PMI Mortgage Loans...............................................................................................37
PMI Policy.......................................................................................................37
Prepayment Interest Shortfall....................................................................................26
Principal Balance................................................................................................27
Principal Prepayment.............................................................................................28
PTCE.............................................................................................................77
Q
Qualified Replacement Mortgage...................................................................................24
R
Rating Agencies..................................................................................................82
Realized Loss....................................................................................................33
Receipt..........................................................................................................72
Received.........................................................................................................72
Record Date......................................................................................................18
Redemption Date..................................................................................................35
Release Price....................................................................................................24
Relevant Depositary..............................................................................................18
Relief Act.......................................................................................................58
Relief Act Shortfall.............................................................................................26
REO Property.....................................................................................................65
Required Overcollateralization Amount............................................................................32
Residual Interest................................................................................................18
Rules............................................................................................................19
S
Sale Agreement...................................................................................................23
Securities Act...................................................................................................78
Seller.......................................................................................................17, 50
Senior Loan......................................................................................................45
Servicer.....................................................................................................17, 50
Servicer Event of Default........................................................................................68
Servicing Advance................................................................................................70
Servicing Agreement..............................................................................................17
Servicing Fee....................................................................................................70
Servicing Fee Rate...............................................................................................70
Similar Law......................................................................................................77
single risks.....................................................................................................76
Six-Month LIBOR..................................................................................................40
SMMEA............................................................................................................77
Standard Non-Conforming Program..................................................................................53
Stated Maturity..................................................................................................18
T
Tax Counsel......................................................................................................79
Term of the Insurance Policy.....................................................................................72
Terms and Conditions.............................................................................................21
Third-Party Servicing Portfolio..................................................................................51
Trust............................................................................................................17
Trust Agreement..................................................................................................17
Trust Fund.......................................................................................................17
U
U.S. Person.......................................................................................................5
Underwriters.....................................................................................................78
USAP.............................................................................................................66
V
Voting Interests.................................................................................................37
DOCSNY1:987889.2987889.3
5542-27 SK8 I-5
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the Notes will be offered
globally (the "Global Securities") and will be available only in book-entry
form. Investors in the Global Securities may hold such Global Securities through
any of The Depository Trust Company ("DTC"), Clearstream or Euroclear. The
Global Securities will be tradable as home market instruments in both the
European and U.S. domestic markets. Initial settlement and all secondary trades
will settle in same-day funds.
Secondary market trading between investors holding Global Securities
through Clearstream and Euroclear will be conducted in the ordinary way in
accordance with their normal rules and operating procedures and in accordance
with conventional eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors holding Global Securities
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations.
Secondary cross-market trading between Clearstream or Euroclear and DTC
Participants holding Notes will be effected on a delivery-against-payment basis
through the respective Depositaries of Clearstream and Euroclear (in such
capacity) and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be
subject to U.S. withholding taxes unless such holders meet certain requirements
and deliver appropriate U.S. tax documents to the securities clearing
organizations or their participants.
Initial Settlement
All Global Securities will be held in book-entry form by DTC in the
name of Cede & Co. as nominee of DTC. Investors' interests in the Global
Securities will be represented through financial institutions acting on their
behalf as direct and indirect Participants in DTC. As a result, Clearstream and
Euroclear will hold positions on behalf of their participants through their
respective Depositaries, which in turn will hold such positions in accounts as
DTC Participants.
Investors electing to hold their Global Securities through DTC will
follow the settlement practices applicable to conventional eurobonds, except
that there will be no temporary global security and no "lock-up" or restricted
period. Investor securities custody accounts will be credited with their
holdings against payment in same-day funds on the settlement date.
Investors electing to hold their Global Securities through Clearstream
or Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no `lock-up' or restricted period. Global Securities will be credited to the
securities custody accounts on the settlement date against payment in same-day
funds.
Secondary Market Trading
Since the purchaser determines the place of delivery, it is important
to establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
Trading between DTC Participants. Secondary market trading between DTC
Participants will be settled using the procedures applicable to prior mortgage
loan asset backed notes issues in same-day funds.
Trading between Clearstream and/or Euroclear Participants. Secondary
market trading between Clearstream Participants or Euroclear Participants will
be settled using the procedures applicable to conventional eurobonds in same-day
funds.
Trading between DTC seller and Clearstream or Euroclear purchaser. When
Global Securities are to be transferred from the account of a DTC Participant to
the account of a Clearstream Participant or a Euroclear Participant, the
purchaser will send instructions to Clearstream or Euroclear through a
Clearstream Participant or Euroclear Participant at least one business day prior
to settlement. Clearstream or Euroclear will instruct the respective Depositary,
as the case may be, to receive the Global Securities against payment. Payment
will include interest accrued on the Global Securities from and including the
last coupon payment date to and excluding the settlement date, on the basis of
either a 360-day year comprised of 30-day months or the actual number of days in
such accrual period and a year assumed to consist of 360 days, as applicable.
For transactions settling on the 31st of the month, payment will include
interest accrued to and excluding the first day of the following month. Payment
will then be made by the respective Depositary of the DTC Participant's account
against delivery of the Global Securities. After settlement has been completed,
the Global Securities will be system and by the clearing system, in accordance
with its usual procedures, to the Clearstream Participant's or Euroclear
Participant's account. The securities credit will appear the next day (European
time) and the cash debt will be back-valued to, and the interest on the Global
Securities will accrue from, the value date (which would be the preceding day
when settlement occurred in New York). If settlement is not completed on the
intended value date (i.e., the trade fails), the Clearstream or Euroclear cash
debt will be valued instead as of the actual settlement date.
Clearstream Participants and Euroclear Participants will need to make
available to the respective clearing systems the funds necessary to process
same-day funds settlement. The most direct means of doing so is to preposition
funds for settlement, either from cash on hand or existing lines of credit, as
they would for any settlement occurring within Clearstream or Euroclear. Under
this approach, they may take on credit exposure to Clearstream or Euroclear
until the Global Securities are credited to their accounts one day later.
As an alternative, if Clearstream or Euroclear has extended a line of
credit to them, Clearstream Participants or Euroclear Participants can elect not
to preposition funds and allow that credit line to be drawn upon the finance
settlement. Under this procedure, Clearstream Participants or Euroclear
Participants purchasing Global Securities would incur overdraft charges for one
day, assuming they cleared the overdraft when the Global Securities were
credited to their accounts. However, interest on the Global Securities would
accrue from the value date. Therefore, in many cases the investment income on
the Global Securities earned during that one-day period may substantially reduce
or offset the amount of such overdraft charges, although this result will depend
on each Clearstream Participant's or Euroclear Participant's particular cost of
funds.
Since the settlement is taking place during New York business hours,
DTC Participants can employ their usual procedures for sending Global Securities
to the respective European Depositary for the benefit of Clearstream
Participants or Euroclear Participants. The sale proceeds will be available to
the DTC seller on the settlement date. Thus, to the DTC Participants a
cross-market transaction will settle no differently than a trade between two DTC
Participants.
Trading between Clearstream or Euroclear Seller and DTC Purchaser. Due
to time zone differences in their favor, Clearstream Participants and Euroclear
Participants may employ their customary procedures for transactions in which
Global Securities are to be transferred by the respective clearing system,
through the respective Depositary, to a DTC Participant. The seller will send
instructions to Clearstream or Euroclear through a Clearstream Participant or
Euroclear Participant at least one business day prior to settlement. In these
cases Clearstream or Euroclear will instruct the respective Depositary, as
appropriate, to deliver the Global Securities to the DTC Participant's account
against payment. Payment will include interest accrued on the Global Securities
from and including the last coupon payment to and excluding the settlement date
on the basis of either a 360-day year comprised of 30-day months or the actual
number of days in such accrual period and a year assumed to consist of 360 days,
as applicable. For transactions settling on the 31st of the month, payment will
include interest accrued to and excluding the first day of the following month.
The payment will then be reflected in the account of the Clearstream Participant
or Euroclear Participant the following day, and receipt of the cash proceeds in
the Clearstream Participant's or Euroclear Participant's account would be
back-valued to the value date (which would be the preceding day, when settlement
occurred in New York). Should the Clearstream Participant or Euroclear
Participant have a line of credit with its respective clearing system and elect
to be in debt in anticipation of receipt of the sale proceeds in its account,
the back-valuation will extinguish any overdraft incurred over that one-day
period. If settlement is not completed on the intended value date (i.e., the
trade fails), receipt of the cash proceeds in the Clearstream Participant's or
Euroclear Participant's account would instead be valued as of the actual
settlement date.
Finally, day traders that use Clearstream or Euroclear and that
purchase Global Securities from DTC Participants for delivery to Clearstream
Participants or Euroclear Participants should note that these trades would
automatically fail on the sale side unless affirmative action were taken. At
least three techniques should be readily available to eliminate this potential
problem:
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 Global Securities in the U.S. from a DTC Participant no
later than one day prior to settlement, which would give the Global
Securities sufficient time to be reflected in their Clearstream or
Euroclear account in order to settle the sale side of the trade; or
o staggering the value dates for the buy and sell sides of the trade so
that the value date for the purchase from the DTC Participant is at
least one day prior to the value date for the sale to the Clearstream
Participant or Euroclear Participant.
Certain U.S. Federal Income Tax Documentation Requirements
A beneficial owner of Global Securities holding securities through
Clearstream or Euroclear (or through DTC if the holder has an address outside
the U.S.) will be subject to the 30% U.S. withholding tax that generally applies
to payments of interest (including original issue discount) on registered debt
issued by U.S. Persons, unless (i) each clearing system, bank or other financial
institution that holds customers' securities in the ordinary course of its trade
or business in the chain of intermediaries between such beneficial owner and the
U.S. entity required to withhold tax complies with applicable certification
requirements and (ii) such beneficial owner takes one of the following steps to
obtain an exemption or reduced tax rate:
Exemption for non-U.S. Persons (Form W-8BEN). Beneficial owners of
Global Securities that are non-U.S. Persons can obtain a complete exemption from
the withholding tax by filing a signed Form W-8BEN (Certificate of Foreign
Status of Beneficial Owner for United States Tax Withholding). If the
information shown on Form W-8BEN changes, a new Form W-8BEN must be filed within
30 days of such change.
Exemption for non-U.S. Persons with effectively connected income (Form
W-8ECI). A non-U.S. Person, including a non-U.S. corporation or bank with a U.S.
branch, for which the interest income is effectively connected with its conduct
of a trade or business in the United States, can obtain an exemption from the
withholding tax by filing Form W-8ECI (Certificate of Foreign Person's Claim for
Exemption from Withholding of Tax on Income Effectively Connected with the
Conduct of a Trade or Business in the United States).
Exemption or reduced rate for non-U.S. Persons resident in treaty
countries (Form W-8BEN). Non-U.S. Persons that are Note owners residing in a
country that has a tax treaty with the United States can obtain an exemption or
reduced tax rate (depending on the treaty terms) by filing Form W-8BEN.
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a
complete exemption from the withholding tax by filing Form W-9 (Payer's Request
for Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The Note owner of a Global
Security or, in the case of a Form W-8ECI filer, his agent, files by submitting
the appropriate form to the person through whom it holds (the clearing agency,
in the case of persons holding directly on the books of the clearing agency).
Form W-8BEN and Form W-8ECI are effective until the third succeeding calendar
year from the date the form is signed.
Final withholding regulations (the "New Regulations") effective January
1, 2001 affect the documentation required from non-U.S. Persons. The New
Regulations replace a number of prior tax certification forms (including IRS
Form W-8, 1001 and 4224) with a new series of IRS Form W-8 and generally
standardize the period of time for which withholding agents can rely on such
forms (although certain of the new forms may remain valid indefinitely if the
beneficial owner provides a United States taxpayer identification number and the
information on the form does not change).
The term "U.S. Person" means:
o a citizen or resident of the United States,
o a corporation, partnership or other entity treated as a
corporation or partnership for United States federal income tax
purposes organized in or under the laws of the United States or
any state thereof or the District of Columbia (unless, in the case
of a partnership, Treasury regulations provide otherwise),
o an estate the income of which is includible in gross income for United
States tax purposes, regardless of its
source, or
o a trust if a court within the United States is able to exercise
primary supervision over the administration of the trust and one
or more United States persons have authority to control all
substantial decisions of the trust.
Notwithstanding the preceding sentence, to the extent provided in Treasury
regulations, certain trusts in existence on August 20, 1996, and treated as
United States persons prior to such date, that elect to continue to be treated
as United States persons will also be a U.S. Person.
This summary does not deal with all aspects of U.S. Federal income tax
withholding that may be relevant to foreign holders of the Global Securities.
Investors are advised to consult their own tax advisors for specific tax advice
concerning their holding and disposing of the Global Securities.
DOCSNY1:987889.2987889.3
5542-27 SK8
$
(Approximate)
Trust 200 -
Issuer
Wachovia Asset Securitization Issuance, Inc.LLC
Depositor
[ ]
Servicer
Asset-Backed Notes, Series 200 -
- --------------------------------------------------------------------------------
PROSPECTUS SUPPLEMENT
- --------------------------------------------------------------------------------
Wachovia SecuritiesCapital Markets [Other Underwriter]
You should rely only on the information contained or incorporated by
reference in this prospectus supplement and the accompanying prospectus. We have
not authorized anyone to provide you with different information.
We are not offering the Asset-Backed Notes, Series 200 - in any state
where the offer is not permitted.
We do not claim that the information in this prospectus supplement and
prospectus is accurate as of any date other than the dates stated on the
respective covers.
Dealers will deliver a prospectus supplement and prospectus when acting
as underwriters of the Asset-Backed Notes, Series 200 - and with respect to
their unsold allotments or subscriptions. In addition, all dealers selling
Asset-Backed Notes, Series 200 - will be required to deliver a prospectus
supplement and prospectus for ninety days following the date of this prospectus
supplement.
, 200
@
SUBJECT TO COMPLETION, DATED NOVEMBER [ ], 2002
Wachovia Asset Securitization, Inc. Issuance, LLC
Depositor
[ ]
Servicer
$ (Approximate)
Mortgage Pass-Through Certificates, Series 200 -
Principal and interest payable monthly, commencing in 200
The Trust will Issue--
o Ten classes of senior Class A Certificates.
o Six classes of Class B Certificates, all of which are subordinated to, and
provide credit enhancement for, the Class A Certificates. Each class of
Class B Certificates is also subordinated to each class of Class B
Certificates, if any, with a lower number.
The classes of offered certificates are listed under the heading "Offered
Certificates" in the table on page S- .
The yield to maturity of the interest only certificates and the principal only
certificates will be particularly sensitive to the rate of principal payments on
the mortgage loans, as more fully described in this prospectus supplement.
The Assets of the Trust will Include--
o A pool of fully amortizing, one- to four-family, residential first mortgage
loans, substantially all of which have original terms to stated maturity of
approximately years.
Neither the Securities and Exchange Commission nor any state securities
commission has approved the offered certificates or determined that this
prospectus supplement or the prospectus is accurate or complete. Any
representation to the contrary is a criminal offense.
The offered certificates will be offered by Wachovia Securities, Inc.Capital
=======
Markets, LLC and [Other Underwriter], as underwriters, at varying prices to be
============
determined at the time of sale to investors. The anticipated delivery date for
the offered certificates is , 200 . Total proceeds to the depositor for the
offered certificates will be approximately % of the initial principal balance of
the offered certificates, before deducting expenses payable by the depositor.
Wachovia SecuritiesCapital Markets [Other Underwriter]
===============
- --------------------------------------------------------------------------------
The information in this prospectus supplement is not complete and may be
changed. The Depositor may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is effective. This
prospectus supplement is not an offer to sell these securities and is not
soliciting an offer to buy these securities in any state where the offer or sale
is not permitted.
- --------------------------------------------------------------------------------
S-1
, 200
S-2
TABLE OF CONTENTS
Important Notice About Information Payments on Mortgage Loans;
Presented in this Prospectus Accounts................................ S-
Supplement and the Prospectus............ S- Servicing Compensation and Payment
Summary of Terms............................ S- Of Expenses............................. S-
Risk Factors................................ S- Compensating Interest.................... S-
The Rate of Principal Payments on the Advances................................. S-
Mortgage Loans Will Affect the Optional Termination..................... S-
Yield on the Offered Certificates........ S- Special Servicing Agreements............. S-
Certificates May Not Be Appropriate The Trustee.............................. S-
For Individual Investors................. S- Voting Rights............................ S-
Subordination of Class B Certificates Description of the Certificates............. S-
Increases Risk of Loss................... S- Denominations and Form.................. S-
Limited Source of Payments-- No Book-Entry Certificates................. S-
Recourse to Depositor, Seller, Distributions........................... S-
Servicer or Trustee...................... S- Pool Distribution Amount................ S-
Limited Liquidity........................... S- Priority of Distributions............... S-
Geographic Concentration May Interest................................ S-
Increase Risk of Loss Due to LIBOR................................... S-
Adverse Economic Conditions or Principal............................... S-
Natural Disasters........................ S- Allocation of Losses.................... S-
Rights of Beneficial Owners May Be Restrictions on Transfer of the
Limited by Book-Entry System............. S- Class A-R and Class A-LR
Tax Consequences of Residual Certificates.......................... S-
Certificates............................. S- Prepayment and Yield Considerations.........
Recent Developments May Increase Prepayment Considerations and
Risk of Loss on the Mortgage Loans... S- Risks................................. S-
Forward Looking Statement................... S- Assumptions Relating to Tables.......... S-
The Mortgage Pool........................... S- Weighted Average Lives of the
Mortgage Loan Data....................... S- Offered Certificates.................. S-
The Seller.................................. S- Yield on the Class A-5 Certificates ..S-
The Servicer................................ S- Yield on the Class A-PO
General.................................. S- Certificates......................... S-
Delinquency and Loss Experience of Yield on the Class A-WIO
of the Servicer........................ S- Certificates......................... S-
Underwriting Standards...................... S-
The Pooling and Servicing Yield on the Class A-R and
Agreement................................... S- Class A-LR Certificates.............. S-
Assignment of Mortgage Loans............. S- Yield on the Subordinate
Repurchases of Mortgage Loans............ S- Certificates....................... S
Optional Repurchases of Certain
Mortgage Loans.......................... S-
S-3
Yield Considerations with Respect to Recent Developments--
the Class B-2 and Class B-3 California Legislation.................. S-
Certificates.......................... S- ERISA Considerations........................ S-
Credit Support.............................. S- Method of Distribution...................... S-
Use of Proceeds............................. S- Legal Matters............................... S-
Federal Income Tax Consequences............. S- Certificate Ratings......................... S-
Regular Certificates.................... S- Index of Significant Prospectus
Residual Certificates................... S- Supplement Definitions.................. S-
Backup Withholding and Reporting Annex I--Global Clearance, Settlement
Requirements.......................... S- and Tax Documentation
State Taxes................................. S- Procedures............................. A-
S-4
Important Notice About Information Presented
in this Prospectus Supplement and the Prospectus
The offered certificates are described in two separate documents that
progressively provide more detail: (i) the accompanying prospectus, which
provides general information, some of which may not apply to a particular series
of certificates such as your certificates; and (ii) this prospectus supplement,
which describes the specific terms of your certificates and may differ from
information in the prospectus.
If the description of the terms of your certificates varies between
this prospectus supplement and the prospectus, you should rely on the
information in this prospectus supplement.
Cross-references are included in this prospectus supplement and the
prospectus to captions in these materials where you can find additional
information. The foregoing Table of Contents and the Table of Contents in the
prospectus provide the locations of these captions.
The Index of Significant Prospectus Supplement Definitions beginning on
page S- of this prospectus supplement and the Index of Significant Definitions
beginning on page of the prospectus direct you to the locations of the
definitions of capitalized terms used in each of the documents. Any capitalized
terms that are not defined in this prospectus supplement and that do not have
obvious meanings are defined in the prospectus.
Wachovia Asset Securitization Issuance, Inc.LLC's principal offices are
located at One Wachovia Center 301 South College Street, Suite D, Charlotte,
North Carolina 28288 and its phone number is (704) 374-2702.383-4634.
------------------
S-5
THE SERIES 200 - CERTIFICATES
Initial Class Initial
Balance Pass-Through Rating of
Class Balance(1) Rate Principal Types(2) Interest Types(2) Certificates(3)
- --------------- ------------ ------------ ------------------- ------------------ -----------------
Offered Certificates
Class A-1......... $ % Senior, Sequential Pay Fixed Rate
Class A-2......... $ % Senior, Sequential Pay Fixed Rate
Class A-3......... $ % Senior, Sequential Pay Fixed Rate
Class A-4......... $ (4) Senior, Sequential Pay Floating Rate
Class A-5......... (5) (6) Senior, Notional Amount Inverse Floating
Rate, Interest Only
Class A-6......... $ % Senior, Lockout Fixed Rate
Class A-R......... $ % Senior, Sequential Pay Fixed Rate
Class A-LR........ $ % Senior, Sequential Pay Fixed Rate
Class A-WIO....... (7) (8) Senior, Notional Amount Variable Rate,
Interest Only
Class A-PO........ $ (9) Senior, Ratio Strip Principal Only
Class B-1......... $ % Subordinated Fixed Rate
Class B-2......... $ % Subordinated Fixed Rate
Class B-3......... $ % Subordinated Fixed Rate
Non-Offered Certificates
Class B-4......... $ % Subordinated Fixed Rate
Class B-5......... $ % Subordinated Fixed Rate
Class B-6......... $ % Subordinated Fixed Rate
- ---------------------------
(1) Approximate. The initial class balances may vary by a total of plus or minus
5%.
(2) See "Description of the Securities -- Categories of Classes of Securities"
in the prospectus for a description of these principal and interest types
and see "Description of the Certificates -- Priority of Distributions" and
"-- Allocation of Losses" in this prospectus supplement for a description
of the effects of subordination.
(3) See "Certificate Ratings" in this prospectus supplement.
(4) During the initial LIBOR based interest accrual period, interest will
accrue on the Class A-4 Certificates at the rate of % per annum. During
each LIBOR based interest accrual period thereafter, interest will accrue
on the Class A-4 Certificates at a per annum rate equal to (i) % plus (ii)
LIBOR subject to a minimum rate of % and a maximum rate of %. See
"Description of the Certificates--Interest" in this prospectus supplement.
(5) The Class A-5 Certificates are interest only certificates, have no class
balance and will bear interest on the Class A-5 notional amount (initially
approximately $ ) as described in this prospectus supplement under
"Description of Certificates--Interest"
(6) During the initial LIBOR based interest accrual period, interest will
accrue on the Class A-5 Certificates at the rate of approximately % per
annum. During each LIBOR based interest accrual period thereafter, interest
will accrue on the Class A-5 Certificates at a per annum rate equal to (i)
approximately % minus (ii) LIBOR, subject to a minimum rate of % and a
maximum rate of approximately %. See "Description of the
Certificates--Interest" in this prospectus supplement.
(7) The Class A-WIO Certificates are interest only certificates, have no
principal balance, and will bear interest on the Class A-WIO notional
amount (initially approximately $ ) as described in this prospectus
supplement under "Description of the Certificates--Interest."
(8) Interest will accrue on the Class A-WIO notional amount as of any
distribution date at a per annum rate equal to (i) the weighted average of
the net mortgage interest rates of the premium mortgage loans (based on the
Stated Principal Balances of the mortgage loans on the due date in the
month preceding the month of such distribution date) minus (ii) %. For the
initial distribution date occurring in 200 , this rate is expected to be
approximately % per annum.
(9) The Class A-PO Certificates are principal only certificates and will not be
entitled to distributions in respect of interest.
- --------------------------------------------------------------------------------
S-6
SUMMARY OF TERMS
This summary highlights selected information from this prospectus
supplement. It does not contain all of the information that you need to consider
in making your investment decision. To understand the terms of the offered
certificates, you should read this entire prospectus supplement and the
prospectus carefully.
Title of Series: Wachovia Asset Trustee:
Securitization Inc.Issuance, LLC, Distribution Date:The day of each
=============
Mortgage Pass-Through month (or, if not a
Certificates, Series 200 - business day, the
next business day) Depositor:
Wachovia Asset beginning , 200
Securitization Issuance, Inc.LLC Closing Date: On or about , 200
========= ===
Cut-off Date: , 200
Issuer: Wachovia Asset 200 - Trust Record Date: The last business
============================
Securitization 200 - Trust day of the
month preceding a
Seller: distribution date
Servicer:
--------------------
The Certificates
The certificates will be issued pursuant to a pooling and servicing
agreement, dated as of the closing date. A summary chart of the initial class
balances, principal types, pass-through rates, interest types and ratings of the
certificates is set forth on page S- .
The certificates represent all of the beneficial ownership interest in the
trust.
- ---------------------------------------------------------------------------------------------------------------
Classifications of Classes of Certificates
- ---------------------------------------------------------------------------------------------------------------
Offered Certificates: A-1, A-2, A-3, A-4, A-5, A-6, A-R, A-LR, A-WIO, A-PO, B-1, B-2 and B-3
- -------------------------------------- ------------------------------------------------------------------------
Non-Offered Certificates: B-4, B-5 and B-6
- -------------------------------------- ------------------------------------------------------------------------
Senior Certificates: A-1, A-2, A-3, A-4, A-5, A-6, A-R, A-LR, A-WIO and A-PO
- -------------------------------------- ------------------------------------------------------------------------
Subordinate Certificates: B-1, B-2, B-3, B-4, B-5 and B-6
- -------------------------------------- ------------------------------------------------------------------------
Class A Certificates: A-1, A-2, A-3, A-4, A-5, A-6, A-R, A-LR, A-WIO and A-PO
- -------------------------------------- ------------------------------------------------------------------------
Class B Certificates: B-1, B-2, B-3, B-4, B-5 and B-6
- -------------------------------------- ------------------------------------------------------------------------
Floating Rate Certificates: A-4
- -------------------------------------- ------------------------------------------------------------------------
Inverse Floating Rate Certificates: A-5
- -------------------------------------- ------------------------------------------------------------------------
Interest Only Certificates: A-5 and A-WIO
- -------------------------------------- ------------------------------------------------------------------------
Lockout Certificates: A-6
- -------------------------------------- ------------------------------------------------------------------------
Principal Only Certificates: A-PO
- -------------------------------------- ------------------------------------------------------------------------
Residual Certificates: A-R and A-LR
- -------------------------------------- ------------------------------------------------------------------------
S-7
Only the Class A, Class B-1, Class B-2 and Class B-3 Certificates are being
offered by this prospectus supplement.
The Class B-4, Class B-5 and Class B-6 Certificates are not offered by this
prospectus supplement. These non-offered certificates are subordinated to the
offered certificates for distributions of principal and interest and for
allocations of losses on the mortgage loans.
Information provided with respect to the non-offered certificates is
included solely to aid your understanding of the offered certificates.
Mortgage Pool
The mortgage pool will consist of fixed-rate, conventional,
fully-amortizing mortgage loans secured by first liens on one- to four-family
properties. The depositor expects the mortgage loans to have the following
approximate characteristics:
Selected Mortgage Loan Data as of , 200
--------------------------------------------------------- -------------------------- -----------------------
Range or Total Weighted Average
--------------------------------------------------------- -------------------------- -----------------------
Number of Mortgage Loans --
--------------------------------------------------------- -------------------------- -----------------------
Aggregate Unpaid Principal Balance $ --
--------------------------------------------------------- -------------------------- -----------------------
Unpaid Principal Balance $ to $ $
--------------------------------------------------------- -------------------------- -----------------------
Interest Rate % to % %
--------------------------------------------------------- -------------------------- -----------------------
Administrative Fee Rate % --
--------------------------------------------------------- -------------------------- -----------------------
Remaining Terms to Stated Maturity to months Months
--------------------------------------------------------- -------------------------- -----------------------
Original Term to months Months
--------------------------------------------------------- -------------------------- -----------------------
Number of Months Since Origination to months Months
--------------------------------------------------------- -------------------------- -----------------------
Original Loan-to-Value Ratio % to % %
--------------------------------------------------------- -------------------------- -----------------------
Latest Maturity Date --
--------------------------------------------------------- -------------------------- -----------------------
Geographic Concentration of Mortgaged Properties in Excess of 5.00% of the Aggregate Unpaid Principal
Balance
============================================================================================================
[State] %
=========================================================
[State] %
=========================================================
[State] %
=========================================================
[State] %
=========================================================
[State] %
--------------------------------------------------------- -------------------------- -----------------------
Maximum Single Zip Code Concentration % --
--------------------------------------------------------- -------------------------- -----------------------
The characteristics of the mortgage pool may change because:
o Prior to the issuance of the certificates, the depositor may remove
mortgage loans from the mortgage pool. The depositor also may
substitute new mortgage loans for mortgage loans in the mortgage pool
prior to the closing date.
o After the issuance of the certificates, mortgage loans may be removed
from the trust because of repurchases by the depositor for breaches of
representations or failure to deliver required documents. Under
certain circumstances, the depositor may instead make substitutions
for defective mortgge loans.
S-8
These removals and/or substitutions may result in changes in the mortgage
pool characteristics shown above. These changes may affect the weighted average
lives and yields to maturity of the related offered certificates.
Additional information on the mortgage pool appears under "The Mortgage
Pool" in this prospectus supplement.
Optional Termination
At its option, the depositor may purchase all remaining mortgage loans in
the trust and effect early retirement of the certificates on any distribution
date on which the aggregate scheduled principal balance of the mortgage pool is
less than % of the initial aggregate scheduled principal balance of the mortgage
pool.
See "The Pooling and Servicing Agreement -- Optional Termination" in this
prospectus supplement.
If the depositor exercises its right to repurchase all of the mortgage
loans, the certificates outstanding at that time will be retired earlier than
would otherwise be the case.
See "Prepayment and Yield Considerations" in this prospectus supplement.
Priority of Distributions
Distributions will be made on each distribution date in the following order
of priority:
o First, to the trustee an amount in payment for its services for such
distribution date;
o Second, to each class of senior certificates (other than the Class
A-PO Certificates) to pay interest;
o Third, to the classes of senior certificates entitled to receive
distributions of principal, as set forth in this prospectus supplement
under "Description of the Certificates -- Principal," to pay
principal;
o Fourth, to the Class A-PO Certificates, to pay certain Class A-PO
deferred amounts, but only from amounts that would otherwise be
distributable on such distribution date as principal of the
subordinated certificates;
o Fifth, to each class of subordinate certificates, first to pay
interest and then to pay principal in the order of numerical class
designations, beginning with Class B-1 Certificates; and
o Sixth, to the Class A-R and Class A-LR Certficates, any remaining
amounts in the related REMIC.
S-9
All of the distributions described above are subject to the limitations
set forth in this prospectus supplement under "Description of the Certificates
- -- Interest" and "-- Principal."
Under certain circumstances described in this prospectus supplement,
distributions that would otherwise be made on the subordinate certificates may
be made on the senior certificates instead. See "Description of the Certificates
- -- Allocation of Losses" in this prospectus supplement.
Interest Distributions
The amount of interest that will accrue on your certificates during
each interest accrual period (unless you own a Class A-PO Certificate) is equal
to: o one-twelfth of the pass-through rate for your class (as set forth on page
S- ) multiplied by the
principal balance or notional amount of your certificate on the
distribution date, minus o the amount of certain interest shortfalls arising
from the timing of prepayments on the mortgage loans
and interest losses allocated to your class, as described under
"Description of the Certificates -- Allocation of Losses" in this
prospectus supplement.
The Class A-PO Certificates are principal only certificates and are not
entitled to distributions of interest.
See "Description of the Certificates -- Distributions" and "--
Interest" in this prospectus supplement.
Principal Distributions
On each distribution date, principal distributions to the certificates
will be made in the order and priority described under "Description of the
Certificates -- Priority of Distributions" in this prospectus supplement.
The Class A-5 and Class A-WIO Certificates are interest only
certificates and are not entitled to distributions of principal.
Credit Support
Credit support for the offered certificates is provided by
subordination as follows:
Subordination of Class B Certificates
[Insert Subordination Table]
See "Description of the Certificates -- Priority of Distributions" and
"-- Allocation of Losses" and "Credit Support" in this prospectus supplement.
S-10
Shifting Interest in Prepayments
Additional credit enhancement is provided by the allocation of all
principal prepayments to the senior certificates (other than the Class A-PO
Certificates) for the first five years and the disproportionately greater
allocation of prepayments to such senior certificates over the following four
years. The disproportionate allocation of prepayments will accelerate the
amortization of those senior certificates relative to the amortization of the
subordinate certificates. As a result, the credit support percentage for the
Class A Certificates should be maintained and may be increased during the first
nine years.
See "Description of the Certificates -- Principal" in this prospectus
supplement.
Prepayment and Yield Considerations
The yield to maturity on your offered certificates will be sensitive to the
rate and timing of principal payments (which will be affected by prepayments,
defaults and liquidations) on the mortgage loans. As a result, your yield may
fluctuate significantly.
o In general, if you purchased your offered certificate at a premium or
if you purchased a Class A-5 or Class A-WIO Certificate (which has no
principal balance) and principal distributions occur at a rate faster
than you assumed, your actual yield to maturity will be lower than
anticipated.
o Conversely, if you purchased your offered certificate at a discount
and principal distributions occur at a rate slower than you assumed,
your actual yield to maturity will be lower than anticipated.
Because the Class A-PO Certificates represent only the right to receive a
portion of the principal received with respect to mortgage loans with net
mortgage interest rates lower than %, the yield to maturity on the Class A-PO
Certificates will be extremely sensitive to the rate an timing of principal
payments on the mortgage loans with net mortgage interest rates lower than %.
Because the interest accrued on each distribution date on the Class A-WIO
Certificates is based on a per annum rate equal to (i) the weighted average of
the mortgage loans with a net mortgage interest rate greater than or equal to %
less (ii) %, the yield to maturity on the Class A-WIO Certificates will be
extremely sensitive to the rate and timing of principal payments on the mortgage
loans with a net mortgage interest rate greater than or equal to %, particularly
those mortgage loans with higher mortgage interest rates.
S-11
The yield to maturity on the Class A-4 Certificates will be sensitive to
changes in the rate of LIBOR. The yield to maturity on the Class A-5
Certificates will be extremely sensitive to changes in the rate of LIBOR and
increases in LIBOR may result in a lower yield than you expected. In particular,
if you are purchasing a Class A-5 Certificate you should consider the risk that
high constant rates of LIBOR combined with high constant prepayment rates on the
mortgage loans may result in a negative yield.
The yield to maturity of the Class B-1, Class B-2 and Class B-3
Certificates will be increasingly sensitive to the amounts and timing of losses
on the mortgage loans due to the fact that, once the total balance of the Class
B-4, Class B-5 and Class B-6 Certificates has been reduced to zero, all losses
will be allocated to the Class B-3, Class B-2 and Class B-1 Certificates, in
that order, until the balance of each class has been reduced to zero.
Because the mortgage loans may be prepaid at any time, it is not possible
to predict the rate at which you will receive distributions of principal. Since
prevailing interest rates are subject to fluctuation, you may not be able to
reinvest your distributions at yields equaling or exceeding the yields on the
offered certificates. Yields on any reinvestments may be lower, and could be
significantly lower, than the yields on your offered certificates.
See "Prepayment and Yield Considerations" in this prospectus supplement
and "Yield Considerations" in the prospectus.
Weighted Average Life (in years)
[Table to be Inserted]
Federal Income Tax Consequences
For federal income tax purposes, elections will be made to treat the trust
as two separate REMICs.
o The offered certificates (other than the Class A-R and Class A-LR
Certificates) will constitute "regular interests" in one of the REMICs
and will be treated as debt instruments for federal income tax
purposes.
o The Class A-R and Class A-LR Certificates will constitute the sole
class of "residual interests" in the respective REMICs.
Interest on the offered certificates must be included in your income under
an accrual method of tax accounting, even if you are otherwise a cash method
taxpayer.
The Class A-5, Class A-WIO and Class A-PO Certificates will, and certain
other classes may, be issued with original issue discount for federal income tax
purposes. If you
S-12
hold such a certificate, you will be required to include original issue discount
in income as it accrues on a constant yield method, regardless of whether you
receive concurrently the cash attributable to such original issue discount.
The holders of the Class A-R and Class A-LR Certificates will be required
to report as ordinary income or loss their pro rata share of the net income or
the net loss of their respective REMIC and will be required to fund tax
liabilities with respect to any such net income although no cash distributions
are expected to be made with respect to the Class A-R and Class A-LR
Certificates other than the distribution of their respective $ class balances
and interest on those balances.
See "Federal Income Tax Consequences" in this prospectus supplement and in
the prospectus.
Legal Investment
If your investment activities are subject to legal investment laws and
regulations, regulatory capital requirements or review by regulatory
authorities, then you may be subject to restrictions on investment in the
offered certificates. You should consult your legal, tax and accounting advisers
for assistance in determining the suitability of and consequences to you of the
purchase, ownership and sale of offered certificates.
o The senior certificates and the Class B-1 Certificates will constitute
"mortgage related securities" for purposes of the Secondary Mortgage
Market Enhancement Act of 1984, as amended, so long as they are rated
in one of the two highest rating categories by at least one nationally
recognized rating agency.
o The Class B-2 and Class B-3 Certificates will not constitute "mortgage
related securities" under the Secondary Mortgage Market Enhancement
Act of 1984.
See "Legal Investment" in the prospectus.
ERISA Considerations
If you are a fiduciary or other person acting on behalf of any employee
benefit plan or arrangement, including an individual retirement account, subject
to the ERISA, the Internal Revenue Code of 1986, as amended, or any federal,
state or local law which is similar to ERISA or the Internal Revenue Code or
1986, you should carefully review with your legal advisors whether the purchase
or holding of an offered certificate could give rise to a transaction prohibited
or not otherwise permissible under ERISA, the Internal Revenue Code of 1986 or
any similar law.
Subject to the considerations and conditions described under "ERISA
Considerations" in this prospectus supplement, it is expected that the offered
certificates (other than the Class A-R and Class A-LR Certificates) may be
purchased by plans. The Class A-R and Class A-LR Certificates may not be
acquired by plans.
See "ERISA Considerations" in this prospectus supplement and in the
prospectus.
S-13
RISK FACTORS
o The offered certificates are not suitable investments for all
investors.
o The offered certificates are complex financial instruments, so you
should not purchase any offered certificates unless you or your
financial advisor possess the necessary expertise to analyze the
potential risks associated with an investment in mortgage-backed
securities.
o You should not purchase any offered certificates unless you
understand, and are able to bear, the prepayment, credit, liquidity
and market risks associated with those offered certificates.
o You should carefully consider the risk factors discussed below in
addition to the other information contained in this prospectus
supplement and the prospectus.
The Rate of Principal Payments on the
Mortgage Loans Will Affect the Yield
on the Offered Certificates
The rate of distributions of principal and the yield to maturity on
your certificates will be directly related to (i) the rate of payments of
principal on the mortgage loans and (ii) the amount and timing of defaults by
borrowers that result in losses on the mortgage loans. Borrowers are permitted
to prepay their mortgage loans, in whole or in part, at any time without
penalty.
The rate of principal payments on the mortgage loans mainly will be
affected by the following:
o the amortization schedules of the mortgage loans;
o the rate of partial prepayments and full prepayments by borrowers due
to refinancing, job transfer, changes in property values or other
factors;
o liquidations of the properties that secure defaulted mortgage loans;
o repurchases of mortgage loans by the depositor as a result of
defective documentation or breaches of representations or warranties;
and
o the optional repurchase of all the mortgage loans by the depositor to
effect a termination of the trust.
S-14
For a more detailed discussion of these factors, see "Prepayment and Yield
Considerations" in this prospectus supplement and "Description of the Agreements
- -- Material Terms of the Pooling and Servicing Agreements and the Underlying
Servicing-Assignment of Assets; Repurchases" and "-- Termination; Optional
Purchase of Mortgage Loans" and "Yield Considerations" in the prospectus.
The rate of payments (including prepayments) on mortgage loans is
influenced by a variety of economic, geographic, social and other factors, but
depends greatly on the level of mortgage interest rates:
o If prevailing interest rates for similar mortgage loans fall below the
interest rates on the mortgage loans, the rate of prepayment would
generally be expected to increase due to refinancings.
o Conversely, if prevailing interest rates for similar mortgage loans
rise above the interest rates on the mortgage loans, the rate of
prepayment would generally be expected to decrease.
Mortgage originators make general and targeted solicitations for
refinancings. Any such solicited refinancings may result in a rate of prepayment
that is higher than you might otherwise expect.
If you are purchasing offered certificates at a discount, and specifically
if you are purchasing the Class A-PO Certificates, you should consider the risk
that if principal payments on the mortgage loans or, in the case of the Class
A-PO Certificates, discount mortgage loans, occur at a rate slower than you
expected, your yield will be lower than you expected. See "Prepayment and Yield
Considerations -- Yield on the Class A-PO Certificates" in this prospectus
supplement for a more detailed description of risks associated with the purchase
of the Class A-PO Certificates, including a table demonstrating the particular
sensitivity of the Class A-PO Certificates to the rate of prepayments.
If you are purchasing offered certificates at a premium, or are purchasing
a Class A-5 or Class A-WIO Certificate (which has no principal balance), you
should consider the risk that if principal payments on the mortgage loans or, in
the case of the Class A-WIO Certificates, the premium mortgage loans, occur at a
rate faster than you expected, your yield may be lower than expected. If you are
purchasing Class A-5 or Class A-WIO Certificates, you should consider the risk
that a rapid rate of principal payments on the mortgage loans or, in the case of
the Class A-WIO Certificates, the premium mortgage loans, could result in your
failure to recover your initial investment. See "Prepayment and Yield
Considerations--Yield on the Class A-WIO Certificates" in this prospectus
supplement for a more detailed description of the risks associated with the
purchase of the Class A-WIO Certificates, including a table demonstrating the
particular sensitivity of the Class A-WIO Certificates to the rate of
prepayments.
If you are purchasing the Class A-5 Certificates, you should also consider
the risk that a
S-15
high rate of LIBOR may result in a lower actual yield
than you expected. In particular, if you are purchasing a Class A-5 Certificate,
you should consider the risk that high constant rates of LIBOR combined with
high constant prepayment rates on the mortgage loans will result in a negative
yield.
See "Prepayment and Yield Considerations -- Yield on the Class A-5
Certificates" in this prospectus supplement for a more detailed description of
the risks associated with the purchase of the Class A-5 Certificates, including
a table demonstrating the particular sensitivity of the Class A-5 Certificates
to the rate of prepayments and LIBOR.
See "Summary of Terms -- Prepayment and Yield Considerations" and
"Prepayment and Yield Considerations" in this prospectus supplement.
Certificates May Not Be Appropriate
For Individual Investors
If you are an individual investor who does not have sufficient resources or
expertise to evaluate the particular characteristics of the applicable class of
offered certificates, the offered certificates may not be an appropriate
investment for you. This may be the case because, among other things:
o if you purchase your certificates at a price other than par, your
yield to maturity will be sensitive to the uncertain rate and timing
of principal prepayments on the mortgage loans;
o the rate of principal distributions on, and the weighted average lives
of, the offered certificates will be sensitive to the uncertain rate
and timing of principal prepayments on the mortgage loans and the
priority of principal distributions among the classes of certificates,
and as such, the offered certificates may be inappropriate investments
for you if you require a distribution of a particular amount of
principal on a specific date or an otherwise predictable stream of
distributions;
o you may not be able to reinvest amounts distributed in respect of
principal on your certificates (which distributions, in general, are
expected to be greater during periods of relatively low interest
rates) at a rate at least as high as the applicable pass-through rate
or your expected yield;
o a secondary market for the offered certificates may not develop or
provide you with liquidity of investment; and
o you must pay tax on any interest or original issue discount in the
year it accrues, even if the cash is paid to you in a different year.
If you are an individual investor considering the purchase of an
offered certificate, you
S-16
should also carefully consider the other risk factors discussed in this
prospectus supplement and the special considerations discussed under the
headings "Summary of Terms -- Prepayment and Yield Considerations" and
"Prepayment and Yield Considerations" in this prospectus supplement and "Yield
Considerations" in the prospectus.
Subordination of Class B Certificates
Increases Risk of Loss
If you purchase Class B Certificates, you are more likely to suffer
losses as a result of losses or delinquencies on the mortgage loans than are
holders of the Class A Certificates.
o The rights of the holders of each class of Class B Certificates to
receive distributions of interest and principal are subordinated to
the rights of the holders of the Class A Certificates and the holders
of each class of Class B Certificates with a lower numerical
designation. For example, the holders of the Class B-2 Certificates
will not receive principal or interest on a distribution date until
the holders of the Class A Certificates and Class B-1 Certificates
have received the amounts to which they are entitled on that date.
o Losses that are realized on the mortgage loans will be allocated first
to the Class B-6 Certificates, then to the Class B-5 Certificates and
so on, in reverse of the numerical order of the Class B Certificates,
until the outstanding balances of those classes have been reduced to
zero. After the outstanding balances of the Class B Certificates have
been reduced to zero, all losses will be allocated to the Class A
Certificates.
For a more detailed description of the subordination feature of the Class B
Certificates, see "Description of the Certificates -- Allocation of Losses" and
"Credit Support" in this prospectus supplement.
Limited Source of Payments - No
Recourse to Depositor, Seller,
Servicer or Trustee
Proceeds of the mortgage loans will be the sole source of payments on the
certificates. The certificates do not represent an interest in or obligation of
the depositor, the seller, the servicer, the trustee or any of their affiliates.
There are, however, limited obligations of the depositor with respect to certain
breaches of its representations and warranties, and limited obligations of the
servicer with respect to its servicing obligations.
Neither the certificates nor the mortgage loans will be guaranteed by or
insured by any governmental agency or instrumentality, the depositor, the
seller, the servicer, the trustee or any of their affiliates. Consequently, if
payments on the mortgage loans are insufficient or otherwise
S-17
unavailable to make all payments required on the certificates, there will be no
recourse to the depositor, the seller, the servicer, the trustee or any of their
affiliates.
Limited Liquidity
The underwriters intend to make a market for purchase and sale of the
offered certificates after their initial issuance, but the underwriters have no
obligation to do so. There is no assurance that such a secondary market will
develop or, if it does develop, that it will provide you with liquidity of
investment or that it will continue for the life of the offered certificates. As
a result, you may not be able to sell your certificates or you may not be able
to sell your certificates at a high enough price to produce your desired return
on investment.
The secondary market for mortgage-backed securities has experienced periods
of illiquidity and can be expected to do so in the future. Illiquidity means
that there may not be any purchasers for your class of certificates. Although
any class of certificates may experience illiquidity, it is more likely that
classes of certificates that are more sensitive to prepayment, credit or
interest rate risk (such as the Class A-5, Class A-WIO, Class A-PO or Class B
Certificates) will experience illiquidity.
Geographic Concentration May
Increase Risk of Loss Due to
Adverse Economic Conditions or
Natural Disasters
At various times, certain geographic regions will experience weaker
economic conditions and housing markets and, consequently, will experience
higher rates of delinquency and loss on mortgage loans generally. In addition,
California, Florida and several other states have experienced natural disasters,
including earthquakes, fires, floods and hurricanes, which may adversely affect
property values. Any concentration of mortgaged properties in a state or region
may present unique risk considerations. See the charts on page S- for a listing
of the locations and concentrations of mortgaged properties.
Any deterioration in housing prices in a state or region due to adverse
economic conditions, natural disaster or other factors, and any deterioration of
economic conditions in a state or region that adversely affects the ability of
borrowers to make payments on the mortgage loans, may result in losses on the
mortgage loans. Any losses may adversely affect the yield to maturity of the
offered certificates.
See "The Mortgage Pool" in this prospectus supplement for further
information regarding the geographic concentration of the mortgage loans.
Rights of Beneficial Owners May
Be Limited by Book-Entry System
All of the offered certificates, other than the Class A-R and Class A-LR
Certificates, are book-entry certificates and will be held through the
book-entry system of The Depository Trust Company. Transactions in the these
types of certificates generally can be effected only through
S-18
the Depository Trust Company and their participants. As a result:
o your ability to pledge book-entry certificates to entities that do not
participate in the Depository Trust Company system, or to otherwise
act with respect to book-entry certificates, may be limited due to the
lack of a physical certificate for your certificates; and
o under a book-entry format, you may experience delays in the receipt of
payments, since distributions will be made by the trustee to the
Depository Trust Company, and not directly to you.
For a more detailed discussion of the book-entry certificates, see
"Description of the Certificates --Book-Entry Certificates" in this prospectus
supplement.
Tax Consequences of Residual Certificates
o The Class A-R and Class A-LR Certificates will be the sole "residual
interests" in the respective REMICs for federal income tax purposes.
o The holders of the Class A-R and Class A-LR Certificates must report
as ordinary income or loss their pro rata share of the net income or
the net loss of the respective REMIC whether or not any cash
distributions are made to them. This allocation of income or loss may
result in a zero or negative after-tax return. No cash distributions
are expected to be made with respect to the Class A-R and Class A-LR
Certificates other than the distribution of their respective $ class
balances and interest on those balances.
o Treasury regulations have been proposed and a revenue procedure has
been issued, each effective February 4, 2000 if adopted in final form,
that would require a seller of the Class A-R or Class A-LR Certificate
to either pay the buyer an amount designed to compensate the buyer for
assuming the tax liability or transfer only to certain eligible
transferees should the seller wish to qualify for "safe harbor"
protection from possible disregard of such a transfer.
o Due to their tax consequences, the Class A-R and Class A-LR
Certificates will be subject to restrictions on transfer that may
affect their liquidity. In addition, the Class A-R and Class A-LR
Certificates may not be acquired by Plans.
See "Description of the Certificates -- Restrictions on Transfer of the
Class A-R and Class A-LR Certificates," "Prepayment and Yield Considerations --
Yield on the Class A-R and Class A-LR Certificates," "ERISA Considerations" and
"Federal Income Tax Consequences" in this prospectus supplement.
Recent Developments May Increase
Risk of Loss on the Mortgage Loans
S-19
On September 11, 2001, the United States was subjected to multiple
terrorist attacks, resulting in the loss of many lives and massive property
damage and destruction in New York City and the Washington, D.C. metropolitan
area. Although the damaged and destroyed properties consisted primarily of
commercial and government buildings, these tragic events may nevertheless have
an adverse effect on the value of residential real estate in the United States,
particularly in the New York and Washington, D.C. metropolitan areas. In
addition, it is possible (although the depositor cannot predict the likelihood)
that these events, or any consequential events involving the United States, may
have a temporary or sustained adverse effect on the U.S. economy generally, or
economic conditions in the New York or Washington, D.C. metropolitan areas or
other areas of the United States.
The depositor has not made a determination as to whether any of the
mortgagors of the mortgage loans may have been adversely affected by the
terrorist attacks. However, it is possible that there may be an increase in the
number of delinquencies and foreclosures of the mortgage loans as a result of
these events.
As a result of the terrorist attacks, on September 14, 2001 President Bush
authorized the placement of 50,000 military reservists on active duty status. To
the extent that any such person is a mortgagor of a Mortgage Loan, the interest
rate limitations and other provisions of the Soldiers' and Sailors' Civil Relief
Act of 1940, as amended, and similar state laws, would apply to such mortgage
loan during the period of active duty. It is possible that the number of
reservists placed on active duty status in the near future may increase, and may
increase substantially. In addition, other borrowers who enter military service
after the origination of their mortgage loans (including borrowers who are
members of the National Guard at the time of the origination of their mortgage
loans and are later called to active duty) would be covered by the terms of the
Soldiers and Sailors' Relief Act of 1940, as amended. See "Description of the
Certificates--Interest" and "Recent Developments--California Legislation" in
this prospectus supplement and "Certain Legal Aspects of the Mortgage
Loans--Soldiers' and Sailors' Civil Relief Act of 1940 and Similar Laws" in the
prospectus.
[Additional Risk Factors to be provided as applicable]
S-20
FORWARD LOOKING STATEMENTS
This prospectus supplement and the accompanying prospectus contain
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended. Specifically, forward-looking statements, together with
related qualifying language and assumptions, are found in the material
(including tables) under the headings "Risk Factors" and "Prepayment and Yield
Considerations" in this prospectus supplement and "Risk Factors" and "Yield
Considerations" in the accompanying prospectus. Forward-looking statements are
also found in other places throughout this prospectus supplement and the
prospectus, and may be identified by, among other things, accompanying language
such as "expects," "intends," "anticipates," "estimates" or analogous
expressions, or by qualifying language or assumptions. These statements involve
known and unknown risks, uncertainties and other important factors that could
cause the actual results or performance to differ materially from the
forward-looking statements. These risks, uncertainties and other factors
include, among others, general economic and business conditions, competition,
changes in political, social and economic conditions, regulatory initiatives and
compliance with governmental regulations, customer preference and various other
matters, many of which are beyond the depositor's control. These forward-looking
statements speak only as of the date of this prospectus supplement. The
depositor expressly disclaims any obligation or undertaking to disseminate any
updates or revisions to any forward-looking statements to reflect changes in the
depositor's expectations with regard to those statements or any change in
events, conditions or circumstances on which any forward-looking statement is
based.
S-21
THE MORTGAGE POOL
The following descriptions of the Mortgage Loans and the mortgaged
properties are based upon the expected characteristics of the Mortgage Loans as
of the close of business on the Cut-off Date. The balances shown have been
adjusted for the scheduled principal payments due on or before the Cut-off Date.
Prior to the Closing Date, Mortgage Loans may be removed from Mortgage Pool and
other Mortgage Loans may be substituted for them. The Depositor believes that
the information set forth in this prospectus supplement is representative of the
characteristics of the Mortgage Pool as they will be constituted on the Closing
Date. Unless the context requires otherwise, references below to percentages of
the Mortgage Loans are approximate percentages of the aggregate Stated Principal
Balance of the Mortgage Loans as of the Cut-off Date.
The Wachovia Asset Securitization Issuance, LLC 200 - Trust (the "Trust")
==============
will consist primarily of a pool (the "Mortgage Pool") of fixed-rate,
conventional, fully-amortizing mortgage loans (the "Mortgage Loans") secured by
first liens on one- to four-family residential properties. The Mortgage Loans
will consist of mortgage loans substantially all of which have original terms to
maturity of approximately years. Borrowers may, however, prepay their Mortgage
Loans at any time without penalty. Accordingly, the actual date on which any
Mortgage Loan is paid in full may be earlier than the stated maturity date due
to unscheduled payments of principal. The Mortgage Loans will have scheduled
monthly payments of interest and principal due on the first day of each month.
Each Mortgage Loan bears interest at a fixed rate.
The Depositor will purchase the Mortgage Loans from (the "Seller") on the
Closing Date pursuant to a mortgage loan purchase agreement between the Seller
and the Depositor (the "Mortgage Loan Purchase Agreement"). The Mortgage Loan
Purchase Agreement will provide the Depositor with remedies against the Seller
for breaches of representations and warranties made by the Depositor with
respect to the Mortgage Loans in the Pooling Agreement and for the failure to
deliver documentation with respect to the Mortgage Loans under the Pooling
Agreement.
As of the Cut-off Date, no Mortgage Loan was delinquent and no Mortgage
Loan has been more than 30 days delinquent more than once during the preceding
twelve months. None of the Mortgage Loans will be subject to any buydown
agreement.
As of the Cut-off Date, no Mortgage Loan will have a Loan-to-Value Ratio of
more than %. For more information on the Loan-to-Value Ratios of the Mortgage
Loans, see the "Original Loan-to-Value Ratios" tables below. Subject to minor
exceptions permitted in the Seller's discretion, each Mortgage Loan with a
Loan-to-Value Ratio at origination in excess of 80% will be covered by a primary
mortgage guaranty insurance policy which conforms to the standards of Fannie Mae
("FNMA") or the Federal Home Loan Mortgage Corporation ("FHLMC"). No such
primary mortgage insurance policy will be required with respect to any such
Mortgage Loan after the date on which the related Loan-to-Value Ratio is less
than 80%.
The "Loan-to-Value Ratio" of a Mortgage Loan at any time is the percentage
equal to
S-22
(i) the principal balance of the related Mortgage Loan divided by (ii) the
lesser of (a) the appraised value of the related mortgaged property determined
in an appraisal obtained by the originator at origination of the Mortgage Loan
or an automated valuation model or tax assessed value (it permitted by the
applicable mortgage loan program) and (b) except for Mortgage Loans made for
refinancing purposes, the sales price for the mortgaged property. The value of
any mortgaged property generally will change from the level that existed on the
appraisal or sales date. If residential real estate values generally or in a
particular geographic area decline, the Loan-to-Value Ratios might not be a
reliable indicator of the rates of delinquencies, foreclosures and losses that
could occur with respect to the Mortgage Loans.
S-23
Mortgage Loan Data
The following tables set forth certain characteristics of the Mortgage
Loans as of the Cut-off Date. The balances and percentages may not be exact due
to rounding.
All Discount Premium
Mortgage Mortgage Mortgage
Loans Loans Loans
- --------------------------------------------------------------------------------------------------
Number of Mortgage Loans.........................
Aggregate Stated Principal
Balance(1)................................... $ $ $
Range of Original Terms to
Stated Maturity(1)........................... to to to
Range of Stated Principal
Balances(1).................................. $ to $ $ to $ $ to $
Average Stated Principal
Balance(1)................................... $ $ $
Latest Stated Maturity Date......................
Range of Mortgage Interest
Rates(1)..................................... % to % % to % % to %
Weighted Average Mortgage
Interest Rate(1)............................. % % %
Range of Remaining Terms to
Stated Maturity(1)........................... to to to
Weighted Average Remaining
Term to Stated Maturity(1)...................
Range of Original Loan-to-Value
Ratios(1).................................... % to % % to % % to %
Weighted Average Original
Loan-to-Value Ratio(1)....................... % % %
Geographic Concentration of
Mortgaged Properties
Securing Mortgage Loans
in Excess of 5% of the
Aggregate Stated Principal
Balance(1)
[State]................................ % % %
[State]................................ % % %
[State]................................ % % %
- --------
(1) Approximate.
S-24
Occupancy of Mortgaged Properties(1)
Aggregate % of
Number of Stated Principal Cut-off Date
Mortgage Balance as of Pool Principal
Occupancy Loans Cut-off Date Balance
- --------- ----------- --------------- -----------
Primary Residence .......................................... $ %
Second Home.................................................
----------- --------------- ------------
TOTAL.............................................. $ %
=========== =============== ============
- ------------
(1) Based solely on representations of the mortgagor at the time of origination
of the related Mortgage Loan.
Property Types
Aggregate % of
Number of Stated Principal Cut-off Date
Mortgage Balance as of Pool Principal
Property Type Loans Cut-off Date Balance
- ------------- ----------- --------------- ------------
Single Family Residence..................................... $ %
PUD.........................................................
Condominium.................................................
Townhouse...................................................
3-Family....................................................
----------- --------------- ------------
TOTAL.............................................. $ %
=========== =============== ============
Mortgage Loan Purpose
Aggregate % of
Number of Stated Principal Cut-off Date
Mortgage Balance as of Pool Principal
Purpose Loans Cut-off Date Balance
- ------- ----------- --------------- ------------
Purchase.................................................... $ %
Refinance--Rate/Term.........................................
Refinance--Cashout...........................................
----------- --------------- ------------
TOTAL.............................................. $ %
=========== =============== ============
S-25
Geographical Distribution of the Mortgaged Properties(1)
Aggregate % of
Number of Stated Principal Cut-off Date
Mortgage Balance as of Pool Principal
Geographic Area Loans Cut-off Date Balance
- --------------- ----------- --------------- ------------
............................................................. $ %
.............................................................
.............................................................
.............................................................
.............................................................
.............................................................
.............................................................
.............................................................
.............................................................
.............................................................
.............................................................
.............................................................
.............................................................
.............................................................
.............................................................
.............................................................
.............................................................
.............................................................
.............................................................
.............................................................
.............................................................
.............................................................
.............................................................
.............................................................
.............................................................
.............................................................
.............................................................
.............................................................
.............................................................
.............................................................
.............................................................
............................................................. ----------- --------------- ------------
TOTAL.............................................. $ %
=========== =============== ============
- ------------
(1) As of the Cut-off Date, no more than approximately % of the Mortgage Loans
are expected to be secured by mortgaged properties located in any one
five-digit postal zip code.
S-26
Current Mortgage Loan Principal Balances(1)
Aggregate % of
Number of Stated Principal Cut-off Date
Mortgage Balance as of Pool Principal
Current Mortgage Loan Principal Balances Loans Cut-off Date Balance
- ---------------------------------------- ----------- --------------- ------------
$0.01 to $200,000.00........................................ $ %
$200,000.01 to $250,000.00..................................
$250,000.01 to $300,000.00..................................
$300,000.01 to $350,000.00..................................
$350,000.01 to $400,000.00..................................
$400,000.01 to $450,000.00..................................
$450,000.01 to $500,000.00..................................
$500,000.01 to $550,000.00..................................
$550,000.01 to $600,000.00..................................
$600,000.01 to $650,000.00..................................
$750,000.01 to $800,000.00..................................
----------- --------------- ------------
TOTAL.............................................. $ %
=========== =============== ============
- ------------
(1) As of the Cut-off Date, the average outstanding principal balance of the
Mortgage Loans is expected to be approximately $ .
Original Loan-to-Value Ratios(1)
Aggregate % of
Number of Stated Principal Cut-off Date
Mortgage Balance as of Pool Principal
Original Loan-to-Value Ratios Loans Cut-off Date Balance
- ----------------------------- ----------- --------------- ------------
25.01% to 30.00%............................................ $ %
30.01% to 35.00%............................................
40.01% to 45.00%............................................
45.01% to 50.00%............................................
50.01% to 55.00%............................................
55.01% to 60.00%............................................
60.01% to 65.00%............................................
65.01% to 70.00%............................................
70.01% to 75.00%............................................
75.01% to 80.00%............................................
80.01% to 85.00%............................................
85.01% to 90.00%............................................
90.01% to 95.00%............................................
----------- --------------- ------------
TOTAL.............................................. $ %
=========== =============== ============
- ------------
(1) As of the Cut-off Date, the weighted average Loan-to-Value Ratio at
origination of the Mortgage Loans is expected to be approximately %.
S-27
Mortgage Interest Rates(1)
Aggregate % of
Number of Stated Principal Cut-off Date
Mortgage Balance as of Pool Principal
Mortgage Interest Rates Loans Cut-off Date Balance
- ----------------------- ----------- --------------- ------------
% to %......................................... $ %
% to %.........................................
% to %.........................................
% to %.........................................
% to %.........................................
----------- --------------- ------------
TOTAL.............................................. $ %
=========== =============== ============
- ----------
(1) As of the Cut-off Date, the weighted average mortgage interest rate of the
Mortgage Loans is expected to be approximately % per annum.
Remaining Terms(1)
Aggregate % of
Number of Stated Principal Cut-off Date
Mortgage Balance as of Pool Principal
Remaining Term Loans Cut-off Date Balance
- -------------- ----------- --------------- ------------
to months......................................... $ %
to months.........................................
to months.........................................
----------- --------------- ------------
TOTAL.............................................. $ %
=========== =============== ============
- ----------
(1) As of the Cut-off Date, the weighted average remaining term to stated
maturity of the Mortgage Loans is expected to be approximately months.
Credit Scoring of Mortgagors(1)
Aggregate % of
Number of Stated Principal Cut-off Date
Mortgage Balance as of Pool Principal
Credit Scores Loans Cut-off Date Balance
- ------------- ----------- --------------- ------------
to .................................................. $ %
to ..................................................
to ..................................................
to ..................................................
Unknown Scores..............................................
----------- --------------- ------------
TOTAL.............................................. $ %
=========== =============== ============
- ----------
(1) The scores shown are Bureau Credit Scores from Experian (FICO), Equifax
(Beacon) and TransUnion (Empirica).
S-28
THE SELLER
On or about , 200 (the "Closing Date") the Mortgage Loans will
be sold to the Depositor by (the "Seller").
[Further Information Relating to the Seller to be Inserted]
THE SERVICER
The information in this section has been provided by . Neither the
Depositor nor the Underwriters make any representation or warranty as to the
accuracy or completeness of this information.
General
(in its capacity as servicer, the "Servicer") will act as servicer of the
Mortgage Loans pursuant to the Pooling Agreement. The Servicer is an indirect
subsidiary of , a corporation.
As of , the Servicer and its subsidiaries were servicing approximately
mortgage loans in its Owned and Managed Servicing Portfolio representing an
aggregate outstanding principal balance of approximately $ , and approximately
mortgage loans in its Third-Party Servicing Portfolio representing an aggregate
outstanding principal balance of approximately $ .
The Certificates will not represent an interest in, or an obligation
of, nor are the Mortgage Loans guaranteed by, the Servicer or any of its
affiliates.
Delinquency and Loss Experience of the Servicer
[Delinquency and Loss Experience of the Servicer to be Inserted]
UNDERWRITING STANDARDS
The Seller provided the information in the following paragraphs. None
of the Depositor, the Trustee, the Underwriters, or any of their respective
affiliates have made or will make any representations as to the accuracy or
completeness of such information. The following is a description of the
underwriting standards used by the Seller in connection with its acquisition of
the Mortgage Loans.
[Underwriting Standards of the Seller to be Inserted]
S-29
THE POOLING AND SERVICING AGREEMENT
The Certificates will be issued pursuant to a Pooling and Servicing
Agreement to be dated , 200 (the "Pooling Agreement"), among the Depositor, the
Servicer and the Trustee. The prospectus contains important additional
information regarding the terms and conditions of the Pooling Agreement and the
Certificates. See "Description of the Agreements" in the prospectus.
The following summaries do not purport to be complete and are subject to
the provisions of the Pooling Agreement which are incorporated by reference. The
Depositor plans to file a final copy of the Pooling Agreement with the
Securities and Exchange Commission pursuant to a Current Report on Form 8-K
after the Closing Date.
Assignment of Mortgage Loans
In connection with the transfer and assignment of the Mortgage Loans to the
Trustee, the Depositor will deliver or cause to be delivered to the Trustee, or
a custodian for the Trustee, among other things, with respect to each Mortgage
Loan (collectively, the "Mortgage File"):
o the original Mortgage Note endorsed without recourse in blank or to
the order of the Trustee (or its nominee) or an affidavit signed by an
officer of the Seller certifying that the related original Mortgage
Note has been lost;
o the original or a certified copy of the Mortgage with evidence of
recording indicated thereon (except for any Mortgage not returned from
the public recording office, which will be delivered to the Trustee as
soon as the same is available to the Depositor);
o except as described below, an assignment in recordable form of the
Mortgage (or a copy, if such assignment has been submitted for
recording); and
o if applicable, any riders or modifications to such Mortgage Note and
Mortgage.
Assignments of the Mortgage Loans to the Trustee (or its nominee) will be
recorded in the appropriate public office for real property records, except (i)
in states where, in the opinion of counsel acceptable to the Trustee, such
recording is not required to protect the Trustee's interests in the Mortgage
Loan against the claim of any subsequent transferee or any successor to or
creditor of the Depositor or the Seller, (ii) in states where recordation is not
required by either Rating Agency to obtain the initial ratings on the
Certificates described under "Certificate Ratings" in this prospectus supplement
or (iii) with respect to any Mortgage which has been recorded in the name of
Mortgage Electronic Registration Systems, Inc. ("MERS") or its designee. With
respect to any Mortgage which has been recorded in the name of MERS or its
designee, no mortgage assignment in favor of the Trustee will be required to be
prepared or delivered. Instead, the Servicer will be required to take all
actions as are necessary to cause the
S-30
Trust to be shown as the owner of the related Mortgage Loan on the records of
MERS for purposes of the system of recording transfers of beneficial ownership
of mortgages maintained by MERS. The Trustee will promptly review each Mortgage
File after the Closing Date (or promptly after the Trustee's receipt of any
document permitted to be delivered after the Closing Date) to determine if any
of the foregoing documents is missing.
Repurchases of Mortgage Loans
If any portion of the Mortgage File is not delivered to the Trustee or
if a Mortgage Loan breaches any of the representations made by the Depositor in
the Pooling Agreement in any material respect and the Depositor does not cure
such omission or defect within 90 days, the Depositor will be required on the
Distribution Date in the month following the expiration of the 90-day period
either (i) to repurchase the related Mortgage Loan (or any property acquired in
respect thereof) at a price (the "Purchase Price") equal to 100% of the unpaid
principal balance of such Mortgage Loan plus accrued and unpaid interest on such
principal balance at the related mortgage interest rate, or (ii) to substitute
an Eligible Substitute Mortgage Loan; however, such substitution generally is
permitted only within two years of the Closing Date. Any Mortgage Loan
repurchased or subject to a substitution as described in this paragraph is
referred to as a "Deleted Mortgage Loan."
An "Eligible Substitute Mortgage Loan" generally will:
o have a principal balance, after deduction of all Monthly
Payments due in the month of substitution, not in excess of,
and not more than % less than, the Stated Principal Balance of
the Deleted Mortgage Loan (the amount of any shortfall to be
deposited by the Seller and held for distribution to the
certificateholders on the related Distribution Date (a
"Substitution Adjustment Amount"));
o have a Net Mortgage Interest Rate equal to that of the Deleted
Mortgage Loan;
o have a Loan-to-Value Ratio not higher than that of the Deleted
Mortgage Loan;
o have a remaining term to maturity not greater than (and not
more than one year less than) that of the Deleted Mortgage
Loan; and
o comply with all of the representations and warranties in the
Pooling Agreement as of the date of substitution.
This cure, repurchase or substitution obligation constitutes the sole
remedy available to certificateholders or the Trustee for omission of, or a
material defect in, a Mortgage Loan document.
Optional Repurchases of Certain Mortgage Loans
The Depositor, in its sole discretion, may repurchase from the Trust:
S-31
o any Mortgage Loan that is at least 180 days delinquent; and
o any Mortgage Loan as to which the originator or prior owner of
such Mortgage Loan has breached a representation or warranty
to the Seller regarding the characteristics of such Mortgage
Loan.
Any such repurchase will be at the Purchase Price.
Payments on Mortgage Loans; Accounts
On or prior to the Closing Date, the Servicer will establish an account
(the "Servicer Custodial Account"), which will be maintained as a separate trust
account by the Servicer in trust for the benefit of certificateholders. Funds
credited to the Servicer Custodial Account may be invested for the benefit and
at the risk of the Servicer in certain eligible investments, as described in the
Pooling Agreement, that are scheduled to mature on or prior to the business day
preceding the next Distribution Date. On or prior to the business day
immediately preceding each Distribution Date, the Servicer will withdraw from
the Servicer Custodial Account the Pool Distribution Amount and will deposit
such amounts in an account established and maintained with the Trustee on behalf
of certificateholders (the "Certificate Account"). Funds credited to the
Certificate Account may be invested for the benefit and at the risk of the
Trustee in certain eligible investments, as described in the Pooling Agreement.
Servicing Compensation and Payment of Expenses
The Administrative Fees with respect to the Trust are payable out of
the interest payments received on each Mortgage Loan. The "Administrative Fees"
consist of (a) servicing compensation payable to the Servicer in respect of its
servicing activities (the "Servicing Fee") and (b) fees paid to the Trustee. The
Administrative Fees will accrue on the Stated Principal Balance of each Mortgage
Loan at a rate (the "Administrative Fee Rate") equal to the sum of the Servicing
Fee Rate for such Mortgage Loan and the Trustee Fee Rate. The "Trustee Fee Rate"
will be % per annum. The "Servicing Fee Rate" with respect to each Mortgage Loan
will be % per annum.
The Servicer is obligated to pay certain ongoing expenses associated
with the Trust and incurred by the Servicer in connection with its
responsibilities under the Pooling Agreement. Those amounts will be paid by the
Servicer out of its Servicing Fee. The amount of the Servicer's Servicing Fee is
subject to adjustment with respect to prepaid Mortgage Loans, as described below
under "-- Compensating Interest." The Servicer is also entitled to receive all
late payment fees, assumption fees and other similar charges and all investment
income earned on amounts on deposit in the Servicer Custodial Account.
The Trustee is also entitled to receive all investment income earned on
amounts on deposit in the Certificate Account. In addition to its compensation,
the Trustee is entitled to be reimbursed from and indemnified by the Trust for
certain expenses incurred by the Trustee in connection with its responsibilities
under the Pooling Agreement.
S-32
Compensating Interest
When a Mortgage Loan is subject to a partial prepayment or is prepaid
in full between due dates, the mortgagor is required to pay interest on the
amount prepaid only to the date of prepayment in the case of a prepayment in
full or to the due date in the month in which a partial prepayment is made. No
interest will be paid by the mortgagor on the amount prepaid after those dates.
Prepayments will be distributed to certificateholders on the Distribution Date
in the month following the month of receipt.
Pursuant to the Pooling Agreement, the aggregate Servicing Fee payable
to the Servicer for any month will be reduced by an amount equal to the lesser
of (i) one-twelfth of % of the balance of the Mortgage Loans and (ii) the excess
of (x) 30 days' interest at the mortgage interest rate (less the Servicing Fee
Rate) on the amount of each prepayment on the Mortgage Loans over (y) the amount
of interest actually paid by the related mortgagors on the amount of such
prepayments during the preceding month (any such reduction, "Compensating
Interest"). Any such shortfalls in interest as a result of prepayments on the
Mortgage Loans in excess of the amount of the related Compensating Interest for
a month will reduce the amount of interest available to be distributed on the
Certificates from what would have been the case in the absence of such
prepayments. See "Description of the Certificates -- Interest" in this
prospectus supplement.
Advances
Subject to the following limitations, the Servicer will be required to
advance (any such advance, an "Advance") prior to each Distribution Date an
amount equal to the aggregate of payments of principal and interest (net of the
related Servicing Fee) which were due on the related due date on the Mortgage
Loans and which were delinquent on the related Determination Date. Advances by
the Servicer will be made from its own funds or funds in the Servicer Custodial
Account that do not constitute a portion of the Pool Distribution Amount for
such Distribution Date. The obligation to make an Advance with respect to any
Mortgage Loan will continue until the ultimate disposition of the REO Property
or mortgaged property relating to such Mortgage Loan. An "REO Property" is a
mortgaged property that has been acquired by the Servicer on behalf of the Trust
through foreclosure or grant of a deed in lieu of foreclosure. With respect to
any Distribution Date, the "Determination Date" will be the sixteenth day of the
month in which such Distribution Date occurs or, if such day is not a business
day, the immediately preceding business day.
Advances are intended to maintain a regular flow of scheduled interest
and principal payments on the Certificates rather than to guarantee or insure
against losses. The Servicer is obligated to make Advances if the Advances are,
in its judgment, reasonably recoverable from future payments and collections or
insurance payments or proceeds of liquidation of the related Mortgage Loan. If
the Servicer determines on any Determination Date to make an Advance, such
Advance will be included with the distribution to certificateholders on the
related Distribution Date. Any failure by the Servicer to make a required
Advance will constitute an event of default and the Trustee (if it succeeds to
the obligations of the Servicer under the Pooling Agreement) or
S-33
the successor servicer will be obligated to make the Advance, in accordance with
the terms of the Pooling Agreement.
Optional Termination
The circumstances under which the obligations created by the Pooling
Agreement will terminate in respect of the Certificates are described in
"Description of the Securities--Termination; Optional Purchase of Mortgage
Loans" in the prospectus. In addition, the Depositor will have the option to
purchase all remaining Mortgage Loans and other assets in the Trust when the
scheduled balance of the Mortgage Pool as of the Distribution Date on which the
purchase proceeds are to be distributed is less than % of the initial balance of
the Mortgage Pool. This percentage may be reduced through an amendment to the
Pooling Agreement under the circumstances described below. The purchase price
will generally be equal to the sum of the Stated Principal Balances of the
Mortgage Loans and the fair market value of any REO Properties held by the Trust
together with the amount of any unpaid interest shortfalls on the Certificates
and one month's interest on the Stated Principal Balance of each Mortgage Loan.
Distributions in respect of an optional purchase described above will
be paid to certificateholders in order of their priority of distribution as
described below under "Description of the Certificates -- Priority of
Distributions." The proceeds from such a distribution may not be sufficient to
distribute the full amount to which each class is entitled if the purchase price
is based in part on the fair market value of the REO Property and such fair
market value is less than the scheduled balance of the related Mortgage Loan.
The Pooling Agreement may be amended without the consent of
certificateholders in order to reduce the percentage of the initial balance of
the Mortgage Pool at which the Depositor will have the option to purchase all
the remaining Mortgage Loans, if such reduction is considered necessary by the
Depositor, as evidenced by an officer's certificate delivered to the Trustee, to
preserve the treatment of the transfer of the Mortgage Loans to the Depositor by
the Seller or to the Trust by the Depositor as a sale for accounting purposes.
In no event will the Trust created by the Pooling Agreement continue
beyond the later of (a) the repurchase described above, if it results in the
Trust no longer owning any Mortgage Loans, (b) the expiration of 21 years from
the death of the survivor of the person named in the Pooling Agreement and (c)
the final distribution to certificateholders of amounts received in respect of
the assets of the Trust. The termination of the Trust will be effected in a
manner consistent with applicable federal income tax regulations and the REMIC
status of the Trust.
Special Servicing Agreements
The Pooling Agreement will permit the Servicer to enter into a special
servicing agreement with an unaffiliated holder of a class of Class B
Certificates or of a class of securities representing interests in one or more
classes of Class B Certificates alone or together with other subordinated
mortgage pass-through certificates. Pursuant to such an agreement, such holder
may instruct the Servicer to commence or delay foreclosure proceedings with
respect to delinquent Mortgage Loans.
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The Trustee
____________________ will be the Trustee under the Pooling Agreement.
_______________ is ____________ . The ________________ principal office is
located at _______________ (the "Corporate Trust Office"). Certificate transfer
services are conducted at the Corporate Trust Office. The Trustee may make
available each month, to any interested party, the monthly statement to
certificateholders via the Trustee's website located at "______________." The
Depositor, the Seller and the Servicer may maintain other banking relationships
in the ordinary course of business with the Trustee. The Trustee may appoint one
or more co-trustees if necessary to comply with the fiduciary requirements
imposed by any jurisdiction in which a mortgaged property is located.
Voting Rights
Voting rights for certain actions specified in the Pooling Agreement
will be allocated as follows:
o % of all voting rights will be allocated among the holders of
the Class A Certificates (other than the Class A-5, Class
A-WIO, Class A-R and Class A-LR Certificates) and Subordinate
Certificates based on the outstanding balances of their
Certificates.
o % of all voting rights will be allocated to the holders of the
Class A-5 Certificates.
o % of all voting rights will be allocated to the holders of the
Class A-WIO Certificates.
o % of all voting rights will be allocated to the holders of the
Class A-R and Class A-LR Certificates.
The voting rights allocated to each class will be allocated among the
Certificates of such class based on their Percentage Interests.
The "Percentage Interest" of a Certificate of a class is the percentage
obtained by dividing the initial principal balance (or notional amount) of such
Certificate by the aggregate initial class balance (or aggregate initial
notional amount) of such class.
DESCRIPTION OF THE CERTIFICATES
The Certificates will consist of (i) the thirteen classes of Offered
Certificates listed in the table on page S- of this prospectus supplement (the
"Offered Certificates") and (ii) the Class B-4, Class B-5 and Class B-6
Certificates, which are not offered by this prospectus supplement (collectively,
the "Certificates").
The Senior Certificates in the aggregate will evidence an initial
beneficial ownership
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interest of approximately _____% in the Trust and the Subordinate
Certificates will evidence in the aggregate the remaining _____% undivided
interest in the Trust. The Class A-PO Certificates are Principal Only
Certificates and are not entitled to distributions in respect of interest. The
Class A-5 and Class A-WIO Certificates are Interest Only Certificates and are
not entitled to distributions in respect of principal.
Denominations and Form
The Offered Certificates (other than the Class A-R and Class A-LR
Certificates) will be issuable in book-entry form only (the "Book-Entry
Certificates"). The Class A-R and Class A-LR Certificates will be issued in
definitive, fully-registered form (such form, the "Definitive Certificates").
The following table sets forth the original Certificate form, the minimum
denomination and the incremental denomination of the Offered Certificates. The
Offered Certificates are not intended to be and should not be directly or
indirectly held or beneficially owned in amounts lower than such minimum
denominations. A single certificate of each class may be issued in an amount
different than described above.
Form and Denominations of Offered Certificates
Original Minimum Incremental
Class Certificate Form Denomination Denomination
- ----- ---------------- ------------ ------------
Classes A-1, A-2, A-3, A-4, A-5(1) and A-6.................. Book-Entry $ $
Classes A-R and A-LR........................................ Definitive $ $
Class A-WIO(1).............................................. Book-Entry $ $
Classes A-PO, B-1, B-2 and B-3.............................. Book-Entry $ $
- ----------
(1) Denomination expressed in initial notional amount.
Book-Entry Certificates
Persons acquiring beneficial ownership interests in the Book-Entry
Certificates ("Certificate Owners") will hold such Certificates through The
Depository Trust Company ("DTC") in the United States, or Clearstream or
Euroclear (in Europe) if they are participants of such systems (the
"Participants"), or indirectly through organizations which are participants in
such systems (the "Indirect Participants"). Each class of the Book-Entry
Certificates initially will be represented by one or more physical certificates
registered in the name of Cede & Co., the nominee of DTC. Clearstream and
Euroclear will hold omnibus positions on behalf of their Participants through
customers' securities accounts in Clearstream's and Euroclear's names on the
books of their respective depositaries which in turn will hold such positions in
customers' securities accounts in the depositaries' names on the books of DTC.
Citibank will act as depositary for Clearstream and JPMorgan Chase Bank will act
as depositary for Euroclear (in such capacities, individually the "Relevant
Depositary" and collectively the "European Depositaries"). Investors may hold
such beneficial interest in the Book-Entry Certificates in minimum denominations
of $1,000. Except as described below, no person acquiring a Book-Entry
Certificate (each, a "beneficial owner") will be entitled to receive a
Definitive
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Certificate. Unless and until Definitive Certificates are issued, it is
anticipated that the only "Certificateholder" of the Book-Entry Certificates
will be Cede & Co., as nominee of DTC. Certificate Owners will not be
Certificateholders as that term is used in the Pooling Agreement. Certificate
Owners are only permitted to exercise their rights indirectly through
Participants and DTC.
The beneficial owner's ownership of a Book-Entry Certificate will be
recorded on the records of the brokerage firm, bank, thrift institution or other
financial intermediary (each, a "Financial Intermediary") that maintains the
beneficial owner's account for such purpose. In turn, the Financial
Intermediary's ownership of such Book-Entry Certificate will be recorded on the
records of DTC (or of a participating firm that acts as agent for the Financial
Intermediary, whose interest will in turn be recorded on the records of DTC, if
the beneficial owner's Financial Intermediary is not a DTC Participant, and on
the records of Clearstream or Euroclear, as appropriate).
Certificate Owners will receive all distributions of principal of and
interest on the Book-Entry Certificates from the Trustee through DTC and DTC
Participants. While the Book-Entry Certificates are outstanding (except under
the circumstances described below), under the rules, regulations and procedures
creating and affecting DTC and its operations (the "Rules"), DTC is required to
make book-entry transfers among Participants on whose behalf it acts with
respect to the Book-Entry Certificates and is required to receive and transmit
distributions of principal of, and interest on, the Book-Entry Certificates.
Participants and Indirect Participants with whom Certificate Owners have
accounts with respect to Book-Entry Certificates are similarly required to make
book-entry transfers and receive and transmit such distributions on behalf of
their respective Certificate Owners. Accordingly, although Certificate Owners
will not possess certificates representing their respective interests in the
Book-Entry Certificates, the Rules provide a mechanism by which Certificate
Owners will receive distributions and will be able to transfer their interest.
Certificateholders will not receive or be entitled to receive
certificates representing their respective interests in the Book-Entry
Certificates, except under the limited circumstances described below. Unless and
until Definitive Certificates are issued, Certificateholders who are not
Participants may transfer ownership of Book-Entry Certificates only through
Participants and Indirect Participants by instructing such Participants and
Indirect Participants to transfer Book-Entry Certificates, by book-entry
transfer, through DTC, for the account of the purchasers of such Book-Entry
Certificates, which account is maintained with their respective Participants.
Under the Rules and in accordance with DTC's normal procedures, transfers of
ownership of Book-Entry Certificates will be executed through DTC and the
accounts of the respective Participants at DTC will be debited and credited.
Similarly, the Participants and Indirect Participants will make debits or
credits, as the case may be, on their records on behalf of the selling and
purchasing Certificateholders.
Because of time zone differences, credits of securities received in
Clearstream or Euroclear as a result of a transaction with a Participant will be
made during subsequent securities settlement processing and dated the business
day following the DTC settlement date. Such credits or any transactions in such
securities settled during such processing will be reported to the relevant
Euroclear or Clearstream Participants on such business day. Cash received in
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Clearstream or Euroclear as a result of sales of securities by or through a
Clearstream Participant or Euroclear Participant to a DTC Participant will be
received with value on the DTC settlement date but will be available in the
relevant Clearstream or Euroclear cash account only as of the business day
following settlement in DTC. For information with respect to tax documentation
procedures relating to the Certificates see "Federal Income Tax
Consequences--REMICs--Taxation of Certain Foreign Investors" and in the
prospectus and "Global Clearance, Settlement and Tax Documentation
Procedures--Certain U.S. Federal Income Tax Documentation Requirements" in Annex
I to this prospectus supplement.
Transfers between Participants will occur in accordance with DTC Rules.
Transfers between Clearstream Participants and Euroclear Participants will occur
in accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Clearstream
Participants or Euroclear Participants, on the other, will be effected in
accordance with DTC Rules on behalf of the relevant European international
clearing system by the Relevant Depositary; however, such cross market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in accordance
with its rules and procedures and within established deadlines (European time).
The relevant European international clearing system will, if the transaction
meets its settlement requirements, deliver instructions to the Relevant
Depositary to take action to effect final settlement on its behalf by delivering
or receiving securities in DTC, and making or receiving payment in accordance
with normal procedures for same day funds settlement applicable to DTC.
Clearstream Participants and Euroclear Participants may not deliver instructions
directly to the European Depositaries.
DTC which is a New York-chartered limited purpose trust company,
performs services for its Participants, some of which (and/or their
representatives) own DTC. In accordance with its normal procedures, DTC is
expected to record the positions held by each DTC Participant in the Book-Entry
Certificates, whether held for its own account or as a nominee for another
person. In general, beneficial ownership of Book-Entry Certificates will be
subject to the Rules, as in effect from time to time.
Clearstream International, 67 Bd Grande-Duchesse Charlotte, L-1331
Luxembourg ("Clearstream"), a Luxembourg limited liability company, was formed
in January 2000 through the merger of Cedel International and Deutsche Boerse
Clearing, the shareholders of which comprise 93 of the world's major financial
institutions.
Clearstream is registered as a bank in Luxembourg, and as such is
subject to regulation by the Institute Monetaire Luxembourgeois and the
Luxembourg Monetary Authority, which supervises Luxembourg banks.
Clearstream holds securities for its customers ("Clearstream
Participants") and facilitates the clearance and settlement of securities
transactions by electronic book-entry transfers between their accounts.
Clearstream provides various services, including safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. Clearstream also deals with domestic securities markets
in several
S-38
countries through established depository and custodial relationships.
Clearstream has established an electronic bridge with Euroclear Bank S.A./N.V.
as the Euroclear Operator in Brussels to facilitate settlement of trades between
systems. Clearstream currently accepts over 200,000 securities issues on its
books.
Clearstream's customers are world-wide financial institutions including
underwriters, securities brokers and dealers, banks, trust companies and
clearing corporations. Clearstream's United States customers are limited to
securities brokers and dealers and banks. Currently, Clearstream has
approximately 2,500 customers located in over 80 countries, including all major
European countries, Canada and the United States. Indirect access to Clearstream
is available to other institutions which clear through or maintain custodial
relationship with an account holder of Clearstream.
The Euroclear System ("Euroclear") was created in 1968 to hold
securities for its participants ("Euroclear Participants") and to clear and
settle transactions between Euroclear Participants through simultaneous
electronic book-entry delivery against payment, thereby eliminating the need for
physical movement of certificates and any risk from lack of simultaneous
transfers of securities and cash. Transactions may be settled in a variety of
currencies, included United States dollars. Euroclear includes various other
securities, including securities lending and borrowing and interfaces with
domestic markets in several countries generally similar to the arrangements for
cross-market transfers with DTC described above. Euroclear is operated by
Euroclear Bank S.A./N.V. (the "Euroclear Operator"). All operations are conduced
by the Euroclear Operator, and all Euroclear securities clearance accounts and
Euroclear cash accounts are accounts with the Euroclear Operator. Euroclear plc
establishes policy for Euroclear on behalf of Euroclear Participants. Euroclear
Participants include banks (including central banks), securities brokers and
dealers and other professional financial intermediaries. Indirect access to
Euroclear is also available to other firms that clear through or maintain a
custodial relationship with a Euroclear Participant, either directly or
indirectly.
Securities clearance accounts and cash accounts with the Euroclear
Operator are governed by the Terms and Conditions Governing Use of Euroclear and
the related Operating Procedures of the Euroclear System and applicable Belgian
law (collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities and
cash from Euroclear, and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of specific certificates to specific securities clearance accounts.
The Euroclear Operator acts under the Terms and Conditions only on behalf of
Euroclear Participants, and has no record of or relationship with persons
holding through Euroclear Participants.
Distributions on the Book-Entry Certificates will be made on each
Distribution Date by the Trustee to Cede & Co., as nominee of DTC. DTC will be
responsible for crediting the amount of such payments to the accounts of the
applicable DTC Participants in accordance with DTC's normal procedures. Each DTC
Participant will be responsible for disbursing such payments to the beneficial
owners of the Book-Entry Certificates that it represents and to each Financial
Intermediary for which it acts as agent. Each such Financial Intermediary will
be responsible for disbursing funds to the beneficial owners of the Book-Entry
Certificates that it represents.
S-39
Under a book-entry format, beneficial owners of the Book-Entry
Certificates may experience some delay in their receipt of payments, since such
payments will be forwarded by the Trustee to Cede & Co. Distributions with
respect to Certificates held through Clearstream or Euroclear will be credited
to the cash accounts of Clearstream Participants or Euroclear Participants in
accordance with the relevant system's rules and procedures, to the extent
received by the Relevant Depositary. Such distributions will be subject to tax
reporting in accordance with relevant United States tax laws and regulations.
See "Federal Income Tax Consequences--REMICs--Taxation of Certain Foreign
Investors" in the prospectus. Because DTC can only act on behalf of DTC
Participants, the ability of a beneficial owner to pledge Book-Entry
Certificates to persons or entities that do not participate in the depository
system, or otherwise take actions in respect of such Book-Entry Certificates,
may be limited due to the lack of physical certificates for such Book-Entry
Certificates. In addition, issuance of the Book-Entry Certificates in book-entry
form may reduce the liquidity of such Certificates in the secondary market since
certain potential investors may be unwilling to purchase Certificates for which
they cannot obtain physical certificates.
DTC has advised the Trustee that, unless and until Definitive
Certificates are issued, DTC will take any action the holders of the Book-Entry
Certificates are permitted to take under the Pooling Agreement only at the
direction of one or more Financial Intermediaries to whose DTC accounts the
Book-Entry Certificates are credited, to the extent that such actions are taken
on behalf of Financial Intermediaries whose holdings include such Book-Entry
Certificates. Clearstream or the Euroclear Operator, as the case may be, will
take any other action permitted to be taken by a Certificateholder under the
Pooling Agreement on behalf of a Clearstream Participant or Euroclear
Participant only in accordance with its relevant rules and procedures and
subject to the ability of the Relevant Depositary to effect such actions on its
behalf through DTC. DTC may take actions, at the direction of the related
Participants, with respect to some Book-Entry Certificates which conflict with
actions taken with respect to other Book-Entry Certificates.
Definitive Certificates will be issued to beneficial owners of the
Book-Entry Certificates, or their nominees, rather than to DTC, only if (a) DTC
or the Depositor advises the Trustee in writing that DTC is no longer willing,
qualified or able to discharge properly its responsibilities as nominee and
depository with respect to the Book-Entry Certificates and the Depositor or the
Trustee is unable to locate a qualified successor, (b) the Depositor, at its
sole option, elects to terminate a book-entry system through DTC or (c) after
the occurrence of an event of default under the Pooling Agreement, beneficial
owners having voting rights aggregating not less than 51% of all voting rights
evidenced by each class of the Book-Entry Certificates advise the Trustee and
DTC through the Financial Intermediaries and the DTC Participants in writing
that the continuation of a book-entry system through DTC (or a successor
thereto) is no longer in the best interests of beneficial owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee will be required to notify all beneficial
owners of the occurrence of such event and the availability through DTC of
Definitive Certificates. Upon surrender by DTC of the global certificate or
certificates representing the Book-Entry Certificates and instructions for
S-40
re-registration, the Trustee will issue Definitive Certificates, and thereafter
the Trustee will recognize the holders of such Definitive Certificates as
Certificateholders under the Pooling Agreement.
Although DTC, Clearstream and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of Book-Entry Certificates among
participants of DTC, Clearstream and Euroclear, they are under no obligation to
perform or continue to perform such procedures and such procedures may be
discontinued at any time.
None of the Depositor, the Servicer or the Trustee will have any
responsibility for any aspect of the records relating to or payments made on
account of beneficial ownership interests of the Book-Entry Certificates held by
Cede & Co., as nominee for DTC, or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interests. In the event of the
insolvency of DTC, a DTC Participant or an Indirect DTC Participant in whose
name Book-Entry Certificates are registered, the ability of the Beneficial
Owners of such Book-Entry Certificates to obtain timely payment and, if the
limits of applicable insurance coverage by the Securities Investor Protection
Corporation are exceeded or if such coverage is otherwise unavailable, ultimate
payment, of amounts distributable with respect to such Book-Entry Certificates
may be impaired.
Distributions
Distributions on the Certificates will be made by the Trustee on the
day of each month (or, if not a business day, the next business day), commencing
in 200 (each, a "Distribution Date"), to the persons in whose names such
Certificates are registered at the close of business on the last business day of
the month preceding the month of such Distribution Date (the "Record Date").
Distributions on each Distribution Date will be made by check mailed to
your address as it appears on the applicable certificate register or, if you
hold % of a class of Certificates or if you hold Certificates with an aggregate
initial denomination of $ or more and have notified the Trustee in writing in
accordance with the Pooling Agreement, by wire transfer in immediately available
funds to your account at a bank or other depository institution having
appropriate wire transfer facilities. However, the final distribution in
retirement of a Certificate will be made only upon presentment and surrender of
the Certificate at the Corporate Trust Office of the Trustee. If you own a
Book-Entry Certificate, distributions will be made to you through the facilities
of DTC, as described above under "-- Book-Entry Certificates."
Pool Distribution Amount
The "Pool Distribution Amount" with respect to any Distribution Date
will be equal to the sum of:
(i) all scheduled installments of interest (net of the
related Servicing Fee) and principal due on the due date in the month
in which such Distribution Date occurs and received prior to the
related Determination Date, together with any Advances in respect
S-41
thereof or any Compensating Interest;
(ii) all proceeds of any primary mortgage guaranty insurance
policies and any other insurance policies to the extent such proceeds
are not applied to the restoration of the related mortgaged property or
released to the mortgagor in accordance with the Servicer's normal
servicing procedures and all other cash amounts received and retained
in connection with the liquidation of defaulted Mortgage Loans by
foreclosure or otherwise (collectively, "Liquidation Proceeds"), during
the calendar month preceding the month of such Distribution Date (in
each case, net of unreimbursed expenses incurred in connection with a
liquidation or foreclosure and unreimbursed Advances, if any);
(iii) all partial or full prepayments received during the
calendar month preceding the month of such Distribution Date; and
(iv) amounts received with respect to such Distribution Date
as the Substitution Adjustment Amount or Purchase Price in respect of
any Deleted Mortgage Loan or amounts received in connection with the
optional termination of the Trust as of such Distribution Date, reduced
by amounts in reimbursement for Advances previously made and other
amounts as to which the Servicer is entitled to be reimbursed pursuant
to the Pooling Agreement.
The Pool Distribution Amounts will not include any profit received by
the Servicer on the foreclosure of a Mortgage Loan. Such amounts, if any, will
be retained by the Servicer as additional servicing compensation.
Priority of Distributions
As more fully described herein, distributions will be made on each
Distribution Date from the Pool Distribution Amount in the following order of
priority (the "Pool Distribution Amount Allocation"):
(i) to the Trustee an amount in payment for its services for
such Distribution Date;
(ii) to each class of Senior Certificates (other than the
Class A-PO Certificates) to pay interest;
(iii) pro rata (a) to the Class A-PO Certificates, based on the
PO Principal Amount, and (b) to the other classes of Senior
Certificates entitled to receive distributions of principal, based on
the Senior Principal Distribution Amount, as described below under "--
Principal," to pay principal;
(iv) to the Class A-PO Certificates, to pay any Class A-PO
Deferred Amounts, but only from amounts that would otherwise be
distributable on such Distribution Date as principal of the Subordinate
Certificates; and
S-42
(v) to each class of Subordinate Certificates, first to pay
interest and then to pay principal in the order of their numerical
class designations, beginning with the Class B-1 Certificates.
The Class A-R and Class A-LR Certificates will be entitled to any
remaining amounts in the Upper-Tier REMC and Lower-Tier REMIC, respectively,
subject to the limitations set forth below under "-- Interest" and "--
Principal."
Interest
The pass-through rate for each class of Offered Certificates for each
Distribution Date is as set forth or described in the table on page S- of this
prospectus supplement.
On each Distribution Date, to the extent of the Pool Distribution
Amount, each class of Certificates (other than the Class A-PO Certificates) will
be entitled to receive interest (as to each such class, the "Interest
Distribution Amount") with respect to the related Interest Accrual Period. The
Interest Distribution Amount for any class of Certificates will be equal to the
sum of (i) interest accrued during the related Interest Accrual Period at the
applicable pass-through rate on the related class balance or notional amount and
(ii) the sum of the amounts, if any, by which the amount described in clause (i)
above on each prior Distribution Date exceeded the amount actually distributed
in respect of interest on such prior Distribution Dates and not subsequently
distributed.
The Class A-PO Certificates are Principal Only Certificates and will
not bear interest.
The interest entitlement described in clause (i) of the Interest
Distribution Amount for each class of Certificates will be reduced by the amount
of Net Interest Shortfalls for such Distribution Date. With respect to any
Distribution Date, the "Net Interest Shortfall" is equal to the sum of (i) the
shortfall in interest received with respect to any Mortgage Loan as a result of
a Relief Act Reduction and (ii) any Non-Supported Interest Shortfalls. Net
Interest Shortfalls on any Distribution Date will be allocated pro rata among
all classes of interest-bearing Certificates based on the amount of interest
accrued on each such class of Certificates on such Distribution Date before
taking into account any reduction in such amounts resulting from such Net
Interest Shortfalls. A "Relief Act Reduction" is a reduction in the amount of
monthly interest payment on a Mortgage Loan pursuant to the Soldiers' and
Sailors' Civil Relief Act of 1940, as amended (the "Relief Act") or similar
state laws. See "Recent Developments--California Legislation" in this prospectus
supplement and "Certain Legal Aspects of the Mortgage Loans -- Soldiers' and
Sailors' Civil Relief Act of 1940 and Similar Laws" in the prospectus. With
respect to any Distribution Date, the "Non-Supported Interest Shortfall" is the
amount by which the aggregate of Prepayment Interest Shortfalls during the
calendar month preceding the month of such Distribution Date exceeds the
Compensating Interest for such period. A "Prepayment Interest Shortfall" is the
amount by which interest paid by a mortgagor in connection with a prepayment of
principal on a Mortgage Loan is less than one month's interest at the related
mortgage interest rate (net of the related Servicing Fee Rate) on the amount of
such prepayment.
S-43
Accrued interest to be distributed on any Distribution Date will be
calculated for each class of Certificates on the basis of the related class
balance or notional amount with respect to such Distribution Date. Interest will
be calculated and payable on the basis of a 360-day year consisting of twelve
30-day months.
If on a particular Distribution Date, the Pool Distribution Amount
applied in the order described above under "-- Priority of Distributions" is not
sufficient to make a full distribution of the Interest Distribution Amount for
each class of Certificates interest will be distributed on each class of
Certificates of equal priority pro rata based on the Interest Distribution
Amount the class would otherwise have been entitled to receive in the absence of
such shortfall. Any unpaid amount will be carried forward and added to the
Interest Distribution Amount of that class of Certificates on the next
Distribution Date. Such a shortfall could occur, for example, if Realized Losses
on the Mortgage Loans were exceptionally high or were concentrated in a
particular month. Any such unpaid amount will not bear interest.
Interest will accrue on each class of Certificates (other than the
Class A-4 and Class A-5 Certificates) during each one-month period ending on the
last day of the month preceding the month in which each Distribution Date occurs
(each, a "Regular Interest Accrual Period"). The initial Regular Interest
Accrual Period will be deemed to have commenced on , 200 . Interest which
accrues on each class of Certificates during a Regular Interest Accrual Period
will be calculated on the assumption that distributions in reduction of the
principal balances thereof on the Distribution Date in that Regular Interest
Accrual Period are made on the first day of the Regular Interest Accrual Period.
Interest will accrue on the Class A-4 and Class A-5 Certificates during each
one-month period commencing on the day of the month preceding the month in which
each Distribution Date occurs and ending on the day of the month in which such
Distribution Date occurs (each, a "LIBOR Based Interest Accrual Period" and,
together with a Regular Interest Accrual Period, an "Interest Accrual Period").
The initial LIBOR Based Interest Accrual Period will commence on , 200 .
The Class A-5 Certificates are Interest Only Certificates and have no
class balance. The "Class A-5 Notional Amount" with respect to each Distribution
Date will be equal to the class balance of the Class A-4 Certificates.
Accordingly, any distribution in respect of principal made to, or losses in
respect of principal allocated in reduction of, the class balance of the Class
A-4 Certificates will result in a proportional reduction in the Class A-5
Notional Amount. See "--Principal" and "--Allocation of Losses" in this
prospectus supplement. The Class A-5 Notional Amount with respect to the first
Distribution Date will be $ .
The Class A-WIO Certificates are Interest-Only Certificates and have no
class balance. The "Class A-WIO Notional Amount" with respect to each
Distribution Date will be equal to the aggregate of the Stated Principal
Balances of the Premium Mortgage Loans as of the due date in the month preceding
the month of such Distribution Date. The Class A-WIO Notional Amount with
respect to the first Distribution Date will be approximately $ .
The class balance of a class of Certificates at any time will equal its
initial class balance
S-44
less (i) all distributions of principal made to such class, (ii) losses
allocated to such class as described under "--Allocation of Losses" and (iii)
other adjustments made to such class balance as described under "--Allocation of
Losses" below.
LIBOR
The Class A-4 and Class A-5 Certificates will bear interest at their
respective pass-through rates, which are each based on the arithmetic mean of
the London interbank offered rate quotations for one-month U.S. dollar deposits
("LIBOR") determined monthly by the Trustee as described below. The Trustee will
determine LIBOR and the respective pass-through rates for the Class A-4 and
Class A-5 Certificates for each LIBOR Based Interest Accrual Period on the
second London business day prior to the day on which such LIBOR Based Interest
Accrual Period commences (each, a "LIBOR Determination Date").
On each LIBOR Determination Date, the Trustee will determine LIBOR for
the succeeding LIBOR Based Interest Accrual Period on the basis of the British
Bankers' Association ("BBA") "Interest Settlement Rate" for one-month deposits
in U.S. dollars as found on Telerate page 3750 as of 11:00 A.M. London time on
such LIBOR Determination Date. Such Interest Settlement Rates currently are
based on rates quoted by 16 BBA designated banks as being in the view of such
banks, the offered rate at which deposits are being quoted to prime banks in the
London interbank market. Such Interest Settlement Rates are calculated by
eliminating the four highest rates and the four lowest rates, averaging the
eight remaining rates, carrying the results (expressed as a percentage) out to
six decimal places, and rounding to five decimal places. As used herein
"Telerate page 3750" means the display designated as page 3750 on the Bridge
Telerate Service.
If on any LIBOR Determination Date the Trustee is unable to determine
LIBOR on the basis of the method set forth in the preceding paragraph, LIBOR for
the next LIBOR Based Interest Accrual Period will be the higher of (i) LIBOR as
determined on the previous LIBOR Determination Date or (ii) the Reserve Interest
Rate. The "Reserve Interest Rate" will be the rate per annum which the Trustee
determines to be either (a) the arithmetic mean (rounding such arithmetic mean
upwards if necessary to the nearest whole multiple of 1/16%) of the one-month
U.S. dollar lending rate that New York City banks selected by the Trustee are
quoting on the relevant LIBOR Determination Date to the principal London offices
of at least two leading banks in the London interbank market or (b) in the event
that the Trustee can determine no such arithmetic mean, the lowest one-month
U.S. dollar lending rate that the New York City banks selected by the Trustee
are quoting on such LIBOR Determination Date to leading European banks.
If on any LIBOR Determination Date the Trustee is required, but is
unable to determine the Reserve Interest Rate in the manner provided in the
preceding paragraph, LIBOR for the next LIBOR Based Interest Accrual Period will
be LIBOR as determined on the previous LIBOR Determination Date or, in the case
of the first LIBOR Determination Date, %.
The establishment of LIBOR on each LIBOR Determination Date by the
Trustee and the
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Trustee's calculation of the rate of interest applicable to the Class A-4 and
Class A-5 Certificates for the related LIBOR Based Interest Accrual Period shall
(in the absence of manifest error) be final and binding. Each such rate of
interest may be obtained by telephoning the Trustee at .
Principal
On each Distribution Date, certificateholders will be entitled to
receive principal distributions from the applicable Pool Distribution Amount to
the extent described below and in accordance with the priorities set forth under
"-- Priority of Distributions" above. The Class A-5 and Class A-WIO Certificates
are Interest Only Certificates and are not entitled to distributions of
principal. The principal distributions distributed to a class on any
Distribution Date will be allocated among the holders of such class pro rata in
accordance with their respective Percentage Interests.
All payments and other amounts received in respect of principal of the
Mortgage Loans will be allocated between (i) the Senior Certificates (other than
the Class A-PO Certificates) and the Subordinate Certificates and (ii) the Class
A-PO Certificates in each case based on the applicable Non-PO Percentage and the
applicable PO Percentage, respectively, of such amounts.
The "Non-PO Percentage" with respect to any Mortgage Loan with a Net
Mortgage Interest Rate less than % (each such Mortgage Loan, a "Discount
Mortgage Loan") will be equal to the Net Mortgage Interest Rate
thereof divided by %. The Non-PO Percentage with respect to any Mortgage Loan
with a Net Mortgage Interest Rate greater than or equal to % (each such Mortgage
Loan, a "Premium Mortgage Loan") will be 100%.
The "PO Percentage" with respect to any Discount Mortgage Loan will be
equal to 100% minus the Non-PO Percentage for such Mortgage Loan. The PO
Percentage with respect to any Premium Mortgage Loan will be 0%.
The "Net Mortgage Interest Rate" of a Mortgage Loan is the excess of
its mortgage interest rate over the Administrative Fee Rate.
Non-PO Principal Amount
On each Distribution Date, the Non-PO Principal Amount will be
distributed (i) as principal of the Senior Certificates (other than the Class
A-PO Certificates) in an amount up to the Senior Principal Distribution Amount
and (ii) as principal of the Subordinate Certificates in an amount up to the
Subordinate Principal Distribution Amount.
The "Non-PO Principal Amount" for any Distribution Date will equal the
sum of the applicable Non-PO Percentage of:
(a) all monthly payments of principal due on each Mortgage
Loan on the
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related Due Date;
(b) the principal portion of the Purchase Price of each
Mortgage Loan that was repurchased by the Depositor pursuant to the
Pooling Agreement as of that Distribution Date;
(c) any Substitution Adjustment Amount in connection with a
Deleted Mortgage Loan received with respect to that Distribution Date;
(d) any Liquidation Proceeds allocable to recoveries of
principal of Mortgage Loans that are not yet Liquidated Mortgage Loans
received during the calendar month preceding the month of that
Distribution Date;
(e) with respect to each Mortgage Loan that became a
Liquidated Mortgage Loan during the calendar month preceding the month
of that Distribution Date, the amount of the Liquidation Proceeds
allocable to principal received with respect to that Mortgage Loan; and
(f) all partial and full principal prepayments on the
Mortgage Loans by mortgagors received during the calendar month
preceding the month of that Distribution Date.
The amounts described in clauses (a) through (d) are referred to as
"Scheduled Principal Payments." The amounts described in clauses (e) and (f) are
referred to as "Unscheduled Principal Payments."
Senior Principal Distribution Amount
On each Distribution Date, an amount equal to the lesser of (a) the
Senior Principal Distribution Amount for such Distribution Date and (b) the
product of (1) the Pool Distribution Amount remaining after payment of funds due
to the Trustee and distributions of interest on the Senior Certificates and (2)
a fraction, the numerator of which is the Senior Principal Distribution Amount
and the denominator of which is the sum of the PO Principal Amount and the
Senior Principal Distribution Amount, will be distributed as principal to the
following classes of Senior Certificates, sequentially, as follows:
[Payment Priorities to be Inserted]
The preceding distribution priorities will not apply on any
Distribution Date on or after the Senior Credit Support Depletion Date. On each
of those Distribution Dates, the amount to be distributed as principal to the
Senior Certificates (other than the Class A-PO Certificates) will be
distributed, concurrently, as principal of the classes of Senior Certificates
pro rata in accordance with their respective class balances immediately prior to
that Distribution Date.
The "Senior Credit Support Depletion Date" is the date on which the
aggregate
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balance of the Subordinate Certificates has been reduced to zero.
The "Senior Principal Distribution Amount" for any Distribution Date
will equal the sum of:
(a) the Senior Percentage of the applicable Non-PO Percentage
of the Scheduled Principal Payments for that Distribution Date; and
(b) the Senior Prepayment Percentage of the applicable Non-PO
Percentage of the Unscheduled Principal Payments for that Distribution
Date.
"Stated Principal Balance" means, as to any Mortgage Loan and due date,
the unpaid principal balance of such Mortgage Loan as of such due date, as
specified in the amortization schedule at the time relating thereto (before any
adjustment to such amortization schedule by reason of any moratorium or similar
waiver or grace period), after giving effect to any previous partial principal
prepayments and Liquidation Proceeds received and to the payment of principal
due on such due date and irrespective of any delinquency in payment by the
related mortgagor and after giving effect to any Deficient Valuation.
The "Pool Principal Balance" with respect to any Distribution Date
equals the aggregate of the Stated Principal Balances of the Mortgage Loans
outstanding on the due date in the month preceding the month of such
Distribution Date.
The "Senior Percentage" for any Distribution Date will equal (i) the
aggregate class balance of the Senior Certificates (other than the Class A-PO
Certificates) immediately prior to such date, divided by (ii) the aggregate
class balance of the Certificates (other than the Class A-PO Certificates)
immediately prior to such date.
The "Subordinate Percentage" for any Distribution Date will equal 100%
minus the Senior Percentage for such date.
As of the Cut-off Date, the Senior Percentage and the Subordinate
Percentage are expected to be approximately ___% and ___%, respectively.
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The "Senior Prepayment Percentage" for any Distribution Date occurring
during the periods set forth below will be as follows:
Distribution Date Occurring In Senior Prepayment Percentage
- ------------------------------ ----------------------------
through ........................................ 100%;
through ........................................ the applicable Senior Percentage, plus
70% of the applicable Subordinate
Percentage;
through ........................................ the applicable Senior Percentage, plus
60% of the applicable Subordinate
Percentage;
through ........................................ the applicable Senior Percentage, plus
40% of the applicable Subordinate
Percentage;
through ........................................ the applicable Senior Percentage, plus
20% of the applicable Subordinate
Percentage; and
and thereafter.............................................. the applicable Senior Percentage;
provided, however, that if on any Distribution Date the Senior Percentage
exceeds the initial Senior Percentage, the Senior Prepayment Percentage for such
Distribution Date will equal 100%.
..........No decrease in the Senior Prepayment Percentage will occur, however, if
as of the first Distribution Date as to which any such decrease applied, (i) the
outstanding principal balance of all Mortgage Loans (including, for this
purpose, any Mortgage Loans in foreclosure or any REO Property) delinquent 60
days or more (averaged over the preceding six-month period), as a percentage of
the aggregate class balance of the Subordinate Certificates (averaged over the
preceding six-month period), is equal to or greater than 50%, or (ii) cumulative
Realized Losses with respect to the Mortgage Loans exceed the percentages of the
aggregate balance of the Subordinate Certificates as of the Closing Date (the
"Original Subordinate Principal Balance") indicated below:
Percentage of
Original Subordinate
Distribution Date Occurring In Principal Balance
- --------------------------- --------------------
through ............................................. 30%
through ............................................. 35%
through ............................................. 40%
through ............................................. 45%
and thereafter.................................................. 50%
This disproportionate allocation of certain unscheduled payments in
respect of principal will have the effect of accelerating the amortization of
the Senior Certificates (other than the Class A-PO Certificates) while, in the
absence of Realized Losses on the Mortgage Loans, increasing the relative
interest in the Pool Principal Balance evidenced by the Subordinate
Certificates. Increasing the respective interest of the Subordinate Certificates
relative to that of
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the Senior Certificates (other than the Class A-PO
Certificates) is intended to preserve the availability of the subordination
provided by the Subordinate Certificates.
The "Subordinate Prepayment Percentage" as of any Distribution Date
will equal 100% minus the Senior Prepayment Percentage for such date.
If on any Distribution Date the allocation to any class of Senior
Certificates (other than the Class A-PO Certificates) then entitled to
distributions of full and partial principal prepayments and other amounts to be
allocated in accordance with the Senior Prepayment Percentage, as described
above, would reduce the outstanding class balance of such class below zero, the
distribution to that class of the Senior Prepayment Percentage of those amounts
for such Distribution Date will be limited to the percentage necessary to reduce
the related class balance to zero.
Priority Amount
On each Distribution Date prior to the Senior Credit Support Depletion
Date, the Pool Distribution Amount, up to the Priority Amount for such
Distribution Date, will be distributed as principal to the Class A-6
Certificates.
The "Priority Amount" for any Distribution Date will equal the lesser
of (i) the class balance of the Class A-6 Certificates and (ii) the product of
(a) the Shift Percentage, (b) the Priority Percentage and (c) the Non-PO
Principal Amount.
The "Priority Percentage" for any Distribution Date will equal (i) the
class balance of the Class A-6 Certificates divided by (ii) the aggregate class
balance of the Certificates (other than the Class A-PO Certificates) immediately
prior to such date.
The "Shift Percentage" for any Distribution Date will be the percentage
indicated below:
Shift
Distribution Date Occurring In Percentage
- ------------------------------ ----------
through .............................................. 0%
through .............................................. 30%
through .............................................. 40%
through .............................................. 60%
through .............................................. 80%
and thereafter................................................... 100%
Class A-PO Principal Distribution Amount
On each Distribution Date, distributions of principal of the Class A-PO
Certificates will
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be made in an amount (the "Class A-PO Principal Distribution Amount") equal to
the lesser of:
(a) the PO Principal Amount for such Distribution Date; and
(b) the product of (1) the Pool Distribution Amount remaining
after distribution of funds due to the Trustee and interest on the
Senior Certificates and (2) a fraction, the numerator of which is the
PO Principal Amount and the denominator of which is the sum of the PO
Principal Amount and the Senior Principal Distribution Amount.
The "PO Principal Amount" for any Distribution Date will equal the sum
of the applicable PO Percentage of:
(a) all monthly payments of principal due on each Discount
Mortgage Loan on the related Due Date;
(b) the principal portion of the Purchase Price of each
Discount Mortgage Loan that was repurchased by the Depositor pursuant
to the Pooling Agreement as of such Distribution Date;
(c) any Substitution Adjustment Amount in connection with a
Deleted Mortgage Loan that was a Discount Mortgage Loan received with
respect to such Distribution Date;
(d) any Liquidation Proceeds allocable to recoveries of
principal of Discount Mortgage Loans that are not yet Liquidated
Mortgage Loans received during the calendar month preceding the month
of such Distribution Date;
(e) with respect to each Discount Mortgage Loan that became a
Liquidated Mortgage Loan during the calendar month preceding the month
of such Distribution Date, the amount of Liquidation Proceeds allocable
to principal received with respect to such Discount Mortgage Loan; and
(f) all partial and full principal prepayments by mortgagors
on Discount Mortgage Loans received during the calendar month preceding
such Distribution Date.
Subordinate Principal Distribution Amount
On each Distribution Date, each class of Subordinate Certificates that
is entitled to receive a principal distribution will receive its pro rata share
(based on the class balances of all the Subordinate Certificates that are
entitled to receive a principal distribution) of the Subordinate Principal
Distribution Amount, to the extent that the remaining Pool Distribution Amount
is sufficient therefor. With respect to each class of Subordinate Certificates,
if on any Distribution Date the Fractional Interest is less than the Fractional
Interest for that class on the Closing Date, no classes junior to that class
will be entitled to receive a principal distribution.
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Distributions of principal on the Subordinate Certificates that are
entitled to receive a principal distribution on a Distribution Date will be made
sequentially to each class of Subordinate Certificates in the order of their
numerical class designations, beginning with the Class B-1 Certificates, until
each such class has received its respective pro rata share for the Distribution
Date. However, the Class A-PO Deferred Amount will be paid to the Class A-PO
Certificates from amounts otherwise distributable as principal to the
Subordinate Certificates, beginning with the amounts otherwise distributable as
principal to the class of Subordinate Certificates with the highest numerical
designation.
The "Fractional Interest" with respect to any Distribution Date and
each class of Subordinate Certificates will equal (i) the aggregate of the class
balances immediately prior to such Distribution Date of all classes of
Subordinate Certificates that have higher numerical class designations than such
class, divided by (ii) the aggregate balance of all the Certificates (other than
the Class A-PO Certificates) immediately prior to such Distribution Date.
The approximate Fractional Interests for the Subordinate Certificates
on the Closing Date are expected to be as follows:
Class B-1.................................................. %
Class B-2.................................................. %
Class B-3.................................................. %
Class B-4.................................................. %
Class B-5.................................................. %
Class B-6.................................................. %
The "Subordinate Principal Distribution Amount" for any Distribution
Date will equal the sum of:
(a) the Subordinate Percentage of the applicable Non-PO
Percentage of the Scheduled Principal Payments for such Distribution
Date; and
(b) the Subordinate Prepayment Percentage of the applicable
Non-PO Percentage of the Unscheduled Principal Payments for such
Distribution Date.
Residual Certificates
The Residual Certificates will remain outstanding for so long as the
Trust exists, whether or not they are receiving current distributions of
principal or interest. In addition to distributions of interest and principal as
described above, on each Distribution Date, the holder of the Class A-LR
Certificate will be entitled to receive any Pool Distribution Amount remaining
after the payment of (i) interest and principal on the Senior Certificates, (ii)
Class A-PO Deferred Amounts on the Class A-PO Certificates and (iii) interest
and principal on the Subordinate Certificates, as described above. It is not
anticipated that there will be any significant amounts remaining for any such
distribution.
S-52
Allocation of Losses
On each Distribution Date, the applicable PO Percentage of any Realized
Loss on a Discount Mortgage Loan will be allocated to the Class A-PO
Certificates until their principal balance is reduced to zero. In addition, on
each Distribution Date, the principal balance of the Class A-PO Certificates
will be reduced if and to the extent that such principal balance (after taking
into account the amount of all distributions to be made on such Distribution
Date and the allocation of Realized Losses on such Distribution Date) exceeds
the Adjusted Pool Amount (PO Portion) for such Distribution Date. The amount of
any such Realized Loss allocated on or prior to the Senior Credit Support
Depletion Date will be treated as a "Class A-PO Deferred Amount." To the extent
funds are available on such Distribution Date or on any future Distribution Date
from amounts that would otherwise be allocable to the Subordinate Principal
Distribution Amount, Class A-PO Deferred Amounts will be paid on the Class A-PO
Certificates prior to distributions of principal on the Subordinate
Certificates. Any distribution of the Pool Distribution Amount in respect of
unpaid Class A-PO Deferred Amounts will not further reduce the principal balance
of such Class A-PO Certificates. The Class A-PO Deferred Amounts will not bear
interest. The class balance of the class of Subordinate Certificates then
outstanding with the highest numerical class designation will be reduced by the
amount of any payments in respect of Class A-PO Deferred Amounts. Any excess of
these Class A-PO Deferred Amounts over the class balance of that class will be
allocated to the next most subordinate class to reduce its class balance and so
on, as necessary. After the Senior Credit Support Depletion Date, no new Class
A-PO Deferred Amounts will be created.
On each Distribution Date, the applicable Non-PO Percentage of any
Realized Loss will be allocated first to the Subordinate Certificates, in the
reverse order of their numerical class designations (beginning with the class of
Subordinate Certificates then outstanding with the highest numerical class
designation), in each case until the class balance of the respective class of
Certificates has been reduced to zero, and then to the Senior Certificates
(other than the Class A-PO Certificates) pro rata based on their respective
class balances.
In addition, on each such Distribution Date, the class balance of the
class of Subordinate Certificates then outstanding with the highest numerical
class designation will be reduced if and to the extent that the aggregate of the
class balances of all classes of Certificates (after taking into account the
amount of all distributions to be made on such Distribution Date and the
allocation of Realized Losses on such Distribution Date) exceeds the applicable
Adjusted Pool Amount for such Distribution Date.
After the applicable Senior Credit Support Depletion Date, on each
Distribution Date, the aggregate of the class balances of all classes of Senior
Certificates (other than the Class A-PO Certificates) then outstanding will be
reduced if and to the extent that such aggregate balance (after taking into
account the amount of all distributions to be made on such Distribution Date and
the allocation of Realized Losses on such Distribution Date) exceeds the
difference between the Adjusted Pool Amount and the Adjusted Pool Amount (PO
Portion) for such Distribution
S-53
Date. The amount of any such reduction will be allocated among the Senior
Certificates (other than the Class A-PO Certificates) pro rata based on their
respective class balances. Realized losses allocated to the Class A-4
Certificates will reduce the Class A-5 Notional Amount.
Because principal distributions are paid to certain classes of Senior
Certificates (other than the Class A-PO Certificates) before other classes of
Senior Certificates, holders of those Senior Certificates that are entitled to
receive principal later bear a greater risk of being allocated Realized Losses
on the Mortgage Loans than holders of classes that are entitled to receive
principal earlier.
In general, a "Realized Loss" means, (a) with respect to a Liquidated
Mortgage Loan, the amount by which the remaining unpaid principal balance of the
Mortgage Loan exceeds the amount of Liquidation Proceeds applied to the
principal balance of the related Mortgage Loan and (b) a Bankruptcy Loss.
"Bankruptcy Losses" are losses that are incurred as a result of Debt
Service Reductions or Deficient Valuations. As used in this prospectus
supplement, a "Deficient Valuation" occurs when a bankruptcy court establishes
the value of a mortgaged property at an amount less than the then-outstanding
principal balance of the Mortgage Loan secured by such mortgaged property or
reduces the then-outstanding principal balance of a Mortgage Loan. In the case
of a reduction in the value of the related mortgaged property, the amount of the
secured debt could be reduced to such value, and the holder of such Mortgage
Loan thus would become an unsecured creditor to the extent the then-outstanding
principal balance of such Mortgage Loan exceeds the value so assigned to the
mortgaged property by the bankruptcy court. In addition, certain other
modifications of the terms of a Mortgage Loan can result from a bankruptcy
proceeding, including the reduction (a "Debt Service Reduction") of the amount
of the Monthly Payment on the related Mortgage Loan. However, none of these
events shall be considered a Debt Service Reduction or Deficient Valuation so
long as the Servicer is pursuing any other remedies that may be available with
respect to the related Mortgage Loan and (i) such Mortgage Loan is not in
default with respect to any payment due thereunder or (ii) scheduled Monthly
Payments are being advanced by the Servicer without giving effect to any Debt
Service Reduction.
A "Liquidated Mortgage Loan" is a defaulted Mortgage Loan as to which
the Servicer has determined that all recoverable Liquidation Proceeds have been
received. See "Credit Support" in this prospectus supplement.
With respect to any Distribution Date, the "Adjusted Pool Amount" will
equal the aggregate unpaid principal balance of the Mortgage Loans as of the
Cut-off Date minus the sum of (i) all amounts in respect of principal received
in respect of the Mortgage Loans (including amounts received as Advances,
principal prepayments and Liquidation Proceeds in respect of principal) and
distributed on the Certificates on such Distribution Date and all prior
Distribution Dates and (ii) the principal portion of all Realized Losses (other
than Debt Service Reductions) incurred on the Mortgage Loans from the Cut-off
Date through the end of the month preceding such Distribution Date.
S-54
With respect to any Distribution Date, the "Adjusted Pool Amount (PO
Portion)" will equal the sum as to each Mortgage Loan outstanding at the Cut-off
Date of the product of (A) the PO Percentage for such Mortgage Loan and (B) the
principal balance of such Mortgage Loan as of the Cut-off Date less the sum of
(i) all amounts in respect of principal received in respect of such Mortgage
Loan (including amounts received as Advances, principal prepayments and
Liquidation Proceeds in respect of principal) and distributed on the
Certificates on such Distribution Date and all prior Distribution Dates and (ii)
the principal portion of any Realized Loss (other than a Debt Service Reduction)
incurred on such Mortgage Loan from the Cut-off Date through the end of the
month preceding the month in which such Distribution Date occurs.
Restrictions on Transfer of the
Class A-R and Class A-LR Certificates
The Class A-R and Class A-LR Certificates will be subject to the
following restrictions on transfer and will contain a legend describing such
restrictions.
The REMIC provisions of the Code impose certain taxes on (i)
transferors of residual interests to, or agents that acquire residual interests
on behalf of, Disqualified Organizations (as defined in the prospectus) and (ii)
certain Pass-Through Entities (as defined in the prospectus) that have
Disqualified Organizations as beneficial owners. No tax will be imposed on a
Pass-Through Entity (other than an "electing large partnership" (as defined in
the prospectus)) with respect to the Class A-R or Class A-LR Certificate to the
extent it has received an affidavit from the owner thereof that such owner is
not a Disqualified Organization or a nominee for a Disqualified Organization.
The Pooling Agreement will provide that no legal or beneficial interest
in the Class A-R or Class A-LR Certificate may be transferred to or registered
in the name of any person unless:
o the proposed purchaser provides to the Trustee an affidavit to
the effect that, among other items, such transferee is not a
Disqualified Organization and is not purchasing the Class A-R
or Class A-LR Certificate as an agent for a Disqualified
Organization (i.e., as a broker, nominee or other middleman
thereof); and
o the transferor states in writing to the Trustee that it has no
actual knowledge that such affidavit is false.
Further, such affidavit will require the transferee to affirm that it
(a) historically has paid its debts as they have come due and intends to do so
in the future, (b) understands that it may incur tax liabilities with respect to
the Class A-R or Class A-LR Certificate in excess of cash flows generated
thereby, (c) intends to pay taxes associated with holding the Class A-R or Class
A-LR Certificate as such taxes become due and (d) will not transfer the Class
A-R or Class A-LR Certificate to any person or entity that does not provide a
similar affidavit. The transferor must certify in writing to the Trustee that,
as of the date of the transfer, it had no knowledge or reason to know that the
affirmations made by the transferee pursuant to the preceding sentence
S-55
were false.
In addition to the foregoing, Treasury regulations have been proposed,
effective February 4, 2000 if adopted, that would add additional requirements
for a transfer of a noneconomic residual interest, such as the Class A-R or
Class A-LR Certificate, to be eligible for a safe harbor against possible
disregard of such transfer. Under the proposed Treasury regulations, the
transferor of a Class A-R or Class A-LR Certificate would be required to pay the
transferee thereof an amount designed to compensate the transferee for assuming
the related tax liability.
In order to meet the safe harbor of the proposed Treasury regulations,
the present value of the anticipated tax liabilities associated with holding the
noneconomic residual interest must not exceed the sum of:
(i) the present value of any consideration given to the
transferee to acquire the residual interest;
(ii) the present value of the expected future distributions on
the residual interest; and
(iii) the present value of the anticipated tax savings
associated with holding the residual interest as the related REMIC
generates losses.
For purposes of these computations, the transferee is assumed to pay tax at the
highest rate of tax specified in Section 11(b)(1) of the Code. Further, present
values generally are computed using a discount rate equal to the applicable
Federal rate set forth in Section 1274(d) of the Code compounded semiannually.
However, a lower rate may be used if the transferee can demonstrate that it
regularly borrows, in the course of its trade or business, substantial funds at
such lower rate from unrelated third parties. In some situations, to satisfy
this condition, the transferor of a noneconomic residual interest may have to
pay more consideration to the transferee than would otherwise be the case if the
proposed regulations were not applicable.
Additionally, the IRS issued Revenue Procedure 2001-12 (the "Revenue
Procedure") dealing with the transfer of noneconomic residual interests such as
the Class A-R or Class A-LR Certificate. The Revenue Procedure restates the safe
harbor described in the proposed Treasury regulations discussed above and adds
an alternative test for meeting the safe harbor. To meet the alternative test,
(i) the transferee must be a domestic "C" corporation (other than a corporation
exempt from taxation or a regulated investment company or real estate investment
trust) that meets certain asset tests; (ii) the transferee must agree in writing
that any subsequent transfer of the residual interest would be to an eligible
"C" corporation and meet the requirements for a safe harbor transfer under the
Revenue Procedure; and (iii) the facts and circumstances known to the transferor
on or before the date of the transfer must not reasonably indicate that the
taxes associated with ownership of the residual interest will not be paid by the
transferee.
The Pooling Agreement will not require that transfers of the Class A-R
or Class A-LR Certificate meet the safe harbor under either the test contained
in the proposed Treasury
S-56
regulations or the alternative test of the Revenue Procedure. The holder of the
Class A-R or Class A-LR Certificate is advised to consult its tax advisor
regarding the advisability of meeting the safe harbor.
In addition, neither the Class A-R nor the Class A-LR Certificate may
be purchased by or transferred to any person that is not a U.S. Person, unless:
o such person holds the Class A-R or Class A-LR Certificate in
connection with the conduct of a trade or business within the
United States and furnishes the transferor and the Trustee
with an effective Internal Revenue Service Form W-8ECI; or
o the transferee delivers to both the transferor and the Trustee
an opinion of a nationally-recognized tax counsel to the
effect that such transfer is in accordance with the
requirements of the Code and the regulations promulgated
thereunder and that such transfer of the Class A-R or Class
A-LR Certificate will not be disregarded for federal income
tax purposes.
The term "U.S. Person" means a citizen or resident of the United
States, a corporation or partnership (unless, in the case of a partnership,
Treasury regulations are adopted that provide otherwise) created or organized in
or under the laws of the United States, any state thereof or the District of
Columbia, including an entity treated as a corporation or partnership for
federal income tax purposes, an estate whose income is subject to United States
federal income tax regardless of its source, or a trust if a court within the
United States is able to exercise primary supervision over the administration of
such trust, and one or more such U.S. Persons have the authority to control all
substantial decisions of such trust (or, to the extent provided in applicable
Treasury regulations, certain trusts in existence on August 20, 1996 which are
eligible to elect to be treated as U.S. Persons).
The Pooling Agreement will provide that any attempted or purported
transfer in violation of these transfer restrictions will be null and void and
will vest no rights in any purported transferee.
Any transferor or agent to whom the Trustee provides information as to
any applicable tax imposed on such transferor or agent may be required to bear
the cost of computing or providing such information.
See "Federal Income Tax Consequences -- REMICs -- Taxation of Owners of
Residual Securities -- Tax-Related Restrictions on Transfer of Residual
Securities" in the prospectus.
Neither the Class A-R nor the Class A-LR Certificate may be purchased
by or transferred to any Plan or any person acting on behalf of or investing the
assets of such Plan.
See "ERISA Considerations" in this prospectus supplement and in the
prospectus.
S-57
PREPAYMENT AND YIELD CONSIDERATIONS
Delinquencies on the Mortgage Loans which are not advanced by or on
behalf of the Servicer (because amounts, if advanced, would be nonrecoverable),
will adversely affect the yield on the Certificates. Because of the priority of
distributions, shortfalls resulting from delinquencies not so advanced will be
borne first by the Subordinate Certificates (in the reverse order of their
priority of their numerical designations), and then by the Senior Certificates.
Net Interest Shortfalls will adversely affect the yields on the Offered
Certificates. In addition, losses generally will be borne by the Subordinate
Certificates, as described in this prospectus supplement under "Description of
the Certificates -- Allocation of Losses." As a result, the yields on the
Offered Certificates will depend on the rate and timing of Realized Losses.
The effective yields to investors (other than investors in the Class
A-4 and Class A-5 Certificates) will be lower than the yields otherwise produced
by the applicable rate at which interest is passed through to investors and the
purchase price of their Certificates because monthly distributions will not be
payable to investors until the day (or, if not a business day, the next business
day) of the month following the month in which interest accrues on the Mortgage
Loans (without any additional distribution of interest or earnings thereon in
respect of such delay).
Prepayment Considerations and Risks
Because principal payments on the Mortgage Loans will be distributed to
certificateholders currently, the rate of principal payments on the Offered
Certificates, the aggregate amount of each interest payment on the Offered
Certificates, and the yield to maturity of Offered Certificates purchased at a
price other than par are directly related to the rate of payments of principal
on the Mortgage Loans (or, in the case of the Class A-PO Certificates, the
Discount Mortgage Loans or, in the case of the Class A-WIO Certificates, the
Premium Mortgage Loans). The principal payments on the Mortgage Loans may be in
the form of scheduled principal payments or principal prepayments (for this
purpose, the term "principal prepayment" includes prepayments and any other
recovery of principal in advance of its scheduled due date, including
repurchases and liquidations due to default, casualty, condemnation and the
like). Any such prepayments will result in distributions to you of amounts that
would otherwise be distributed over the remaining term of the Mortgage Loans.
See "Yield Considerations" in the prospectus.
The rate at which mortgage loans in general prepay may be influenced by
a number of factors, including general economic conditions, mortgage market
interest rates, availability of mortgage funds and homeowner mobility.
o In general, if prevailing mortgage interest rates fall
significantly below the mortgage interest rates on the
Mortgage Loans, the Mortgage Loans are likely to prepay at
higher rates than if prevailing mortgage
S-58
interest rates remain at or above the mortgage interest rates
on the Mortgage Loans.
o Conversely, if prevailing mortgage interest rates rise above
the mortgage interest rates on the Mortgage Loans, the rate of
prepayment would be expected to decrease.
The timing of changes in the rate of prepayments may significantly
affect the actual yield to you, even if the average rate of principal
prepayments is consistent with your expectations. In general, the earlier the
payment of principal of the Mortgage Loans the greater the effect on your yield
to maturity. As a result, the effect on your yield of principal prepayments
occurring at a rate higher (or lower) than the rate you anticipate during the
period immediately following the issuance of the Certificates will not be offset
by a subsequent like reduction (or increase) in the rate of principal
prepayments. You should also consider the risk, in the case of an Offered
Certificate purchased at a discount, particularly a Class A-PO Certificate, that
a slower than anticipated rate of payments in respect of principal (including
prepayments) on the Mortgage Loans (or on the Discount Mortgage Loans in the
case of the Class A-PO Certificates) will have a negative effect on the yield to
maturity of such Offered Certificate. You should also consider the risk, in the
case of an Offered Certificate purchased at a premium or in the case of the
Class A-5 and Class A-WIO Certificates (which have no principal balance), that a
faster than anticipated rate of payments in respect of principal (including
prepayments) on the Mortgage Loans (or on the Premium Mortgage Loans in the case
of the Class A-WIO Certificates) will have a negative effect on the yield to
maturity of such Offered Certificate. You must make your own decisions as to the
appropriate prepayment assumptions to be used in deciding whether to purchase
Offered Certificates.
Mortgagors are permitted to prepay the Mortgage Loans, in whole or in
part, at any time without penalty. The rate of payment of principal may also be
affected by any repurchase of the Mortgage Loans permitted or required by the
Pooling Agreement including any optional termination of the Trust Fund by the
Depositor. See "The Pooling and Servicing Agreement -- Optional Termination" in
this prospectus supplement for a description of the Depositor's option to
repurchase the Mortgage Loans when the scheduled balance of the Mortgage Loans
is less than
% of the initial balance of the Mortgage Loans. The Depositor may be
required to repurchase Mortgage Loans because of defective documentation or
material breaches in its representations and warranties with respect to such
Mortgage Loans. Any repurchases will shorten the weighted average lives of the
classes of Offered Certificates.
All of the Mortgage Loans will include "due-on-sale" clauses which
allow the holder of the Mortgage Loan to demand payment in full of the remaining
principal balance upon sale or certain transfers of the property securing such
Mortgage Loan. To the extent that the Servicer has knowledge of the conveyance
or proposed conveyance of the underlying mortgaged property, the Servicer will
enforce "due-on-sale" clauses to the extent permitted by applicable law.
However, the Servicer will not take any action in relation to the enforcement of
any "due-on-sale" provisions which would impair or threaten to impair any
recovery under any related primary mortgage insurance policy. See "Yield
Considerations" in the prospectus. Acceleration of Mortgage Loans as a result of
enforcement of such "due-on-sale" provisions in connection with transfers of the
related mortgaged properties or the occurrence of certain other events resulting
in
S-59
acceleration would affect the level of prepayments on the Mortgage Loans,
thereby affecting the weighted average lives of the classes of the Offered
Certificates.
Investors in the Class A-4 Certificates should understand that if LIBOR
is greater than or equal to % per annum, the pass-through rate of such class
will remain at its maximum rate of % per annum. Investors in the Class A-4
Certificates should consider the risk that if LIBOR is lower than anticipated,
the actual yields to such investors will be lower than the anticipated yields.
Conversely, investors in the Class A-5 Certificates should consider the risk
that if LIBOR is higher than anticipated, the actual yields to such investors
will be significantly lower than the anticipated yields. Investors in the Class
A-5 Certificates should also understand that if LIBOR is greater than or equal
to % per annum, the Class A-5 Certificates will accrue interest at the minimum
rate of % per annum. Further, based on the Modeling Assumptions, high constant
rates of LIBOR, especially when combined with certain high constant prepayment
rates on the Mortgage Loans, are expected to produce a negative yield to
investors in the A-5 Certificates. See "--Yield on the Class A-5 Certificates"
below.
Investors in the Class A-4 and Class A-5 Certificates should understand
that the timing of changes in LIBOR may affect the actual yields to such
investors even if the average rate of LIBOR is consistent with such investors'
expectations. Each investor must make an independent decision as to the
appropriate LIBOR assumptions to be used in deciding whether to purchase a Class
A-4 or Class A-5 Certificate.
As described in this prospectus supplement under "Description of the
Certificates -- Principal," the Senior Prepayment Percentage of the applicable
Non-PO Percentage of all principal prepayments (excluding for this purpose,
liquidations due to default, casualty, condemnation and the like) initially will
be distributed to the classes of Senior Certificates (other than the Class A-PO
Certificates) then entitled to receive principal prepayment distributions. This
may result in all (or a disproportionate percentage) of those principal
prepayments being distributed to the Senior Certificates (other than the Class
A-PO Certificates) and none (or less than their pro rata share) of such
principal prepayments being distributed to holders of the Subordinate
Certificates during the periods of time described in the definition of "Senior
Prepayment Percentage."
As described herein under "Description of the Certificates --
Principal," unless the class balances of the other Class A Certificates (other
than the Class A-PO Certificates) have been reduced to zero, the Class A-6
Certificates will not be entitled to any distributions of principal for five
years following the Closing Date, and during the next five years the percentage
of principal payments allocated to the Class A-6 Certificates will gradually
increase.
Assumptions Relating to Tables
The tables beginning on page S- (the "Decrement Tables") have been
prepared on the basis of the following assumptions (the "Modeling Assumptions"):
(a) the Mortgage Pool consists of two hypothetical mortgage
loans having the following characteristics:
S-60
Remaining
Unpaid Mortgage Term Age
Principal Balance Interest Rate (Months) (Months)
----------------- ------------- -------- --------
$ %
$ %
(b) the initial balances and pass-through rates for the
Offered Certificates are as set forth or described in the table on page
S- ;
(c) there are no Net Interest Shortfalls, delinquencies or
Realized Losses with respect to the Mortgage Loans;
(d) scheduled payments of principal and interest with respect
to the Mortgage Loans are received on the applicable due date beginning
on , 200 ;
(e) prepayments are received, together with a 30 days'
interest thereon, on the last day of each month beginning in 200 ;
(f) the Mortgage Loans prepay at the indicated percentages of
PSA;
(g) optional termination of the Trust does not occur;
(h) no Mortgage Loans are required to be repurchased from the
Trust and no Mortgage Loans are substituted for the Mortgage Loans
included in the Trust on the Closing Date;
(i) the Certificates are issued on the Closing Date; and
(j) cash payments on the Certificates are received on the day
of each month beginning in 200 in accordance with the priorities and
amounts described in this prospectus supplement under "Description of
the Certificates."
Although the characteristics of the mortgage loans for the Decrement
Tables have been prepared on the basis of the weighted average characteristics
of the Mortgage Loans which are expected to be in the Mortgage Pool, there is no
assurance that the Modeling Assumptions will reflect the actual characteristics
or performance of the Mortgage Loans or that the performance of the Offered
Certificates will conform to the results set forth in the tables.
Weighted Average Lives of the Offered Certificates
Weighted average life of a class of Offered Certificates (other than
the Class A-5 and Class A-WIO Certificates) refers to the average amount of time
that will elapse from the date of issuance of the Certificate until each dollar
in reduction of its balance is distributed to investors. With respect to the
Class A-5 Certificates, weighted average life refers to the average amount of
S-61
time that will elapse from the date of issuance of the Offered Certificates
until each dollar in reduction of the class balance of the Class A-4
Certificates is distributed to investors. With respect to the Class A-WIO
Certificates, the weighted average life refers to the average amount of time
that will elapse from the date of issuance of the Offered Certificates until the
date on which the aggregate of the Stated Principal Balances of the Premium
Mortgage Loans has been reduced to zero. The weighted average lives of classes
of Offered Certificates will be influenced by, among other things, the rate at
which principal of the Mortgage Loans is paid, which may be in the form of
scheduled principal payments or principal prepayments (for this purpose, the
term "prepayments" includes prepayments and liquidations due to default,
casualty, condemnation and the like), the timing of changes in such rate of
principal payments and the priority sequence of distributions of principal of
such Offered Certificates. The interaction of the foregoing factors may have
different effects on each class of Offered Certificates and the effects on any
such class may vary at different times during the life of such class.
Accordingly, no assurance can be given as to the weighted average life of any
such class of Offered Certificates. For an example of how the weighted average
lives of the Offered Certificates are affected by the foregoing factors at
various constant percentages of PSA, see the Decrement Tables set forth below.
Prepayments on mortgage loans are commonly measured relative to a
prepayment standard or model. The prepayment model used in this prospectus
supplement is the Prepayment Standard Assumption ("PSA"), which represents an
assumed rate of principal prepayment each month relative to the then-outstanding
principal balance of a pool of mortgage loans for the life of such mortgage
loans. A prepayment assumption of 100% PSA assumes constant prepayment rates of
0.2% per annum of the then-outstanding principal balance of such mortgage loans
in the first month of the life of the mortgage loans and an additional 0.2% per
annum in each month thereafter until the thirtieth month. Beginning in the
thirtieth month and in each month thereafter during the life of the mortgage
loans, 100% PSA assumes a constant prepayment rate of 6% per annum each month.
As used in the table below, "0% PSA" assumes prepayment rates equal to 0% of
PSA, i.e., no prepayments. Correspondingly, "300% PSA" assumes prepayment rates
equal to 300% of PSA, and so forth. PSA does not purport to be a historical
description of prepayment experience or a prediction of the anticipated rate of
prepayment of any pool of mortgage loans, including the Mortgage Loans. The
Depositor believes that no existing statistics of which it is aware provide a
reliable basis for investors to predict the amount or the timing of receipt of
prepayments on the Mortgage Loans.
The Decrement Tables set forth below have been prepared on the basis of
the Modeling Assumptions described above under "-- Assumptions Relating to
Tables." There will likely be discrepancies between the characteristics of the
actual Mortgage Loans included in the Mortgage Pool and the characteristics of
the Mortgage Loans assumed in preparing the Decrement Tables. Any such
discrepancy may have an effect upon the percentages of initial class balances
(or initial notional amount, in the case of the Class A-5 and Class A-WIO
Certificates) outstanding set forth in the Decrement Tables (and the weighted
average lives of the Offered Certificates). In addition, to the extent that the
Mortgage Loans that actually are included in the Mortgage Pool have
characteristics that differ from those assumed in preparing the following
Decrement Tables, the class balance or notional amount of a class of Offered
Certificates could be reduced to zero
S-62
earlier or later than indicated by such Decrement Tables.
Furthermore, the information contained in the Decrement Tables with
respect to the weighted average life of any Offered Certificate is not
necessarily indicative of the weighted average life of that class of Offered
Certificates that might be calculated or projected under different or varying
prepayment assumptions.
It is not likely that (i) all of the Mortgage Loans will have the
interest rates or remaining terms to maturity assumed or (ii) the Mortgage Loans
will prepay at the indicated percentage of PSA until maturity. In addition, the
diverse remaining terms to maturity of the Mortgage Loans (which include many
recently originated Mortgage Loans) could produce slower or faster reductions of
the class balances or notional amount than indicated in the Decrement Tables at
the various percentages of PSA specified.
Based upon the Modeling Assumptions, the following Decrement Tables
indicate the projected weighted average life of each class of the Offered
Certificates and set forth the percentages of the initial class balance or
notional amount of each class that would be outstanding after each of the dates
shown at various constant percentages of the PSA.
S-63
Percentage of Initial Class Balance(1) Outstanding
at the Respective Percentages of PSA Set Forth Below:
Class A-1, Class A-3,
Class A-4 and Class A-5 Class A-2
------------------------------------- ------------------------------------
Distribution Date 0% 125% 300% 400% 500% 0% 125% 300% 400% 500%
- ----------------- -- ---- ---- ---- ---- -- ---- ---- ---- ----
Initial Percentage...........
.............
.............
.............
.............
.............
.............
.............
.............
.............
.............
.............
.............
.............
.............
.............
.............
.............
.............
.............
.............
.............
.............
.............
.............
Weighted Average Life (in years)(2)
- --------------
(1) With respect to the Class A-5 Certificates, percentages are expressed as
percentages of the initial Class A-5 Notional Amount.
(2) The weighted average life of a class of Certificates is determined by (i)
multiplying the amount of each distribution in reduction of the class
balance or notional amount thereof by the number of years from the date of
the issuance of such class to the related Distribution Date, (ii) adding
the results and (iii) dividing the sum by the initial balance or notional
amount of that class.
S-64
Percentage of Initial Class Balance Outstanding
at the Respective Percentages of PSA Set Forth Below:
Class A-6 Class A-R and Class A-LR
------------------------------------- ------------------------------------
Distribution Date 0% 125% 300% 400% 500% 0% 125% 300% 400% 500%
- ----------------- -- ---- ---- ---- ---- -- ---- ---- ---- ----
Initial Percentage...........
.............
.............
.............
.............
.............
.............
.............
.............
.............
.............
.............
.............
.............
.............
.............
.............
.............
.............
.............
.............
.............
.............
.............
.............
.............
.............
Weighted Average Life (in years)(1)
- --------------
(1) The weighted average life of a class of Certificates is determined by (i)
multiplying the amount of each distribution in reduction of the class
balance thereof by the number of years from the date of the issuance of
such class to the related Distribution Date, (ii) adding the results and
(iii) dividing the sum by the initial balance of that class.
S-65
Percentage of Initial Class Balance Outstanding
at the Respective Percentages of PSA Set Forth Below:
Class A-PO Class A-WIO
------------------------------------- ------------------------------------
Distribution Date 0% 125% 300% 400% 500% 0% 125% 300% 400% 500%
-- ---- ---- ---- ---- -- ---- ---- ---- ----
Initial Percentage...........
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
Weighted Average Life (in years)(1)
- --------------
(1) The weighted average life of a class of Certificates is determined by (i)
multiplying the amount of each distribution in reduction of the class
balance thereof by the number of years from the date of the issuance of
such class to the related Distribution Date, (ii) adding the results and
(iii) dividing the sum by the initial balance of that class.
S-66
Percentage of Initial Class Balance Outstanding
at the Respective Percentages of PSA Set Forth Below:
Class B-1, Class B-2 and Class B-3
-------------------------------------------------------
Distribution Date 0% 125% 300% 400% 500%
- ----------------- -- ---- ---- ---- ----
Initial Percentage..........................
.............................
.............................
.............................
.............................
.............................
.............................
.............................
.............................
.............................
.............................
.............................
.............................
.............................
.............................
.............................
.............................
.............................
.............................
.............................
.............................
.............................
.............................
.............................
.............................
.............................
.............................
Weighted Average Life (in years)(1).........
- --------------
(1) The weighted average life of a class of Certificates is determined by (i)
multiplying the amount of each distribution in reduction of the class
balance thereof by the number of years from the date of the issuance of
such class to the related Distribution Date, (ii) adding the results and
(iii) dividing the sum by the initial balance of that class.
S-67
Yield on the Class A-5 Certificates
The significance of the effects of prepayment on the Mortgage Loans and
changes in LIBOR on the Class A-5 Certificates is illustrated in the following
table which shows the pre-tax yield (on a corporate bond equivalent basis) to
the holders of Class A-5 Certificates under different constant percentages of
PSA and rates of LIBOR. The yields of such Certificates set forth in the
following table were calculated using the Modeling Assumptions and the
additional assumptions that (i) on the first LIBOR determination Date and on
each LIBOR Determination Date thereafter, LIBOR will be as indicated, (ii) the
Class A-5 Certificates are purchased on the Closing Date at an assumed purchase
price equal to % of their notional amount plus accrued interest from
, 200 to (but not including) the Closing Date and (iii) the notional
amount for the Class A-5 Certificates applicable on the Distribution Date in 200
is $ .
As indicated in the following table, the yield to investors in the
Class A-5 Certificates will be extremely sensitive to changes in the rate of
LIBOR. Increases in LIBOR may have a negative effect on the yield to investors
in Class A-5 Certificates. In addition, investors in the Class A-5 Certificates,
which are Interest Only Certificates and have no class balance, should consider
the risk that a rapid rate of prepayment on the Mortgage Loans or a high level
of LIBOR could result in the failure of investors in the Class A-5 Certificates
to fully recover their initial investment.
It is not likely that the Mortgage Loans will prepay at a constant rate
until maturity, that all of the Mortgage Loans will prepay at the same rate or
that they will have the characteristics assumed. There can be no assurance that
the Mortgage Loans will prepay at any of the rates shown in the table or at any
other particular rate. The timing of changes in the rate of prepayments may
affect significantly the yield realized by a holder of a Class A-5 Certificate
and there can be no assurance that your pre-tax yield on the Class A-5
Certificates will correspond to any of the pre-tax yields shown in this
prospectus supplement. You must make your own decision as to the appropriate
prepayment assumptions to be used in deciding whether to purchase a Class A-5
Certificate.
Changes in LIBOR may not correlate with changes in prevailing mortgage
interest rates. Each investor must make its own decision as to the appropriate
interest rate assumptions to be used in deciding whether to purchase a Class A-5
Certificate.
S-68
Sensitivity of the Class A-5 Certificates to Changes in LIBOR
(Pre-Tax Yields to Maturity)
Percentage of PSA
-------------------------------------------------------
LIBOR 0% 125% 300% 400% 500%
- ----- -- ---- ---- ---- ----
%....................................
%....................................
%....................................
%....................................
%....................................
% and above..........................
The yields set forth in the preceding table were calculated by (i)
determining the monthly discount rates that, when applied to the assumed streams
of cash flows to be paid on the Class A-5 Certificates, would cause that
discounted present value of such assumed streams of cash flows to equal the
assumed purchase price of the Class A-5 Certificates indicated above and (ii)
converting such monthly rates to corporate bond equivalent rates. Such
calculation does not take into account variations that may occur in the interest
rates at which you may be able to reinvest funds received as payments of
interest on the Class A-5 Certificates and consequently does not purport to
reflect the return on any investment in the Class A-5 Certificates when such
reinvestment rates are considered.
Yield on the Class A-PO Certificates
The Class A-PO Certificates are Principal Only Certificates and, as
such, will not be entitled to receive distributions of interest in respect of
the Mortgage Loans.
The significance of the effects of prepayments on the Class A-PO
Certificates is illustrated in the following tables which show the pre-tax
yields (on a corporate bond equivalent basis) to the holders of Class A-PO
Certificates under different constant percentages of PSA. The yields set forth
were calculated using the Modeling Assumptions and the additional assumption
that the Class A-PO Certificates are purchased on the Closing Date at an assumed
purchase price equal to % of their class balance.
As indicated in the following table, because the Class A-PO
Certificates represent the right to receive only a portion of the principal
received with respect to the Discount Mortgage Loans, the yield to maturity on
the Class A-PO Certificates will be extremely sensitive to the rate and timing
of principal payments (including prepayments) on the Discount Mortgage Loans.
It is not likely that the Discount Mortgage Loans will prepay at a
constant rate until maturity, that all of the Discount Mortgage Loans will
prepay at the same rate or that they will have the characteristics assumed.
There can be no assurance that the Discount Mortgage Loans will prepay at any of
the rates shown in the table or at any other particular rate. The timing of
S-69
changes in the rate of prepayments may affect significantly the yield realized
by a holders of the Class A-PO Certificates and there can be no assurance that
your pre-tax yield on your Class A-PO Certificates will correspond to any of the
pre-tax yields shown in this prospectus supplement. You must make your own
decision as to the appropriate prepayment assumptions to be used in deciding
whether to purchase a Class A-PO Certificate.
Sensitivity of the Class A-PO Certificates to Prepayments
(Pre-Tax Yields to Maturity)
Percentage of PSA
------------------------------------------
0% 125% 300% 400% 500%
-- ---- ---- ---- ----
Class A-PO Certificates......................
The yields set forth in the preceding table were calculated by (i)
determining the monthly discount rates that, when applied to the assumed streams
of cash flows to be paid on the Class A-PO Certificates, would cause the
discounted present values of such assumed streams of cash flows to equal the
assumed purchase price of the Class A-PO Certificates indicated above and (ii)
converting such monthly rates to corporate bond equivalent rates. This
calculation does not take into account variations that may occur in the interest
rates at which you may be able to reinvest funds received as payments of
principal of the Class A-PO Certificates and consequently does not purport to
reflect the return on any investment in the Class A-PO Certificates when such
reinvestment rates are considered.
Yield on the Class A-WIO Certificates
The Class A-WIO Certificates are Interest Only Certificates and, as
such, will not be entitled to receive distributions of principal in respect of
the Mortgage Loans.
The significance of the effects of prepayments on the Class A-WIO
Certificates is illustrated in the following table which shows the pre-tax yield
(on a corporate bond equivalent basis) to the holders of Class A-WIO
Certificates under different percentages of PSA. The yields set forth were
calculated using the Modeling Assumptions and the additional assumption that the
Class A-WIO Certificates are purchased on the Closing Date at an assumed
purchase price equal to % of the assumed initial notional amount plus accrued
interest from
, 200 to (but not including) the Closing Date and that the initial
notional amount applicable to the Distribution Date in 200 will be approximately
$ .
As indicated in the following table, because interest accrued on each
Distribution Date on the Class A-WIO Certificates is based on a per annum rate
equal to the weighted average of the Net Mortgage Interest Rates of the Premium
Mortgage Loans less %, the yield to maturity on the Class A-WIO Certificates
will be extremely sensitive to the rate and timing of principal payments
(including prepayments) on the Premium Mortgage Loans, particularly the Premium
Mortgage Loans with higher mortgage interest rates. In general, mortgage loans
with higher mortgage interest rates may tend to experience faster
S-70
rates of prepayment in respect of principal than mortgage loans with lower
mortgage interest rates in response to changes in market interest rates. An
investor in the Class A-WIO Certificates should fully consider the associated
risks, including the risk that a rapid rate of principal payments (including
prepayments) could result in the failure of such investor to fully recover its
initial investment.
It is not likely that the Premium Mortgage Loans will prepay at a
constant rate until maturity, that all of the Premium Mortgage Loans will prepay
at the same rate or that they will have the characteristics assumed. There can
be no assurance that the Premium Mortgage Loans will prepay at any of the rates
shown in the table or at any other particular rate. The timing of changes in the
rate of prepayments may affect significantly the yield realized by a holder of a
Class A-WIO Certificate and your pre-tax yield on the Class A-WIO Certificates
will likely not correspond to any of the pre-tax yields shown in this prospectus
supplement. You must make your own decision as to the appropriate prepayment
assumptions to be used in deciding whether to purchase a Class A-WIO
Certificate.
Sensitivity of Class A-WIO Certificates to Prepayments
(Pre-Tax Yields to Maturity)
Percentage of PSA
------------------------------------------
0% 125% 300% 400% 500%
-- ---- ---- ---- ----
Class A-WIO Certificates ......................
The yields set forth in the preceding table were calculated by (i)
determining the monthly discount rates that when applied to the assumed stream
of cash flows to be paid on the Class A-WIO Certificates, would cause the
discounted present value of such assumed stream of cash flows to equal the
assumed purchase price of the Class A-WIO Certificates indicated above and (ii)
converting such monthly rates to corporate bond equivalent rates. This
calculation does not take into account variations that may occur in the interest
rates at which you may be able to reinvest funds received as payments of
interest on the Class A-WIO Certificates and consequently does not purport to
reflect the return on any investment in the Class A-WIO Certificates when such
reinvestment rates are considered.
Yield on the Class A-R and Class A-LR Certificates
The after-tax rate of return to the holder of the Class A-R or Class
A-LR Certificate will reflect its pre-tax rate of return, reduced by the taxes
required to be paid with respect to such Certificate. If you hold the Class A-R
or Class A-LR Certificate, you may have tax liabilities during the early years
of the applicable REMIC's term that substantially exceed any distributions
payable thereon during any such period. In addition, the present value of the
tax liabilities with respect to your Class A-R or Class A-LR Certificate may
substantially exceed the present value of expected distributions on your Class
A-R or Class A-LR Certificate and of any tax benefits that may arise with
respect to it. Accordingly, the after-tax rate of return on the Class A-R or
Class A-LR Certificate may be negative or may be otherwise significantly
adversely affected. The timing and amount of taxable income attributable to the
Class A-R or
S-71
Class A-LR Certificate will depend on, among other things, the timing and
amounts of prepayments and losses experienced with respect to the Mortgage
Loans.
If you own the Class A-R or Class A-LR Certificate, you should consult
your tax advisors regarding the effect of taxes and the receipt of any payments
made in connection with the purchase of the Class A-R or Class A-LR Certificate
on your after-tax rate of return. See "Federal Income Tax Consequences" in this
prospectus supplement and in the prospectus.
Yield on the Subordinate Certificates
The weighted average life of, and the yield to maturity on, the
Subordinate Certificates, in increasing order of their numerical class
designation, will be progressively more sensitive to the rate and timing of
mortgagor defaults and the severity of ensuing losses on the Mortgage Loans. If
the actual rate and severity of losses on the Mortgage Loans is higher than
those you assumed, the actual yield to maturity of your Subordinate Certificate
may be lower than the yield you expected. The timing of losses on Mortgage Loans
will also affect your actual yield to maturity, even if the rate of defaults and
severity of losses over the life of the Trust are consistent with your
expectations. In general, the earlier a loss occurs, the greater the effect on
an investor's yield to maturity. Realized Losses on the Mortgage Loans will be
allocated to reduce the balance of the applicable class of Subordinate
Certificates (as described in this prospectus supplement under "Description of
the Certificates -- Allocation of Losses"), without the receipt of cash equal to
the reduction. In addition, shortfalls in cash available for distributions on
the Subordinate Certificates will result in a reduction in the balance of the
class of Subordinate Certificates then outstanding with the highest numerical
class designation if and to the extent that the aggregate balance of all classes
of Certificates, following all distributions and the allocation of Realized
Losses on a Distribution Date, exceeds the balance of the Mortgage Pool as of
the due date occurring in the month of such Distribution Date. As a result of
such reductions, less interest will accrue on that class of Subordinate
Certificates than otherwise would be the case. The yield to maturity of the
Subordinate Certificates will also be affected by the disproportionate
allocation of principal prepayments to the Senior Certificates (other than the
Class A-PO Certificates). Net Interest Shortfalls, other cash shortfalls in the
Pool Distribution Amount and distribution of funds to holders of the Class A-PO
Certificates otherwise available for distribution on the Subordinate
Certificates to the extent of reimbursement for Class A-PO Deferred Amounts. See
"Description of the Certificates -- Allocation of Losses" in this prospectus
supplement.
If on any Distribution Date, the Fractional Interest for any class of
Subordinate Certificates is less than its original Fractional Interest, all
partial principal prepayments and principal prepayments in full available for
distribution on the Subordinate Certificates will be allocated solely to that
class and all other classes of Subordinate Certificates with lower numerical
class designations, thereby accelerating the amortization thereof relative to
that of the classes junior to that class and reducing the weighted average lives
of the classes of Subordinate Certificates receiving such distributions.
Accelerating the amortization of the classes of Subordinate Certificates with
lower numerical class designations relative to the other classes of
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Subordinate Certificates is intended to preserve the availability of the
subordination provided by those other classes.
Yield Considerations with Respect to the Class B-2 and Class B-3 Certificates
Defaults on mortgage loans may be measured relative to a default
standard or model. The model used in this prospectus supplement, the standard
default assumption ("SDA"), represents an assumed rate of default each month
relative to the outstanding performing principal balance of a pool of new
mortgage loans. A default assumption of 100% SDA assumes constant default rates
of 0.02% per annum of the outstanding principal balance of such mortgage loans
in the first month of the life of the mortgage loans and an additional 0.02% per
annum in each month thereafter until the 30th month. Beginning in the 30th month
and in each month thereafter through the 60th month of the life of the mortgage
loans, 100% SDA assumes a constant default rate of 0.60% per annum each month.
Beginning in the 61st month and in each month thereafter through the 120th month
of the life of the mortgage loans, 100% SDA assumes that the constant default
rate declines each month by 0.0095% per annum, and that the constant default
rate remains at 0.03% per annum in each month after the 120th month. For the
following tables, it is assumed that there is no delay between the default and
liquidation of the mortgage loans. As used in the following tables, "0% SDA"
assumes no defaults. SDA is not a historical description of default experience
or a prediction of the rate of default of any pool of mortgage loans.
The following tables indicate the sensitivity of the pre-tax yield to
maturity on the Class B-2 and Class B-3 Certificates to various rates of
prepayment and varying levels of Realized Losses. The tables set forth below are
based upon, among other things, the Modeling Assumptions (other than the
assumption that no defaults shall have occurred with respect to the Mortgage
Loans) and the additional assumption that liquidations (other than those
scenarios indicated as 0% of SDA (no defaults)) occur monthly on the last day of
the preceding month (other than on a due date) at the percentages of SDA set
forth in the table.
In addition, it was assumed that (i) Realized Losses on liquidations of
% or % of the outstanding principal balance of the Liquidated Mortgage Loans, as
indicated in the tables below (referred to as a "Loss Severity Percentage"),
will occur at the time of liquidation and (ii) the Class B-2 and Class B-3
Certificates are purchased on the Closing Date at assumed purchase prices equal
to % and %, in each case, of their balance plus accrued interest from , 200 to
(but not including) the Closing Date.
It is highly unlikely that the Mortgage Loans will have the precise
characteristics referred to in this prospectus supplement or that they will
prepay or liquidate at any of the rates specified or that the Realized Losses
will be incurred according to one particular pattern. The assumed percentages of
SDA and PSA and the Loss Severity Percentages shown below are for illustrative
purposes only. Those assumptions may not be correct and the actual rates of
prepayment and liquidation and loss severity experience of the Mortgage Loans
may not correspond to any of the assumptions made in this prospectus supplement.
For these reasons, and because the timing of cash flows is critical to
determining yield, the pre-tax yield to maturity of the Class B-2 and Class B-3
Certificates are likely to differ from the pre-tax yields to maturity shown
below.
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The pre-tax yields to maturity set forth below were calculated by
determining the monthly discount rates which, when applied to the assumed
streams of cash flows to be paid on the Class B-2 and Class B-3 Certificates,
would cause the discounted present value of those assumed streams of cash flows
to equal the aggregate assumed purchase prices of the Class B-2 and Class B-3
Certificates set forth above. In all cases, monthly rates were then converted to
the semi-annual corporate bond equivalent yields shown below. Implicit in the
use of any discounted present value or internal rate of return calculations such
as these is the assumption that intermediate cash flows are reinvested at the
discount rates at which investors may be able to reinvest funds received by them
as distributions on the Class B-2 and Class B-3 Certificates. Consequently,
these yields do not purport to reflect the total return on any investment in the
Class B-2 and Class B-3 Certificates when reinvestment rates are considered.
Sensitivity of Pre-Tax Yields to Maturity of the Class B-2
Certificates to Prepayments and Realized Losses
Loss Percentage of PSA
Percentage Severity ---------------------------------------------------------------
of SDA Percentage 0% 125% 300% 400% 500%
- ------ ---------- --------- ---- ---- ---- ----
%.............................
%.............................
%.............................
%.............................
%.............................
%.............................
%.............................
%.............................
%.............................
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Sensitivity of Pre-Tax Yields to Maturity of the Class B-3
Certificates to Prepayments and Realized Losses
Loss Percentage of PSA
Percentage Severity ---------------------------------------------------------------
of SDA Percentage 0% 125% 300% 400% 500%
- ------ ---------- --------- ---- ---- ---- ----
%.............................
%.............................
%.............................
%.............................
%.............................
%.............................
%.............................
%.............................
%.............................
..........The following table sets forth the amount of Realized Losses that would
be incurred with respect to the Mortgage Loans, expressed as a percentage of the
aggregate outstanding principal balance of the Mortgage Loans as of the Cut-off
Date.
Aggregate Realized Losses
Loss Percentage of PSA
Percentage Severity ---------------------------------------------------------------
of SDA Percentage 0% 125% 300% 400% 500%
- ------ ---------- --------- ---- ---- ---- ----
%.............................
%.............................
%.............................
%.............................
%.............................
%.............................
%.............................
%.............................
You should make your investment decisions based on your determinations
of anticipated rates of prepayment and Realized Losses under a variety of
scenarios. If you are purchasing Class B-2 or Class B-3 Certificates you should
fully consider the risk that Realized Losses on the Mortgage Loans could result
in the failure to fully recover your investments.
CREDIT SUPPORT
The rights of each class of Class B Certificates to receive
distributions of principal and interest are subordinated to such rights of the
Class A Certificates and of each class of Class B Certificates with a lower
numerical designation. For example, the Class B-2 Certificates will not receive
principal or interest on a Distribution Date until the Class A Certificates and
Class B-1
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Certificates have received the amounts to which they are entitled on that
Distribution Date. The subordination described above is intended to increase the
likelihood of receipt by the Class A Certificates and the Class B Certificates
with lower numerical class designations of the amount to which they are entitled
on any Distribution Date and to provide those holders with protection against
Realized Losses on the Mortgage Loans.
The applicable Non-PO Percentage of Realized Losses on the Mortgage
Loan will be allocated to the class of Class B Certificates then outstanding
with the highest numerical class designation. In addition, the balance of that
Class of Class B Certificates will be reduced by the amount of distributions on
the Class A-PO Certificates in reimbursement for the Class A-PO Deferred
Amounts.
The Senior Certificates (other than the Class A-PO Certificates) will
receive 100% of the Non-PO Percentage of principal prepayments received with
respect to the Mortgage Loans until the fifth anniversary of the first
Distribution Date. During the following four years, those Senior Certificates
will receive a large, but generally decreasing, share of such principal
prepayments. This disproportionate allocation of prepayments will result in an
acceleration of the amortization of those Senior Certificates and will enhance
the likelihood that holders of those Certificates will receive the entire amount
of principal to which they are entitled. In addition to this acceleration
mechanism, on any Distribution Date on which the Senior Percentage exceeds the
initial Senior Percentage, the Senior Certificates (other than the Class A-PO
Certificates) will be entitled to receive 100% of the Non-PO Percentage of
principal prepayments received with respect to the Mortgage Loans. See
"Description of the Certificates -- Principal" in this prospectus supplement.
USE OF PROCEEDS
The Depositor will apply the net proceeds of the sale of the Offered
Certificates against the purchase price of the Mortgage Loans.
FEDERAL INCOME TAX CONSEQUENCES
Elections will be made to treat the Trust as two separate "real estate
mortgage investment conduits" (the "Upper-Tier REMIC" and the "Lower-Tier REMIC"
and each, a "REMIC") for federal income tax purposes under the Internal Revenue
Code of 1986, as amended (the "Code").
o The Certificates (other than the Class A-R and Class A-LR
Certificates) will be designated as "regular interests" in the
REMIC. All the Certificates (other than the Class A-R and
Class A-LR Certificates) are "Regular Certificates" for
purposes of the following discussion.
o The Class A-R and Class A-LR Certificates will be designated
as the sole class of "residual interests" in the Upper-Tier
REMIC and Lower-Tier REMIC, respectively.
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See "Federal Income Tax Consequences -- Federal Income Tax Consequences
for REMIC Certificates" in the prospectus.
Regular Certificates
The Regular Certificates generally will be treated as debt instruments
issued by the Upper-Tier REMIC for federal income tax purposes. Income on the
Regular Certificates must be reported under an accrual method of accounting.
The Class A-5, Class A-WIO and Class A-PO Certificates will, and the
other classes of Offered Certificates may, depending on their respective issue
prices, be treated for federal income tax purposes as having been issued with
original issue discount. See "Federal Income Tax Consequences -- REMICs --
Taxation of Owners of Regular Securities -- Original Issue Discount" in the
prospectus. Certain classes of the Regular Certificates may be treated for
federal income tax purposes as having been issued at a premium. Whether any
holder of such a class of Certificates will be treated as holding a Certificate
with amortizable bond premium will depend on such certificateholder's purchase
price and the distributions remaining to be made on such Certificate at the time
of its acquisition by such certificateholder. Holders of such classes of
Certificates should consult their own tax advisors regarding the possibility of
making an election to amortize such premium. See "Federal Income Tax
Consequences -- REMICs -- Taxation of Owners Regular Securities -- Amortizable
Premium" in the prospectus. For purposes of determining the amount and the rate
of accrual of original issue discount and market discount, the Depositor intends
to assume that there will be prepayments on the Mortgage Loans at a rate equal
to % PSA. No representation is made as to the actual rate at which the Mortgage
Loans will be prepaid.
The Regular Certificates will be treated as regular interests in a
REMIC under Section 860G of the Code. Accordingly, to the extent described in
the prospectus:
o the Regular Certificates will be treated as assets described
in Section 7701(a)(19)(C) of the Code;
o the Regular Certificates will be treated as "real estate
assets" within the meaning of Section 856(c)(4)(A) of the
Code; and
o interest on the Regular Certificates will be treated as
interest on obligations secured by mortgages on real property
within the meaning of Section 856(c)(3)(B) of the Code.
See "Federal Income Tax Consequences -- REMICs -- Classification of
REMICs" in the prospectus.
Residual Certificates
S-77
If you hold the Class A-R or Class A-LR Certificate, you must include
the taxable income or loss of the Upper-Tier REMIC or Lower-Tier REMIC,
respectively, in determining your federal taxable income. Your resulting tax
liability may exceed cash distributions to you during certain periods. In
addition, all or a portion of the taxable income you recognize from the Class
A-R or Class A-LR Certificate may be treated as "excess inclusion" income,
which, among other consequences, will result in your inability to use net
operating losses to offset such income from the Upper-Tier REMIC or Lower-Tier
REMIC, respectively.
You should consider carefully the tax consequences of any investment in
the Class A-R or Class A-LR Certificate discussed in the prospectus and should
consult your tax advisors with respect to those consequences. See "Federal
Income Tax Consequences" in the prospectus. Specifically, you should consult
your tax advisors regarding whether, at the time of acquisition, the Class A-R
or Class A-LR Certificate will be treated as a "noneconomic" residual interest
and "tax avoidance potential" residual interest. See "Federal Income Tax
Consequences -- REMICs -- Taxation of Owners of Residual Securities --
Tax-Related Restrictions on Transfer of Residual Securities -- Noneconomic
Residual Interests," "-- Foreign Investors" and "-- Mark to Market Regulations"
in the prospectus. Additionally, for information regarding Prohibited
Transactions, see "Federal Income Tax Consequences -- REMICs -- Taxes That May
Be Imposed on the REMIC Pool -- Prohibited Transactions" in the prospectus.
Backup Withholding and Reporting Requirements
Certain holders or other beneficial owners of Offered Certificates may
be subject to backup withholding a phasing down from 30% to 28% over the period
2002 to 2006 with respect to interest paid on the Offered Certificates if those
holders or beneficial owners, upon issuance, fail to supply the Trustee or their
broker with their taxpayer identification number, furnish an incorrect taxpayer
identification number, fail to report interest, dividends or other "reportable
payments" (as defined in the Code) properly, or, under certain circumstances,
fail to provide the Trustee or their broker with a certified statement, under
penalty of perjury, that they are not subject to backup withholding. See
"Federal Income Tax Consequences -- REMICs - Taxation of Certain Foreign
Investors -- Backup Withholding" in the prospectus.
The Trustee will be required to report annually to the Internal Revenue
Service (the "IRS"), and to each certificateholder of record, the amount of
interest paid (and original issue discount accrued, if any) on the Regular
Certificates and the amount of interest withheld for federal income taxes, if
any, for each calendar year, except as to exempt holders (generally, holders
that are corporations, certain tax-exempt organizations or nonresident aliens
who provide certification as to their status as nonresidents). As long as the
only "certificateholder" of record of the Offered Certificates (other than the
Class A-R and Class A-LR Certificates) is Cede & Co., as nominee for DTC,
beneficial owners of the Offered Certificates and the IRS will receive tax and
other information including the amount of interest paid on such Certificates
from DTC Participants rather than from the Trustee. (The Trustee, however, will
respond to requests for necessary information to enable Participants and certain
other persons to complete their reports.) See "Federal Income Tax Consequences
- -- REMICs - Taxation of Certain Foreign Investors --
S-78
Reporting Requirements" in the prospectus.
All investors should consult their tax advisors regarding the federal,
state, local or foreign income tax consequences of the purchase, ownership and
disposition of the Offered Certificates.
STATE TAXES
The Depositor makes no representations regarding the tax consequences
of purchase, ownership or disposition of the Offered Certificates under the tax
laws of any state. Investors considering an investment in the Offered
Certificates should consult their tax advisors regarding such tax consequences.
RECENT DEVELOPMENTS--CALIFORNIA LEGISLATION
In California, Assembly Bill No. 1433 (the "New Legislation") which
revises certain provisions of the California Military and Veterans Code to
provide protection equivalent to that provided by the Relief Act to California
national guard members called up to active service by the Governor, California
national guard members called up to active service by the President and
reservists called to active duty.
The New Legislation could result in shortfalls in interest and could
affect the ability of the Servicer to foreclose on the affected Mortgage Loan in
a timely fashion. In addition, the New Legislation, like the Relief Act,
provides broad discretion for a court to modify a mortgage loan upon application
by the mortgagor. None of the Depositor, the Seller or the Servicer has
undertaken a determination as to which Mortgage Loans, if any, may be affected.
See "Certain Legal Aspects of the Mortgage Loans -- Soldiers' and Sailors' Civil
Relief Act of 1940 and Similar Laws" and similar laws in the prospectus.
ERISA CONSIDERATIONS
A fiduciary or other person acting on behalf of any employee benefit
plan or arrangement, including an individual retirement account (an "IRA"),
subject to the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), the Code or any federal, state or local law ("Similar Law") which is
similar to ERISA or the Code (collectively, a "Plan") should carefully review
with its legal advisors whether the purchase or holding of an Offered
Certificate could give rise to a transaction prohibited or not otherwise
permissible under ERISA, the Code or Similar Law. See "ERISA Considerations" in
the prospectus.
[On April 3, 1996, the U.S. Department of Labor extended to Wachovia
Securities, Inc.Capital Markets, LLC (formerly First Union Securities, Inc.), an
=====================
indirect, wholly-owned subsidiary of Wachovia Corporation ("Wachovia
SecuritiesCapital Markets"), an administrative exemption (amended and restated
as Prohibited Transaction Exemption 2000-58, 65 Fed. Reg. 67765)] [On , the U.S.
Department of Labor extended to [Other Underwriter], an administrative exemption
(amended and restated as Prohibited Transaction Exemption 2000-58, 65 Fed. Reg.
67765)] (the "Exemption") from certain of the prohibited
S-79
transaction rules of ERISA and the related excise tax provisions of Section 4975
of the Code with respect to the initial purchase, the holding and the subsequent
resale by certain Plans of certificates in pass-through trusts that consist of
certain receivables, loans and other obligations that meet the conditions and
requirements of the Exemption. The Exemption applies to mortgage loans such as
the Mortgage Loans, but does not cover certain IRAs and certain employee benefit
plans covering only self-employed individuals which are subject to the
prohibited transaction provisions of the Code.
For a general description of the Exemption and the conditions that must
be satisfied for the Exemption to apply, see "ERISA Considerations" in the
prospectus.
The Underwriter believes that the Exemption will cover the acquisition
and holding of the Offered Certificates (other than the Class A-R and Class A-LR
Certificates) by the Plans to which it applies and that all conditions of the
Exemption other than those within the control of the investors will be met. In
addition, as of the date hereof, there is no single mortgagor that is the
obligor on 5% of the initial balance of the Mortgage Pool.
Prospective Plan investors should consult with their legal advisors
concerning the impact of ERISA, the Code and Similar Law, the applicability of
PTCE 83-1 described under "ERISA Considerations" in the prospectus and the
Exemption, and the potential consequences in their specific circumstances, prior
to making an investment in the Offered Certificates. Moreover, each Plan
fiduciary should determine whether under the governing plan instruments and the
applicable fiduciary standards of investment prudence and diversification, an
investment in the Offered Certificates is appropriate for the Plan, taking into
account the overall investment policy of the Plan and the composition of the
Plan's investment portfolio.
The Class A-R and Class A-LR Certificates may not be purchased by or
transferred to a Plan or a person acting on behalf of or investing assets of a
Plan. See "Description of the Certificates -- Restrictions on Transfer of the
Class A-R and Class A-LR Certificates" in this prospectus supplement.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting
Agreement (the "Underwriting Agreement") among the Depositor, Wachovia
SecuritiesCapital Markets and [Other Underwriter] ("Other Underwriter" and,
================
together with Wachovia SecuritiesCapital Markets, the "Underwriters"), the
Depositor has agreed to sell to the Underwriters, and the Underwriters have
agreed to purchase the Offered Certificates as follows: [To Be Provided].
Wachovia Corporation conducts its investment banking, institutional, and capital
markets businesses through its various bank, broker-dealer and nonbank
subsidiaries (including Wachovia SecuritiesCapital Markets) under the trade name
===============
of Wachovia SecuritiesCapital Markets. Any references to Wachovia
SecuritiesCapital Markets in this prospectus supplement, however, do not include
Wachovia Securities, Inc.Capital Markets, LLC, member NASD/SIPC, a separate
======================
broker-dealer subsidiary of Wachovia Corporation and sister affiliate of
Wachovia SecuritiesCapital Markets which is not participating as a selling group
===============
member in the distribution
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of the Offered Certificates. Proceeds to the Depositor from the sale of the
Offered Certificates are expected to be approximately % of the initial balance
of those Certificates, before deducting expenses payable by the Depositor.
Distribution of the Offered Certificates will be made by the
Underwriter from time to time in negotiated transactions or otherwise at varying
prices to be determined at the time of sale. In connection with the purchase and
sale of the Offered Certificates, the Underwriter may be deemed to have received
compensation from the Depositor in the form of underwriting discounts.
The Depositor has been advised by the Underwriters that they intend to
make a market in the Offered Certificates but have no obligation to do so. There
can be no assurance that a secondary market for the Offered Certificates will
develop or, if it does develop, that it will continue.
The Depositor has agreed to indemnify the Underwriters against, or make
contributions to the Underwriters with respect to, certain liabilities,
including liabilities under the Securities Act of 1933, as amended.
Wachovia SecuritiesCapital Markets is an affiliate of the Depositor,
================
the Seller and the Servicer, and is a registered broker/dealer. Any obligations
of Wachovia SecuritiesCapital Markets are the sole responsibility of Wachovia
================
SecuritiesCapital Markets and do not create any obligation or guarantee on the
================
part of any affiliate of Wachovia SecuritiesCapital Markets.
===============
LEGAL MATTERS
The validity of and certain federal income tax matters with respect
to the Offered Certificates will be passed upon for the Depositor and
Underwriters
by Cadwalader, Wickersham & Taft LLP, New York, New York and Orrick, Herrington
==============================================
& Sutcliffe LLP, New York, New York.
===============
CERTIFICATE RATINGS
At their issuance, each class of Offered Certificates is required to
receive from (" ") and (" " and, together with,
, the "Rating Agencies") at least the rating set forth in the table on
page S- of this prospectus supplement.
Ratings on mortgage pass-through certificates address the likelihood of
receipt by certificateholders of payments required under the Pooling Agreement.
and ratings take into consideration the credit quality
of the Mortgage Pool, including any credit support, structural and legal
aspects associated with the Offered Certificates, and the extent to which the
payment stream of the Mortgage Pool is adequate to make payments required under
the Offered Certificates. and ratings on the Offered Certificates do not,
however, constitute a statement regarding frequency of prepayments on the
S-81
Mortgage Loans.
and ratings do not address the possibility that, as a result
of principal prepayments, a holder of a Class A-5 or Class A-WIO Certificate may
not fully recover its initial investment.
The Depositor has not requested a rating of any class of Offered
Certificates by any rating agency other than and . However, there can be no
assurance as to whether any other rating agency will rate the Offered
Certificates or, if it does, what rating would be assigned by such other rating
agency. The rating assigned by any such other rating agency to a class of
Offered Certificates may be lower than the ratings assigned by and .
The rating of the Offered Certificates should be evaluated
independently from similar ratings on other types of securities. A security
rating is not a recommendation to buy, sell or hold securities and may be
subject to revision or withdrawal at any time by the assigning rating agency.
S-82
INDEX OF SIGNIFICANT PROSPECTUS SUPPLEMENT DEFINITIONS
Adjusted Pool Amount...............................53
Adjusted Pool Amount (PO Portion)..................53
Administrative Fee Rate............................30
Administrative Fees................................30
Advance............................................31
Bankruptcy Losses..................................52
BBA................................................43
beneficial owner...................................35
Book-Entry Certificates............................34
Certificate Account................................30
Certificate Owners.................................34
Certificateholder..................................35
Certificates.......................................34
Class A-5 Notional Amount..........................43
Class A-PO Deferred Amount.........................51
Class A-PO Principal Distribution Amount...........49
Class A-WIO Notional Amount........................43
Clearstream........................................37
Clearstream Participants...........................37
Closing Date.......................................27
Code...............................................75
Compensating Interest..............................31
Corporate Trust Office.............................33
Debt Service Reduction.............................53
Decrement Tables...................................59
Deficient Valuation................................52
Definitive Certificates............................34
Deleted Mortgage Loan..............................29
Determination Date.................................31
Discount Mortgage Loan.............................45
Distribution Date..................................39
DTC................................................34
Eligible Substitute Mortgage Loan..................29
ERISA..............................................78
Euroclear..........................................37
Euroclear Operator.................................37
Euroclear Participants.............................37
European Depositaries..............................35
Exemption..........................................79
FHLMC..............................................20
Financial Intermediary.............................35
FNMA...............................................20
Fractional Interest................................50
Global Securities...................................1
Indirect Participants..............................35
Interest Accrual Period............................43
Interest Distribution Amount.......................41
Interest Settlement Rate...........................43
IRA................................................78
IRS................................................77
LIBOR..............................................43
LIBOR Based Interest Accrual Period................43
S-83
LIBOR Determination Date...........................43
Liquidated Mortgage Loan...........................53
Liquidation Proceeds...............................40
Loan-to-Value Ratio................................21
Loss Severity Percentage...........................72
Lower-Tier REMIC...................................75
MERS...............................................28
Modeling Assumptions...............................59
Mortgage File......................................28
Mortgage Loan Purchase Agreement...................20
Mortgage Loans.....................................20
Mortgage Pool......................................20
Net Interest Shortfall.............................42
Net Mortgage Interest Rate.........................45
New Legislation....................................78
New Regulations.....................................5
Non-PO Percentage..................................45
Non-PO Principal Amount............................45
Non-Supported Interest Shortfall...................42
Offered Certificates...............................34
Original Subordinate Principal Balance.............48
Other Underwriter..................................79
Participants.......................................34
Percentage Interest................................33
Plan...............................................78
PO Percentage......................................45
PO Principal Amount................................49
Pool Distribution Amount...........................40
Pool Distribution Amount Allocation................41
Pool Principal Balance.............................47
Pooling Agreement..................................28
Premium Mortgage Loan..............................45
Prepayment Interest Shortfall......................42
Priority Amount....................................48
Priority Percentage................................48
PSA................................................61
Purchase Price.....................................29
Rating Agencies....................................80
Realized Loss......................................52
Record Date........................................39
Regular Certificates...............................75
Regular Interest Accrual Period....................42
Relevant Depositary................................35
Relief Act.........................................42
Relief Act Reduction...............................42
REMIC..............................................75
REO Property.......................................31
Reserve Interest Rate..............................44
Revenue Procedure..................................55
Rules..............................................35
Scheduled Principal Payments.......................46
SDA................................................72
Seller.........................................20, 27
Senior Credit Support Depletion Date...............46
S-84
Senior Percentage..................................47
Senior Prepayment Percentage.......................47
Senior Principal Distribution Amount...............46
Servicer...........................................27
Servicer Custodial Account.........................30
Servicing Fee......................................30
Servicing Fee Rate.................................30
Shift Percentage...................................49
Similar Law........................................78
Stated Principal Balance...........................46
Subordinate Percentage.............................47
Subordinate Prepayment Percentage..................48
Subordinate Principal Distribution Amount..........51
Substitution Adjustment Amount.....................29
Telerate page 3750.................................44
Terms and Conditions...............................38
Trust..............................................20
Trustee Fee Rate...................................30
U.S. Person........................................55
Underwriters.......................................79
Underwriting Agreement.............................79
Unscheduled Principal Payments.....................46
Upper-Tier REMIC...................................75
Wachovia Securities.................79Capital Markets........................79
=========================================
S-85
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the Offered Certificates
(other than the Class A-R and Class A-LR Certificates) will be offered globally
(the "Global Securities") and will be available only in book-entry form.
Investors in the Global Securities may hold such Global Securities through any
of DTC, Clearstream or Euroclear. The Global Securities will be tradable as home
market instruments in both the European and U.S. domestic markets. Initial
settlement and all secondary trades will settle in same-day funds.
Secondary market trading between investors holding Global Securities
through Clearstream and Euroclear will be conducted in the ordinary way in
accordance with their normal rules and operating procedures and in accordance
with conventional eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors holding Global Securities
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations.
Secondary cross-market trading between Clearstream or Euroclear and DTC
Participants holding Certificates will be effected on a delivery-against-payment
basis through the respective Depositaries of Clearstream and Euroclear (in such
capacity) and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be
subject to U.S. withholding taxes unless such holders meet certain requirements
and deliver appropriate U.S. tax documents to the securities clearing
organizations or their participants.
Initial Settlement
All Global Securities will be held in book-entry form by DTC in the
name of Cede & Co., as nominee of DTC. Investors' interests in the Global
Securities will be represented through financial institutions acting on their
behalf as direct and indirect Participants in DTC. As a result, Clearstream and
Euroclear will hold positions on behalf of their participants through their
respective Depositaries, which in turn will hold such positions in accounts as
DTC Participants.
Investors electing to hold their Global Securities through DTC will
follow the settlement practices applicable to conventional eurobonds, except
that there will be no temporary global security and no "lock-up" or restricted
period. Investor securities custody accounts will be credited with their
holdings against payment in same-day funds on the settlement date.
A-1
Investors electing to hold their Global Securities through Clearstream
or Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no 'lock-up' or restricted period. Global Securities will be credited to the
securities custody accounts on the settlement date against payment in same-day
funds.
Secondary Market Trading
Since the purchaser determines the place of delivery, it is important
to establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
Trading between DTC Participants. Secondary market trading between DTC
Participants will be settled using the procedures applicable to prior mortgage
loan asset backed certificates issues in same-day funds.
Trading between Clearstream and/or Euroclear Participants. Secondary
market trading between Clearstream Participants or Euroclear Participants will
be settled using the procedures applicable to conventional eurobonds in same-day
funds.
Trading between DTC seller and Clearstream or Euroclear purchaser. When
Global Securities are to be transferred from the account of a DTC Participant to
the account of a Clearstream Participant or a Euroclear Participant, the
purchaser will send instructions to Clearstream or Euroclear through a
Clearstream Participant or Euroclear Participant at least one business day prior
to settlement. Clearstream or Euroclear will instruct the respective Depositary,
as the case may be, to receive the Global Securities against payment. Payment
will include interest accrued on the Global Securities from and including the
last coupon payment date to and excluding the settlement date, on the basis of
either a 360-day year comprised of 30-day months or the actual number of days in
such accrual period and a year assumed to consist of 360 days, as applicable.
For transactions settling on the 31st of the month, payment will include
interest accrued to and excluding the first day of the following month. Payment
will then be made by the respective Depositary of the DTC Participant's account
against delivery of the Global Securities. After settlement has been completed,
the Global Securities will be credited to the respective clearing system and by
the clearing system, in accordance with its usual procedures, to the Clearstream
Participant's or Euroclear Participant's account. The securities credit will
appear the next day (European time) and the cash debt will be back-valued to,
and the interest on the Global Securities will accrue from, the value date
(which would be the preceding day when settlement occurred in New York). If
settlement is not completed on the intended value date (i.e., the trade fails),
the Clearstream or Euroclear cash debt will be valued instead as of the actual
settlement date.
Clearstream Participants and Euroclear Participants will need to make
available to the respective clearing systems the funds necessary to process
same-day funds settlement. The most direct means of doing so is to preposition
funds for settlement, either from cash on hand or existing lines of credit, as
they would for any settlement occurring within Clearstream or Euroclear. Under
this approach, they may take on credit exposure to Clearstream or
A-2
Euroclear until the Global Securities are credited to their accounts one day
later.
As an alternative, if Clearstream or Euroclear has extended a line of
credit to them, Clearstream Participants or Euroclear Participants can elect not
to preposition funds and allow that credit line to be drawn upon the finance
settlement. Under this procedure, Clearstream Participants or Euroclear
Participants purchasing Global Securities would incur overdraft charges for one
day, assuming they cleared the overdraft when the Global Securities were
credited to their accounts. However, interest on the Global Securities would
accrue from the value date. Therefore, in many cases the investment income on
the Global Securities earned during that one-day period may substantially reduce
or offset the amount of such overdraft charges, although this result will depend
on each Clearstream Participant's or Euroclear Participant's particular cost of
funds.
Since the settlement is taking place during New York business hours,
DTC Participants can employ their usual procedures for sending Global Securities
to the respective European Depositary for the benefit of Clearstream
Participants or Euroclear Participants. The sale proceeds will be available to
the DTC seller on the settlement date. Thus, to the DTC Participants a
cross-market transaction will settle no differently than a trade between two DTC
Participants.
Trading between Clearstream or Euroclear Seller and DTC Purchaser. Due
to time zone differences in their favor, Clearstream Participants and Euroclear
Participants may employ their customary procedures for transactions in which
Global Securities are to be transferred by the respective clearing system,
through the respective Depositary, to a DTC Participant. The seller will send
instructions to Clearstream or Euroclear through a Clearstream Participant or
Euroclear Participant at least one business day prior to settlement. In these
cases Clearstream or Euroclear will instruct the respective Depositary, as
appropriate, to deliver the Global Securities to the DTC Participant's account
against payment. Payment will include interest accrued on the Global Securities
from and including the last coupon payment to and excluding the settlement date
on the basis of either a 360-day year comprised of 30-day months or the actual
number of days in such accrual period and a year assumed to consist of 360 days,
as applicable. For transactions settling on the 31st of the month, payment will
include interest accrued to and excluding the first day of the following month.
The payment will then be reflected in the account of the Clearstream Participant
or Euroclear Participant the following day, and receipt of the cash proceeds in
the Clearstream Participant's or Euroclear Participant's account would be
back-valued to the value date (which would be the preceding day, when settlement
occurred in New York). Should the Clearstream Participant or Euroclear
Participant have a line of credit with its respective clearing system and elect
to be in debt in anticipation of receipt of the sale proceeds in its account,
the back-valuation will extinguish any overdraft incurred over that one-day
period. If settlement is not completed on the intended value date (i.e., the
trade fails), receipt of the cash proceeds in the Clearstream Participant's or
Euroclear Participant's account would instead be valued as of the actual
settlement date.
Finally, day traders that use Clearstream or Euroclear and that
purchase Global Securities
A-3
from DTC Participants for delivery to Clearstream
Participants or Euroclear Participants should note that these trades would
automatically fail on the sale side unless affirmative action were taken. At
least three techniques should be readily available to eliminate this potential
problem:
(a) borrowing through Clearstream or Euroclear for one day
(until the purchase side of the day trade is reflected in their
Clearstream or Euroclear accounts) in accordance with the clearing
system's customary procedures;
(b) borrowing the Global Securities in the U.S. from a DTC
Participant no later than one day prior to settlement, which would give
the Global Securities sufficient time to be reflected in their
Clearstream or Euroclear account in order to settle the sale side of
the trade; or
(c) staggering the value dates for the buy and sell sides of
the trade so that the value date for the purchase from the DTC
Participant is at least one day prior to the value date for the sale to
the Clearstream Participant or Euroclear Participant.
Certain U.S. Federal Income Tax Documentation Requirements
A beneficial owner of Global Securities holding securities through
Clearstream or Euroclear (or through DTC if the holder has an address outside
the U.S.) will be subject to the 30% U.S. withholding tax that generally applies
to payments of interest (including original issue discount) on registered debt
issued by U.S. Persons, unless (i) each clearing system, bank or other financial
institution that holds customers' securities in the ordinary course of its trade
or business in the chain of intermediaries between such beneficial owner and the
U.S. entity required to withhold tax complies with applicable certification
requirements and (ii) such beneficial owner takes one of the following steps to
obtain an exemption or reduced tax rate:
Exemption for non-U.S. Persons (Form W-8BEN). Beneficial owners of
Global Securities that are non-U.S. Persons can obtain a complete exemption from
the withholding tax by filing a signed Form W-8BEN (Certificate of Foreign
Status of Beneficial Owner for United States Tax Withholding). If the
information shown on Form W-8BEN changes, a new Form W-8BEN must be filed within
30 days of such change.
Exemption for non-U.S. Persons with effectively connected income (Form
W-8ECI). A non-U.S. Person, including a non-U.S. corporation or bank with a U.S.
branch, for which the interest income is effectively connected with its conduct
of a trade or business in the United States, can obtain an exemption from the
withholding tax by filing Form W-8ECI (Certificate of Foreign Person's Claim for
Exemption from Withholding of Tax on Income Effectively Connected with the
Conduct of a Trade or Business in the United States).
A-4
Exemption or reduced rate for non-U.S. Persons resident in treaty
countries (Form W-8BEN). Non-U.S. Persons that are Certificate Owners residing
in a country that has a tax treaty with the United States can obtain an
exemption or reduced tax rate (depending on the treaty terms) by filing Form
W-8BEN.
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a
complete exemption from the withholding tax by filing Form W-9 (Payer's Request
for Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The Certificate Owner of a
Global Security or, in the case of a Form W-8ECI filer, his agent, files by
submitting the appropriate form to the person through whom it holds (the
clearing agency, in the case of persons holding directly on the books of the
clearing agency). Form W-8BEN and Form W-8ECI are effective until the third
succeeding calendar year from the date the form is signed.
Final withholding regulations (the "New Regulations") effective January
1, 2001 affect the documentation required from non-U.S. Persons. The New
Regulations replace a number of prior tax certification forms (including IRS
Form W-8, 1001 and 4224) with a new series of IRS Form W-8 and generally
standardize the period of time for which withholding agents can rely on such
forms (although certain of the new forms may remain valid indefinitely if the
beneficial owner provides a United States taxpayer identification number and the
information on the form does not change).
This summary does not deal with all aspects of U.S. Federal income tax
withholding that may be relevant to foreign holders of the Global Securities.
Investors are advised to consult their own tax advisors for specific tax advice
concerning their holding and disposing of the Global Securities.
A-5
Wachovia Asset Securitization, Inc.Issuance, LLC
==============
Depositor
[ ]
Servicer
$
(Approximate)
Mortgage Pass-Through
Certificates, Series 200 -
PROSPECTUS SUPPLEMENT
You should rely only on the information contained or
incorporated by reference in this prospectus supplement and
the accompanying prospectus. No one has been authorized to
provide you with different information.
The Offered Certificates are not being offered in any state
where the offer is not permitted.
The Depositor does not claim the accuracy of the information
in this prospectus supplement and the accompanying prospectus
as of any date other than the dates stated on their respective
covers.
Dealers will deliver a prospectus supplement and prospectus
when acting as underwriters of the Offered Certificates and
with respect to their unsold allotments or subscriptions. In
addition, all dealers selling the Offered Certificates will
deliver a prospectus supplement and prospectus until ninety
days following the date of this prospectus supplement.
Wachovia SecuritiesCapital Markets [Other Underwriter]
===============
, 200
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Other Expenses of Issuance and Distribution (Item 14 of Form S-3).
The expenses expected to be incurred in connection with the issuance
and distribution of the Securities being registered, other than underwriting
compensation, are as set forth below. All such expenses, except for the filing
fee, are estimated.
Filing Fee for Registration Statement $80.90 1,237,770
=========
Legal Fees and Expenses * $3,000,000
==========
Accounting Fees and Expenses * $600,000
========
Trustee's Fees and Expenses * $250,000
========
(including counsel fees)
Blue Sky Fees and Expenses * $150,000
========
Printing and Engraving Expenses * $300,000
========
Rating Agency Fees * $4,500,000
==========
Insurance Fees and Expenses * $750,000
========
Miscellaneous * $4,500,000
==========
- --------------------------------------------------------------------------------
Total * $15,287,770
===========
*To be provided by amendment.
Indemnification of Directors and Officers (Item 15 of Form S-3).
The Pooling and Servicing Agreement or Indenture for each Series of
Securities will provide either that the Registrant, the Servicer and/or the
Master Servicer, and their respective directors, officers, employees and agents,
will be entitled to indemnification by the Trust Fund and will be held harmless
against any loss, liability or expense incurred in connection with any legal
action relating to the Pooling and Servicing Agreement or Indenture or the
Securities, other than any loss, liability or expense incurred by reason of
willful misfeasance, bad faith or gross negligence in the performance of his or
its duties thereunder or by reason of reckless disregard of his or its
obligations and duties thereunder.
Sections 55-8-50 through 55-8-58 of the revised North Carolina Business
Corporation Act (the "NCBCA") contain specific provisions relating to
indemnification of directors and officers of North Carolina corporations. In
general, the statute provides that (i) a corporation must indemnify a director
or officer who is wholly successful in defense of a proceeding to which he is a
party because of his status as such, unless limited by the articles of
incorporation, and (ii) a corporation may indemnify a director or officer if he
is not wholly successful in such defense, if it is determined as provided in the
statute that the director or officer meets a certain standard of conduct;
provided when a director or officer is liable to the corporation, the
corporation may not indemnify him. The statute also permits a director or
officer of a
-2-
corporation who is a party to a proceeding to apply to the courts
for indemnification, unless the articles of incorporation provide otherwise, and
the court may order indemnification under certain circumstances set forth in the
statute. The statute further provides that a corporation may, in its articles of
incorporation, bylaws, contract or resolution, provide indemnification in
addition to that provided by the statute, subject to certain conditions set
forth in the statute.
Article 3, Part 3 of the North Carolina Limited Liability Company Act provides
in substance that North Carolina limited liability companies shall have the
power, under specified circumstances, to indemnify their managers, directors,
executives and members in connection with judgments, settlements, penalties,
fines or expenses incurred in a proceeding to which such person is a party
because of their activities as a manager or member. The North Carolina Limited
Liability Company Act also provides that North Carolina limited liability
companies may purchase insurance on behalf of any member, manager, employee or
agent. Sections 4 and 5 of the Registrant's Operating Agreement incorporates the
indemnification provisions of Article 3 of the North Carolina Limited Liability
Company Act to the fullest extent provided for therein.
The Registrant maintains directors and officers liability insurance,
which provides coverage for the benefit of its subsidiaries, subject to certain
deductible amounts. In general, the policy insures (i) the Registrant's
directors and its officers against certain losses and/or (ii) the Registrant
against loss arising from claims against the directors and officers by reason of
their wrongful acts, all subject to the terms and conditions contained in the
policy.
Under agreements that may be entered into by the Registrant,
certain controlling persons, directors and officers of the Registrant may be
entitled to indemnification by underwriters and agents who participate in the
distribution of the Securities covered by the Registration Statement against
certain liabilities, including liabilities under the Securities Act of 1933, as
amended.
Exhibits (Item 16 of Form S-3).
1.1 Form of Underwriting Agreement (Incorporated by reference to Exhibit
1.1 to Registration Statement No. 333-97457)..
=
3.1 Articles of Incorporation.
3.2 Operating Agreement.
4.1 Form of Pooling and Servicing Agreement (Incorporated by reference to
Exhibit 4.1 to Registration Statement No.
333-97457). .
==
4.2 Form of Indenture (Incorporated by reference to Exhibit 4.2 to
Registration Statement No. 333-97457)..
=
4.3 Form of Mortgage Loan Purchase Agreement.
4.4 Form of Trust Agreement.
4.5 Form of Servicing Agreement.
*5.1 Opinion of Cadwalader, Wickersham & Taft LLP with respect to legality.
-3-
*5.2 Opinion of Orrick, Herrington & Sutcliffe LLP with respect to
legality.
*8.1 Opinion of Cadwalader, Wickersham & Taft LLP with respect to certain
tax matters.
*8.2 Opinion of Orrick, Herrington & Sutcliffe LLP with respect to certain
tax matters.
*23.1Consent of Cadwalader, Wickersham & Taft LLP (included as part of
Exhibit 5.1 and Exhibit 8.1).
*23.2Consent of Orrick, Herrington & Sutcliffe LLP (included as part of
Exhibit 5.2 and Exhibit 8.2).
24.1 Power of Attorney.
* To be filed by Pre-Effective Amendment.
Undertakings (Item 17 of Form S-3).
The Registrant hereby undertakes:
(a)(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement;
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) to reflect in the prospectus any facts or events arising after
the effective date of this Registration Statement (or the most
recent post-effective amendment thereof) which, individually or
in the aggregate, represent a fundamental change in the
information set forth in this Registration Statement.
Notwithstanding the foregoing, any increase or decrease in the
volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered)
and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent no more than
20 percent change in the maximum aggregate offering price set
forth in the "Calculation of Registration Fee" table in the
effective registration statement; provided, however, that
(a)(1)(i) and (a)(1)(ii) will not apply if the information
required to be included in a post-effective amendment
-4-
thereby is contained in periodic reports filed pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934 that
are incorporated by reference in this Registration Statement; and
(iii)to include any material information with respect to the plan of
distribution not previously disclosed in this Registration
Statement or any material change to such information in this
Registration Statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof; and
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) The Registrant hereby undertakes that, for purposes of determining any
liability under the Securities Act of 1933, each filing of the Registrant's
annual report pursuant to Section 13(a) or Section 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in this Registration Statement shall be
deemed to be a new Registration Statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
(d) The undersigned Registrant hereby undertakes to file an application for
the purpose of determining the eligibility of the trustee to act under
subsection (a) of Section 310 of the Trust Indenture Act of 1939 in accordance
with the rules and regulations prescribed by the Commission under Section
305(b)(2) of the Trust Indenture Act of 1939.
-5-
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, the Registrant certifies that it has reasonable grounds to believe that
it meets all of the requirements for filing on Form S-3, reasonably believes
that the security rating requirement referred to in Transaction Requirement B.2
or B.5 of Form S-3 will be met by the time of sale of the securities registered
hereby, and has duly caused this Amendment No 1 to the Registration Statement to
=====================
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Charlotte, North Carolina, on September 29,October 31, 2003.
==========
WACHOVIA ASSET SECURITIZATION,
INC. ISSUANCE, LLC
===============
By: /s/ Thomas Wickwire
---------------------------------------
Thomas Wickwire
Manager, President and Chief Executive
=======
Officer
Pursuant to the requirements of the Securities Act of 1933, as
amended, this Registration Statement has been signed by the following persons in
the capacities and on the dates indicated.
Signature Title Date
- ------------------------------------- --------------------------------------- ------------------------------
/s/ Thomas Wickwire Manager, President and Chief Executive September 29,October 31, 2003
- ------------------------------------- ========= ===========
Thomas Wickwire Officer
/s/ David L. Pitelka Treasurer, (Chief Financial Officer and September 29,October 31, 2003
- ------------------------------------- = ===========
David L. Pitelka Chief Accounting Officer)
/s/ Lana Cummings Chief Accounting Officer October 31, 2003
===================================== ======================== ================
Lana Cummings
=============
/s/ Curtis Y. Arledge DirectorManager September 29,October 31, 2003
- ------------------------------------- ======= ===========
Curtis Y. Arledge
/s/ Juliana C. Johnson DirectorManager September 29,October 31, 2003
- ------------------------------------- ======= ===========
Juliana C. Johnson
- ---------------------------------------------------------------------------------------------------------------------
*Note: Powers of Attorney appointing Thomas Wickwire, David L. Pitelka and,
Lana Cummings, Curtis Y. Arledge, and Juliana C. Johnson or any of them
============= ======================
acting singly, to execute any amendments to the Registration Statement,
=================
any amendments thereto and any registration statement for additional
Mortgage Asset-Backed Pass-Through Certificates and Assets-Backed Notes
that is to be effective on filing pursuant to Rule 462(b) under
-6-
the Securities Act of 1933, as amended, on behalf of the above-named
individuals, are filed as Exhibit 24.1 hereto.
-7-
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
1.1 Form of Underwriting Agreement (Incorporated by reference to Exhibit
1.1 to Registration Statement No. 333-97457)..
=
3.1 Articles of Incorporation.
3.2 Operating Agreement.
4.1 Form of Pooling and Servicing Agreement (Incorporated by reference to
Exhibit 4.1 to Registration Statement No.
333-97457). .
==
4.2 Form of Indenture (Incorporated by reference to Exhibit 4.2 to
Registration Statement No. 333-97457)..
=
4.3 Form of Mortgage Loan Purchase Agreement.
4.4 Form of Trust Agreement.
4.5 Form of Servicing Agreement.
*5.1 Opinion of Cadwalader, Wickersham & Taft LLP with respect to legality.
*5.2 Opinion of Orrick, Herrington & Sutcliffe LLP with respect to
legality.
*8.1 Opinion of Cadwalader, Wickersham & Taft LLP with respect to certain
tax matters.
*8.2 Opinion of Orrick, Herrington & Sutcliffe LLP with respect to certain
tax matters.
*23.1Consent of Cadwalader, Wickersham & Taft LLP (included as part of
Exhibit 5.1 and Exhibit 8.1).
*23.2Consent of Orrick, Herrington & Sutcliffe LLP (included as part of
Exhibit 5.2 and Exhibit 8.2).
24.1 Power of Attorney.
- --------------------
* To be filed by Pre-Effective Amendment.
-8-
Exhibit 24.1
WACHOVIA ASSET SECURITIZATION, INC. ISSUANCE, LLC
==============
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Thomas Wickwire, David L. Pitelka and, Lana Cummings,
=============
Curtis Y. Arledge and Juliana C. Johnson, and each of them, as his or her true
=======================
and lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, for him or her and in his or her name, place and stead, in any
and all capacities (including his capacity as director and/or officer of
Wachovia Asset Securitization Issuance, Inc.LLC (the "Registrant")) to sign the
======== ===
Registration Statement, any and all amendments (including post-effective
amendments) to the Registration Statement, and any registration statement for
additional Mortgage Asset-Backed Pass-Through Certificates and
AssetsAsset-Backed Notes that is to be effective upon filing pursuant to Rule
=====
462(b) under the Securities Act of 1933, and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorney-in-fact and agent full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully and to all intents and
purposes as might or could be done in person, hereby ratifying and confirming
all that said attorney-in-fact and agent, or her substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
SIGNATURE TITLE DATE
- --------------------------------------- --------------------------------------- -------------------------------
/s/ Thomas Wickwire Manager, President and Chief Executive September 29,October 31, 2003
- ------------------- ========= ===========
- --------------------------------------- Officer
Thomas Wickwire
/s/ David L. Pitelka Treasurer, (Chief Financial Officer and September 29,October 31, 2003
- -------------------- = ===========
Chief Accounting Officer)
=====================================
David L. Pitelka
/s/ Lana Cummings Chief Accounting Officer October 31, 2003
===================================== ======================== ================
Lana Cummings
=============
/s/ Curtis Y. Arledge_ DirectorManager September 29,October 31, 2003
- ---------------------- ======= ===========
Curtis Y. Arledge
/s/ Juliana C. Johnson DirectorManager September 29,October 31, 2003
- ---------------------- ======= ===========
Juliana C. Johnson
-9-